Application Neutrality and a Paradox of Side Payments

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1 Application Neutrality and a Paradox of Side Payment Eitan Altman St«ephane Caron INRIA D«epartement d Informatique 2004 Route de Luciole «Ecole Normale Sup«erieure Sophia-Antipoli, France 45 rue d Ulm, Pari, France eitan.altman@ophia.inria.fr tephane.caron@en.fr George Keidi CS&E and EE Dept Penn State Univerity Univerity Park, PA, keidi@engr.pu.edu ABSTRACT The ongoing debate over net neutrality cover a broad et of iue related to the regulation of public network. Thi paper contain two eparate contribution: (a) an extenion of the quadratic-utility framework we propoed in [4] to tudy the impact of ide payment in a ytem involving pluralitie of acce and content provider; and (b) a variation of thi model to deal with the quetion of application neutrality. Our analyi of the generalized framework (a) reveal an intereting paradox that did not occur with monopolitic player: ide payment handicap the provider who perceive them. Application neutrality (b) refer to price dicrimination: ISP charging conumer different fee depending on their ue of the network (web urfing, VoIP, file haring, etc.). We analyze the conequence of uch dicrimination for a imple two-application etting. Keyword Net neutrality, ide payment, price dicrimination, regulation, public network 1. INTRODUCTION Different iue have been raied in the context of the net neutrality debate. for Tim Berner-Lee 1, it mean that if I pay to connecttothenetwithacertainqualityofervice, andyoupaytoconnectwiththatorgreaterquality of ervice, then we can communicate at that level ; A full verion of thi paper i available at [8]. 1 Net Neutrality: Thi i eriou, timbl blog, June Permiion to make digital or hard copie of all or part of thi work for peronal or claroom ue i granted without fee provided that copie are not made or ditributed for profit or commercial advantage and that copie bear thi notice and the full citation on the firt page. To copy otherwie, to republih, to pot on erver or to reditribute to lit, require prior pecific permiion and/or a fee. ACM CoNEXT 2009, December 1 4, 2009, Rome, ITALY. Copyright 2009 ACM X-X-X-X/XX/XX...$5.00. for Tim Wu 2, the main idea i that a maximally ueful public information network apire to treat all content, ite, and platform equally ; and for Hahn et al. [1], it uually mean that broadband ervice provider charge conumer only once for Internet acce, do not favor one content provider over another, and do not charge content provider for ending information over broadband line to end uer. Thee definition raie different quetion, including connectivity, non-dicrimination of application, type or origin, and network acce pricing. It eem therefore more relevant to ee net neutrality rather a a topic involving a range of iue regarding the regulation of public network. With thi perpective, [2] dicue five flavor of net neutrality: (a) content neutrality, (b) blocking and rerouting, (c) denying IP-network interconnection, (d) network management, and (e) premium ervice fee. (b) pertain to provider dicriminating packet in favor of their own or affiliated content, while (c) i related to agreement between lat-mile and backbone provider. (d) ha been a central argument for ISP proteting the enforcement of net neutrality principle: they defend their right to manage their own network, epecially in order to deal with congetion iue (e.g., due to highvolume peer-to-peer (P2P) traffic, ee the deciion on Comcat v. the FCC ). They claim that regulation would act a a diincentive for capacity expanion of their network. In thi paper, we addre iue (a): ide payment and application neutrality. Both are rooted in hitorical iue: maive copyright infringement led copyright holder to eek remuneration from ISP, while congetion due to P2Pfile haring led ome providerto adopt non application-neutral policie (e.g., Comcat throttling BitTorrent traffic). However, in what follow we abtract from thee hitorical caue, tudying ide payment in either direction (from ISP to CP and con- 2 Network Neutrality FAQ, neutrality.html

2 verely) and conidering the impact of non applicationneutral pricing independently from congetion. Our work focue on uage-baed pricing: we aume conumer are, to ome extent, willing to pay uagedependent fee, e.g., a overage over fixed monthly fee. Provider are then competing to ettle on their uage-baed price, their goal being to maximize revenue coming from thee charge. Note that a null price doenotmeanaproviderhanoincome, butratherthat all hi monthly revenue are coming from flat-rate pricing. Study of the flat-rate regime i, however, out of the cope of thi paper. See, e.g., [3] for a dicuion of both regime. The ret of the paper i organized a follow. We dicu related work in ubection 1.1 and decribe our framework in ection 2. In ection 3, we tudy the impact of ide payment on the competition between provider. We extend our framework in ection 4 to analyze the effect of non application-neutral pricing from the ISP. We conclude in ection Related Work We tudied in [4] ome net neutrality related iue like ide payment and premium ervice fee (e), limiting our conideration to monopolitic provider. We are now lifting thi limitation with an extended model including competition between multiple identical provider (it i actually a generalization of the idea ketched in [4] VI). Ma et al. [5] advocate the ue of Shapley value a a fair way to hare profit between provider. Thi approach yield Pareto optimality for all player, and expect in particular CP, many of whom receive advertiing revenue, to take part in the invetment for network capacity. However, thi approach i coalitional and there are many obtacle to it real-life implementation. In [6], the author addre whether local ISP hould be allowed to charge remote CP for the right to reach their end uer (again, thi i the ide payment iue). Through tudy of a two-ided market, they determine when neutrality regulation are harmful depending on the parameter characterizing advertiing rate and conumer price enitivity. [7] dicue the net neutrality debate to the light of hitorical precedent, epecially dealing with the quetion of price dicrimination. It alo raie an intereting point about the way cutomer value the network, which i that connectivity i far more important than content. Thi fact ha not been much urveyed in the literature, and unfortunetaly it i not in the cope of our work either ince we focu on a market of identical CP, not on the network a a whole. 2. PROBLEM SET-UP Our model i an extenion of the one in [4]. It encompae three group of player: the Internaut (end uer), modeled collectively through their demand repone, n 1 lat-mile broadband provider (ISP), and n 2 content provider (CP). Conumer pay uagedependent fee for ervice/content that require one ISP and one CP. Providerthen compete in a game to ettle on their uage-baed price, which may turn out to be 0$/byte, i.e., only flat-rate fee would apply. 2.1 Demand Repone Let u denote by p 1i 0 (rep. p 2i 0) the uagebaedpriceofthei th ISP(rep. CP).Theepriceacta diincentive on conumer demand for content/bandwidth. We model thi with a imple linear repone: the amount uer are ready to conume, given that they choe ISP i and CP j, i D(p 1i,p 2j ) = D max d 1 p 1i d 2 p 2j. We are dealing here with a et of homogeneou uer haring the ame repone to price variation. The parameter D max reflect demand under pure flat-rate pricing. Note that all provider may not meaure demand on the ame cale: ISP focu on bandwidth conumption and expre demand in byte, while CP are concerned with content conumption and/or advertiing revenue, thu expreing demand in number of click or product old (book, muic album, etc. ). However, uing a ingle metric (e.g., byte) i more convenient, and other metric can be approximated from thi one uing an appropriate caling factor. In what follow, we furthermore uppoe that uer are only concerned with the total uage-baed price they are charged, i.e., they don t care whether they are givingmoneytoanisporacp.aaconequence,wehave d 1 = d 2 = d. Since demand hould be non-negative, we can then define a maximum price p max uch that p 1i +p 2j D max d 2.2 Cutomer Stickine =: p max. A we uppoe all provider of a given type propoe the ame type/quality of content/ervice, uer deciion are only baed on price conideration. For example, if an ISP charge a price ignificantly lower than the other ISP, in the long run all cutomer will chooe it and the other will have no choice but to align their price or opt out of the game. Therefore, our homogeneity hypothei mean all ISP (and imilarly all CP) have roughly the ame price: p 11 p 12 p 1n1, p 21 p 22 p 2n2. A provider play the uage-baed pricing game, firtorder difference between thee price may appear(e.g., the

3 i th ISP reducing hi price by δp 1i to attract new end uer). Conumer are then more likely to go to the cheapet provider of each group, but price difference may be too mall to convince all of them to move and ome will tay with their current provider. Thi phenomenon i known a cutomer tickine, inertia or loyalty. To model it, we define the fraction σ ki of uer committedtothei th providerofthek th group(k = 1for ISPand2forCP)aafunctionofp k = (p k1,...,p knk ), i.e., σ ki := σ(i,p k ). Propertie expected of the tickine function σ are dicued in [8]. We choe the following model: σ(i,p k ) = 1/p ki nk j=1 1/p kj =: σ ki. (1) The average uage-baed price of network/content acce for a cutomer i then p k := i σ kip ki, i.e., the harmonic mean of {p ki }. 2.3 Non-dicriminating etting In a neutral etting with no ide payment nor application dicrimination, an ISP expected uage-baed revenue i given by U 1i = n 2 j=1 σ 1i σ 2j D(p 1i,p 2j )p 1i = σ 1i D(p 1i,p 2 )p 1i, and imilarly for the j th CP. Neceary condition for an interior Nah Equilibrium Point (NEP) are given by U ki p ki (p 1,p 2 ) = 0 for k = 1,2. The reulting ytem i linear and traightforward to olve, and it olution i a local maximum in revenue for all player (i.e., a Nah equilibrium). At the NEP, demand and revenue are given by D n 1 n 2 = D max, n 1 n 2 +n 1 +n 2 U ki = n 2 3 k (n 1 n 2 +n 1 +n 2 ) 2 U max, for k = 1,2. A expected, cutomer benefit from competition among the provider. With 2 ISP and 2 CP, demand i only 50% of it potential D max, while it i about 70% of D max with 5 ISP and 5 CP. Thi bae model alo encompae two expected behavior: provider from one group benefit from increaed competition in the other group, while their revenue are ignificantly reduced by increaed competition in their own group. Note that competition in a provider own group ha much more impact on hi income than competition in the other group. 3. SIDE PAYMENTS Suppoe now that there are ide payment between the two group of provider. We introduce a uagebaed fee p from the CP to the ISP. When p > 0, CP remunerate the ISP, e.g., to upport the bandwidth cot. On the other hand, if p < 0, ISP give money to the CP, e.g., for copyright remuneration. We uppoe ISP or CP receive ide payment collectively and ultimately hare the aggregate amount proportionally to their cutomer hare. Hence, provider revenue become: U 1i = σ 1i D(p 1i,p 2 )(p 1i +p ) for i 1,n 1, U 2j = σ 2j D(p 1,p 2j )(p 2j p ) for j 1,n 2, where all demand and price factor (rep. D and p ki ± p ) are deemed non-negative. It i expected that p i not a deciion variablefor any playeror group ofplayer. Indeed, inceutilitiearemonotonicinp,thoecontrolling it would alway be incented to increae or decreae it (if they are ISP or CP repectively), leading the other player to opt out of the competition. Therefore, p would normally be regulated and we will conider it a fixed parameter from now on. Neceary condition for an interior equilibrium (null firt-derivative) yield: [ ] p 1 (p 1 +p )+p = 0, (2) 1 p max p 1 p 2 n 1 [ p 2 1 p max p 1 p 2 n 2 ] (p 2 p ) p = 0. (3) With the introduction of non-null p, thi ytem i not linear any more. We provide here the complete tudy of a implified etting where n 1 = n 2 = 2. An extenion to an arbitrary number n of ISP and CP i given in our working paper [8]. 3.1 Interior equilibria Define u := (p 1 +p 2 )/p max, v := (p 1 p 2 )/p max and := p /p max. Equilibrium condition become: 2v 2u 2 v 2 +u = 0, (4) 3uv 2+v = 0, (5) where (4) (2) + (3) and (5) (2) (3). Equilibrium price, demand and revenue are now olvable in cloed form 3. Before we expoe the olution, an important obervation we can make at thi point i given by the following theorem (we prove it in [8]): Theorem 1. When n 1 = n 2 = 2, there i an interior NEP iff p max (1 x)(1 2x)2 (4x 1) 4.64% 36x p max x [ 1 4,1 2 ] In other word, regulated ide payment can only occur to a mall extent ( p < 4.64%of p max ), otherwiethere will be no interior NEP, which mean one of the two 3 Yet, thee expreion are complicated, long and of no extra-computational interet.

4 54% 70% 53% 52% 51% 50% 8% 7% 6% 5% D U 2 U 1 65% 60% 55% 50% 12% 9% 6% 3% D U1 U2 4% 0 Figure 1: Demand and revenue at NEP 1. Figure 2: Demand and revenue at NEP 2. group of player will opt out of the uage-baed pricing game. Therearetwoolutionto(2)and(3), andwechecked that both of them are Nah equilibria. Demand and revenue at NEP 1 and NEP 2 are hown in Figure 1 and 2. Note that NEP 1 i conitent with the reult of the non-dicriminating etting (when = 0, p k = p max/4, D = D max /2 and Uk i = U max/16 for k = 1,2), while NEP 2 doenot exitwhen = 0(there iadicontinuity in equilibrium price at thi point). Both equilibrium point hare the ame paradox : provider receiving ide payment eventually achieve le revenue than the other. 3.2 Convergence to equilibrium In what follow, we conider > 0. The role of ISP and CP are wapped for < 0. All provider are deemed to act independently under a bet-repone behavior. Thu, the vector field ( U1i (p 1,p 2 ) (p p 1,p 2 ), U ) 2j (p 1i p 1,p 2 ) 2j i an appropriate indicator of the aggregate trend of the ytem. Computation revealed the following betrepone behavior: if p 1 > p 1(NEP 2 ), the ytem i attracted by NEP 1 ; otherwie, unle p 1 = p 1(NEP 2 ), combined action of ISP and CP reult in a conenu where all uage-baed revenue for ISP come from ide payment. Let u call thi conenu NEP B. Solving (3) with p 1 = 0 yield p 2(NEP B ) = p max 6 ( 1++ ) , where correponding expreion for demand and revenue follow directly. At NEP B, demand i higher than at NEP 1 or NEP 2 while ISP revenue turn out to be lower (and CP revenuehigher) than at NEP 2 (ee Figure 3). To avoid NEP 2, ISP can reduce their price, relying on increaed demand to compenate revenue loe. Yet, CP can then raie their price, mitigating the increae in demand and contraining the ISP to reduce their price further, down to the point where p 1 = 0. Thi i how bet-repone behavior caue ISP to eventuallyprefer NEP B overnep 2, thoughglobaloptimization how it i le profitable for them. 3.3 Epilogue: a Poioned Chalice For 2 ISP and 2 CP, we aw that the introduction of ide payment in the model yielded a game with two poible outcome: if initial price of ide payment receiver are high enough, provider will reach an interior equilibrium where receiver get le revenue than payer (the higher the ide payment, the lower the revenue), otherwie, receiver will opt out of the uage-baed pricing game, depending only on ide payment for their uage-baed revenue. Thee concluion alo hold for an arbitrary number n of ISP and CP (ee [8]). In both cae, the paradox of ide payment i that they act a a handicap for thoe who receive them. 4. APPLICATION NEUTRALITY Now, let u conider a different iue related to the net neutrality debate: to what extent hould acce provider be allowed to perform packet inpection on the data they tranmit? In particular, given that they charge uage-baed fee, hould they be allowed to perform price dicrimination depending on the application at ue (e.g., video chat, media treaming,...)? In thi

5 67% 66% 65% 64% 63% 62% 61% 12% 9% 6% 3% 0 D U2 U1 Figure 3: Demand and revenue at NEP B. ection, we tudy the impact of uch dicrimination in a configuration with two crude example type of application: web urfing and P2P file haring. 4.1 Additional problem et-up We extend our model to a etting with three group of provider: (1) ISP, providing lat-mile acce to the Internaut, (2) Web Content Provider (Web CP), e.g., earch engine portal(recall all provider in a group aredeemedidentical, oweaumeall WebCPprovide the ame type of client-erver HTTP content a well), and (3) P2P Content Provider(P2P CP), e.g., private P2P network operated in cooperation with copyright holder. Uer chooe an ISP, a Web CP and a P2P CP. To acce web (rep. P2P) content, they pay uage-baed fee to both their ISP and their Web CP (rep. P2P CP). We denote by n 1, n 2 and n 3 the number of ISP, Web CP and P2P CP repectively. Thee group are not coalition: in a group, each provider i independent from the other and eek to maximize their own revenue. In a neutral etting, the i th ISP charge a ingle price p 1i for all type of traffic, while otherwie he may et up two different price p 12,i and p 13,i for HTTP and P2P traffic repectively. Denote by p 2j (rep. p 3j ) the uage-baed price of the j th Web CP (rep. P2P CP). We introduce two eparate demand-repone profile for both type of content: when ISP i, Web CP j and P2P CP l are choen, demand for HTTP and P2P content are D 2 = D 2max d 2 (p 12,i +p 2j ), D 3 = D 3max d 3 (p 13,i +p 3l ), with p 12,i = p 13,i =: p 1i in the neutral etting. A previouly, we write p kmax := D kmax /d k. The portion of uer committed to the i th provider of the k th group i till modeled a σ ki := σ(p k ) = 1/p ki j 1/p kj Wewilleein4.3howtogeneralizethitoISPcharging two different price intead of one. Revenue for ISP i, Web CP j and P2P CP l are given by U 1i = σ 1i (D 2 p 12,i +D 3 p 13,i ), U 2j = σ 2j D 2 p 2j, U 3l = σ 3l D 3 p 3l. Finally, we define the normalized enitivity to uagebaed pricing α and the maximum price ratio γ, α := d 2 d 2 +d 3 and γ := p 2max p 3max, (6) and make the following aumption: α 1/2 d 2 > d 3 : conumer are more enitive to uage-baed pricing of web content than of file haring. γ < 1 p 2max < p 3max : cutomer are ready to pay more for content exchanged on P2P haring ytem (movie, muic, etc. ) than for web page. A dicued in ection 1, we alo uppoe that ISP have enough bandwidth to upply all the demand, i.e., there i no congetion. 4.2 Neutral etting We now conider the broader etting with non-monopolitic provider (i.e., n k > 1 for k 1,3 ) where application neutrality i enforced. In particular, U 1i = σ 1i (D 2 + D 3 )p 1i. We find neceary condition for an interior NEP to be: (n 1 +1)p 1 +αp 2 +(1 α)p 3 = αp 2max +(1 α)p 3max, p 1 +(n 2 +1)p 2 = p 2max, p 1 +(n 3 +1)p 3 = p 3max, which reolution i traightforward. We checked that any olution to thi ytem i alo an NEP. 4.3 Non-neutral etting When application non-neutral pricing i allowed, the ISP utilitie are U 1i = σ 1i (D 2 p 12,i + D 3 p 13,i ), where σ 1i refer to the portion ofuergatheredby ISP i given hi price p 12,i and p 13,i. There are multiple way to generalize equation (1) to multiple criteria: e.g., one couldapplyσ tothemeanprice(p 12,i +p 13,i )/2ormodel σ 1i aaconvexcombinationofσ 12,i and σ 13,i. We choe σ 1i := σ(i, p 1 ) = 1/ p 1i n1 j=1 1/ p 1j (7)

6 where p 1i := αγp 12,i +(1 αγ)p 13,i. Inotherword, we apply the original tickine model (1) to a combined price p 1i defined a a convex combination of p 12,i and p 13,i. See [8] for a dicuion of thi choice. In thi model, we found neceary condition for an interior NEP to be: α ( D 2 p αγ 12 ) = n 1 1 (α D 2 p n 12 +(1 α) D 3 p 13 ), 1 p 1 α αγ ( D 2 p 12 ) = p 12 +(n 2 +1)p 2 = p 2max, p 13 +(n 3 +1)p 3 = p 3max, 1 α 1 αγ ( D 3 p 13 ), where p 1 := αγp 12 +(1 αγ)p 13. Thi ytem can be eventually rewritten a two polynomial equation on p 12 and p 13. It i olvable in cloed form, and any of it olution i alo an NEP. 4.4 Dicuion of experimental reult In our numerical experiment, we took α = 0.8 and γ = 0.3. We ued Sage for our computation, and all our cript are available online 4. Additional plot and reult are provided in [8]. The main reult we oberved i that ISP and Web CP prefer the non-neutral etting, while P2P CP benefit from neutrality regulation. The impact of nonneutral pricing on provider revenue varie with competition: increaed competition bring le benefit for Web CP and le loe for P2P CP. Yet, competition ha almot no effect on the gain of ISP (ee Figure 4). Figure 4: Relative variation in revenue between neutral and non-neutral pricing (n i the number of provider in each group, α = 0.8 and γ = 0.3). 4 html 5. CONCLUSION We preented a framework to dicu the impact of two net neutrality related iue, ide payment and application neutrality, on the three-way interaction between end uer, ISP and CP. Our model relie on a imple linear demand-repone to uage-baed price, and it encompae cutomer loyalty. In ection 3, we tudied the effect of regulated ide payment between the ISP and CP. We determined two poible outcome of the competition, both of them howing the ame paradox : ide payment are actually a handicap for thoe who receive them, inofar a they reduce their equilibrium revenue. We addreed the iue of application neutrality in ection 4 with a imple etting oppoing two type of content: web content and file haring, the latet howing lower price enitivity and higher willingne to pay due to the nature of exchanged content. Our analyi uggeted that ISP and Web CP benefit from application non-neutral practice, while P2P CP are better off in a neutral etting. Additional reult and detailed computation are available in our working paper [8]. 6. REFERENCES [1] R. Hahn and S. Wallten, The Economic of Net Neutrality, Economit Voice, The Berkeley Economic Pre, 3(6), pp. 1-7, [2] R. B. Chong, The 31 Flavor of Net Neutrality, 12 Intellectual Property Law Bulletin, 2008, v. 12. [3] G. Keidi, A. Da, G. de Veciana, On Flat-Rate and Uage-baed Pricing for Tiered Commodity Internet Service, Proc. CISS 2008, Princeton. [4] E. Altman, P. Bernhard, S. Caron, G. Keidi, J. Roja-Mora and S. Wong, A Study of Non-Neutral Network with Uage-baed Price, June [5] R. T. B. Ma, D.-M. Chiu, J. C. S. Lui, V. Mira, and D. Rubentein, On cooperative ettlement between content, tranit and eyeball internet ervice provider, Proc. ACM CoNext [6] J. Muacchio, G. Schwartz and J. Walrand, A Two-Sided Market Analyi of Provider Invetment Incentive With an Application to the Net-Neutrality Iue, Review of Network Economic, 2009, vol. 8, iue 1. [7] A. Odlyzko, Network Neutrality, Search Neutrality, and the Never-ending Conflict between Efficiency and Fairne in Market, Review of Network Economic, 2009, vol. 8, iue 1. [8] E. Altman, S. Caron and G. Keidi, Application Neutrality and a Paradox of Side Payment, Aug Available on