Report about ISPs participation in the two-sided market

ISPs are working for two parties, broadband customers and service providers. Their participation in a two-sided market and the costs incurred for the provision of managed services are discussed in this section. Consumers who seek to access internet constitute one side of the market and the service providers who want to offer the service to the customers are on the other side. ISPs should act in such a way that both are not adversely affected. The costs incurred for providing internet can be recovered by the ISPs from service providers and customers.

Customers who access internet needs to pay a fee for the service and this fee is used to recover the costs by the ISPs. Service providers are charged by ISP if they offer managed service with quality of service guarantee. For instance, if service provider wants to use quality of service guarantee they would be ready to pay for them. Service providers can recover their costs by the revenues generated through their products and services. Charing for such managed service is agreeable. What makes this whole matter controversial is the extent of charge service provider should pay for the managed services. The most common concern about the ISPs is their inaccessibility to the customers, until they pay the consumer’s ISPs. This issue leads to different types of risks.

This would prevent appearance of new competition. Here, ISPs will charge a content and application fee from the service providers that will be higher than the level provided in a competitive market. Another potential risk is setting prices that distinguish between different services. This will restrict new entrants to launch services. For instance if both the ISP and the new entrants provided the same service, they will be in direct competition. There is also a risk of increased transaction costs for online services. Although, the prices remains at the competitive level, the transaction costs are increases which forces new service providers to carry out negotiations with numerous ISPs.

Access arrangements and pricing are a matter of concern between parties when the issue is seen from a competition perspective angle. However, the two sided markets operates significantly well for consumers in various other situations. Since there is no existence of market power, there is no reason to prevent two-sided markets from developing. For better investment in services and networks, ISPs and content and application providers should search and discover new business models.

However, when a significant market power appears and when ISPs creates competition concerns by using different pricing, the problem needs to be dealt with standard competition framework. Innovation in internet services will be hampered if the costs charged on service providers by ISPs become standard for a variety of services, resulting in the increase of the transaction costs. When the transaction costs for most of the internet-based transaction becomes a major fraction of the transaction value, it would lead to a bog concern. By ensuring that managing services exists with ‘best-efforts’ access to the open internet, this issue can be addressed. ‘Best-efforts’ access should be of good quality to support internet-based services that are dependant on low transaction costs and a wider addressable market.

Prioritisation of managed services could degrade ‘best-efforts’ internet accesses

‘Best-efforts’ internet access and managed services should co-exist in the market as significant advantages are associated with both. Network operators should make sure to prioritise managed services in such a way that sufficient network capacity remains for ‘best-efforts’ access to the open internet. There would be a concern if the ‘best-efforts’ internet access falls beyond a certain level, thereby hampering service innovation. If this is real situation, then Ofcom needs to intervene to ensure effective innovative in internet based services.

Setting a minimum quality of service means to offer a sufficient capacity to enable deliverance of video content over open internet. Since, video contents are used for new and applications, this is very important. To offer good quality of service investment in access and backhaul networks would be essential. The minimum quality of service set should not be too high as network providers would find it hard to negotiate prioritised services. This in turn will hinder new business models and eventually preventing greater network investment.

Ofcom needs to consider everything carefully before it intervenes to set a minimum quality of service. Currently, the market does not call for such intervention.