The International Telecommunication Union (ITU) plans to hold a treaty conference, the World Conference on International Telecommunications, in December 2012, which will revise a 1988 treaty.

At stake are the ways communication network owners compensate each other for terminating international voice calls through the payment of settlements. But that is but one of many huge implications.Observers say the danger is direct controls on freedom of Internet expression.

The ITU is seeking to gain more control over Internet content. One reason is that countries such as Russia have called for restrictions over the internet where it is used to” interfere in the internal affairs of a state.”

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Opponents rightly say this represents a dramatic threat to the openness of the internet, where countries could regulate content not just within their own borders but globally.

But there are many practical business implications as well. The ITU proposes to change the way the Internet is governed, in ways that will harm the Internet by raising the cost and complexity of exchanging traffic, Analysys Mason researchers argue.

In part, the ITU wants to create a new Internet traffic “settlements regime” modeled on voice precedents that will be difficult to administer and raise overhead costs.

But there could be other significant effects. First, operators might be induced to maintain their customers’ websites abroad. One of the significant benefits of establishing an internet exchange point is to make it attractive for domestic websites to be hosted at home, in order to increase their performance and lower costs, Analysys Mason notes.

However, given that foreign websites will generate a source of incoming settlements revenue, the incentive to keep them abroad would increase.

At the same time, foreign operators, in order to compensate for the higher settlements costs, would likely raise the price of hosting websites serving countries with high settlement rates.

While this could be seen to increase the incentives to locate content in the target country in order to avoid settlements, that is often not efficient, particularly for small or undeveloped markets from which access to a regional server may be sufficient, Analysys Mason argues.

In addition, it is likely that infrastructure investment decisions would be affected, as providers would be reluctant to invest in providing infrastructure to a particular country to which it is expensive to deliver traffic. In other words, there will be financial reasons not to build more undersea links to certain countries, for example.

Also, huge volumes of Internet traffic could be artificially generated in order to arbitrage a rate-regulated model, to generate inbound payments, alter traffic balances, or otherwise unfairly leverage any accounting rate regime that may be applied to the Internet.

Entities that believe they would be net recipients of settlements, based on current projections of traffic flows, might find themselves net payers as a result of the manipulation of traffic flows by other players. In other words, the incentives for arbitrage will increase.

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