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Summary:

The internet has changed the world, boosted the economic fortunes of many and disrupted entire industries. And it has done so despite an interconnection model that’s built on verbal agreements with no contracts and no money changing hands. And governments should just leave it alone.

Red Square; Moscow
photo: Flickr / yeowatzup

The internet is a pretty communist institution: when you sent a packet over the web, it may go through a dozen different networks, but in most cases no money changes hands. Somebody at each connection point has simply given their okay to exchange the traffic with your ISP or any one of the other links in the chain. Kind of like when you spot your friends a beer knowing they’ll cover your drink in the next round.

And that’s how 99.5 percent of the interconnections take place between global networks work. According to a study out Monday from the OECD covering peering arrangements between providers of bandwidth around the world, most interconnections take place “on a handshake basis, with no written contract and the exchange of data happening with no money changing hands.”

This may seem pretty hippy dippy, or at least a lost source of revenue, but as several high-profile peering disputes can show us, the relatively open nature of these agreements benefits consumers and startups and helps keep costs down. What many people may not think about when considering the internet is that it’s actually a collection of networks all around the world that are joined together. And since the places where those networks join are mostly free of fees and legal drama, the cost of sending data over the internet has fallen.

In praise of peering

This new OECD report notes that the benefits of this approach to peering have brought prices for data down to 100,000 times less than that of a voice minute. Thanks to a survey of 4,300 networks, representing 140,000 direct exchanges of traffic on the internet, the study offers up evidence that less regulation on the internet is a good thing, even if it doesn’t seem initially to protect the consumer interest.

Analysys Mason chart on IXP growth.

The report also comes out in support of Internet Exchange Points (IXPs) – data centers where the networks of many providers meet and cross connect. But the real value in this report is in its warning about the threat to the current peering models from proposed regulations as well as private networks that are seeking to take these handshake deals and turn them into sources of revenue.

From the report:

“As incumbent networks adopt IP technology, there is a risk of conflict between legacy pricing and regulatory models and the more efficient internet model of traffic exchange. By drawing a “bright line” between the two models, regulatory authorities can ensure that the inefficiencies of traditional voice markets will not take hold on the internet… That these “rules of the game” are so ubiquitous and serviceable indicates a degree of public unanimity that an external regulator would be hard-pressed to create. The parties to these agreements include not only internet backbone, access, and content distribution networks, but also universities, NGOs, branches of government, individuals, businesses and enterprises of all sorts—a universality of the constituents of the internet that extends far beyond the reach of any regulatory body’s influence.”

The fall of Tier 1 networks and the rise of work-arounds

One threat to peering is the possibility of the International Telecommunication Union regulating broadband networks more in line with communications networks, a threat we’ve covered before. Other risks include governments interfering in peering disagreements or creating mandatory peering requirements that would then imply that the government would eventually interfere in a peering dispute.

According to the report, that way leads to the type of complicated settlement agreements that have played havoc in the voice markets for decades, leading to higher prices as well as business decisions that aim to optimize revenue as opposed to delivering a better or more cost-effective network. Other elements worth highlighting from the report include:

  • Legacy Tier 1 networks such as AT&T, Sprint, and NTT Communications that were once seen as a threat to this form of free peering have seen their number of connections fall (in some cases costing them more money) while smaller players and CDNs peered around them to take up the slack and demand for a connection.
  • The internet is still growing at a decent rate within the United States from 74 IXPs producing 118 gigabits per second of “observable” bandwidth in 2006 to 85 IXPs producing 826 gigabits per second today.
  • A significant reason bandwidth prices aren’t falling is because of a lack of standards and interoperability of network gear faster than 10 gigabit per second equipment.
  • Those wholesale prices for high-volume transit have remained between about $1.40 and $3 per megabit per second per month in the U.S.

The OECD report should be required reading by regulators and companies that are seeking their fortunes on the internet. Peering is an esoteric subject, but the practice has worked for decades to the benefit of the overall internet ecosystem and the consumer. It may now be under threat in some places thanks to regulations and perhaps overzealous ISPs.

Red Square image courtesy of Flickr user yeowatzup.

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  1. to continue your analogy…

    the problem with this communist state is that eventually no one will invest in the core infrastructure to keep it running… just like the old USSR….

  2. Richard Bennett Monday, October 22, 2012

    What did the old Soviet Union have to do with handshake deals? That’s a terribly strained analogy.

    1. Truly you guys hated my analogy. The idea was that there are deals where players don’t exchange fees but instead share their resources for the good of all players. The internet is a collective was my idea. But clearly it fell flat.

      1. I get the comparison to communalism, or the “Highest Stage of Communism” in Marxist theory. My Marxist friends insist that the Soviet Union was something they call “state capitalism” instead of Pure Communism.

        I regard the PSTN with all those high-priced interconnection agreements overseen by the ITU as more of a soviet-style system than the hippie Internet is. Maybe Woodstock works better.

  3. Thank you for this piece, Stacy. I’m glad you’re finally discovering that it costs nothing to transfer data. The only cost is in maintaining the network. There’s no point in billing the peers because everyone benefits from additional connections. Some peers charge each other arbitrary fees but keep things even for net 0 cost. But those fees are high enough to keep non-peering ISPs from being able to afford a backhaul from them. Any other “costs” are placed by toll collectors who bill by arbitrary events and not real-world expenses.

    The cost of maintaining the networks is dropping each year, but monopolistic telcos are leveraging them more by jacking prices up. The pretense is that there are abuses, and their poor networks are overwhelmed. Well, they’re not spending enough of their record profits to expand them! The “shortage” is artificial; an embargo to keep prices high. High prices make their bundled video services cheaper than downloading from competing vendors.

    Since telcos currently have little incentive to expand their networks, as it will have the effect of lowering the value of their product, we need to think of ways to give them incentive. It seems that classic competition isn’t going to be our white knight this time. One idea I’ve thought about is charging telcos an exponentially-increasing tax rate depending on how much they overcharge for service above the cost of providing it. If they want to make money, they should offer us fatter pipes with unrestricted traffic instead of pitiful data rations which even our current slow connections can use up in a matter of days. Too bad the FCC is in telco’s pockets. It should also be said that existing networks were paid for years ago with public funds, so other ISPs should be allowed to share them. Alas, the telcos seem to have managed to close that avenue somehow.

    Expanding on Paul’s thoughts about core infrastructure; my thought is that today’s telcos will continue to overcharge and overwork the legacy networks until they literally collapse. They’ll use the “emergency” to force the government to pass more laws to “protect” their exclusive control, and infuse them with more free public money. My hope is that they’ll lose control of the process and these “repairs” will be handed to 3rd parties who will open the networks up to competition once again. A couple thousand upstarts will immediately demonstrate that they can provide infinitely superior service at a tiny fraction of the old monopolies, and the jig will be up.

  4. Panayiotis Papadopoulos Tuesday, October 23, 2012

    I cannot believe I read this terrible analogy on GigaOM

    1. Apparently I had a bad day. It happens.

  5. You have both mistaken what the document says and demonstrated your complete lack of understanding of economics all at once!

    Yes, my packets don’t have me paying the backbone provider. However EVERY. SINGLE. PACKET. IS. PAID. FOR.

    I pay my ISP. My ISP pays the backbone, the destination of my packet also pays the backbone, and then the web site pays that destination network.

    The internet is based on capitalism and all transactions are capitalist. Everyone gets paid and all agree based on the terms that they have set out. The agreements are complex because they choose to make them complex. But that’s by mutual agreement. If they didn’t agree they would go to someone else. (to the degree that the government fascists at the FCC allow competition)

    The Soviet Union would sought to force my ISP to give me internet because I needed it without me having to pay anything more than what I could afford (or more likely what the government gave them).

    The difference is government FORCE. Communism and Fascism as you see in the US (see rural broadband by the FCC rammed down the ISPs throats and being subsidized by everyone else if you don’t believe me) are not voluntary. They have an implicit gun pointed at the head of the business or individual. “Do as we tell you to or you’re going to jail, and if you try and avoid that we’ll come with guns to take you there.”

    The internet is the poster child of capitalism. There is no FORCE. Just people trading freely without coercion. To the extent where there is violations of property rights and other legalities it is almost always because of stupid business decisions by the property owners, and there are private remedies and public civil courts to deal with it if they choose that route instead of fixing their business model. In the case of child porn and others there is a natural order that is starting to occur where groups of people that care deeply about the subject are starting to police this themselves, far more effectively than government (see Anonymous).

    So get a clue and read some books by real economists (i.e. if it uses the word Keynes or Marx with anything other than derision you’re reading the wrong book) and skip Communist Manifesto. The dirty little secret is that Marx was a lazy bum that couldn’t even finish it. That’s why Ingel’s name is on it. He was Marx’s benefactor and gave up and finished the loser’s work.

    The beauty of the internet is that there is uncontrollable CHOICE. This terrifies government because they can’t control who you can buy things from. You can buy anything from whomever you choose to buy from at whatever terms the two parties agree upon. The internet, by virtue of what it was built to withstand also is designed to be uncontrollable by government. Even the great firewalls cannot control them because TOR and others get built and the CHOICE continues. Want to gamble? Go ahead, the government can do absolutely nothing about it, you will always be able to find online casinos despite the government’s efforts to legislate morality. And so it goes. What there isn’t on the internet is communism because communism requires FORCE. It is the removal of CHOICE at the barrel of a gun.

    AS FOR YOUR FOLLOWUP THAT THE INTERNET IS A COLLECTIVE: BULL SHIT!!!!! Barter is not a collective. Barter is trade by mutually agreed upon terms the same as using Money. Trading bits and keeping score of the difference is the same as trading services and one party paying dollars for the difference in the value of the services. It’s CAPITALISM. Get your head out of your ass. You clearly took too many social studies classes in communist state subsidized college from communist, union teachers and bought into their complete pile of crap that they spew. It’s time you go deprogrammed from the cult.

    I suggest you start with “The Road to Surfdom”. Then follow up with “Free to Choose”. Then move on to “Capitalist Manifesto” then “The Making of Modern Economics”, then when you’re ready start getting into Hazlet, Rand (non-fiction), and finally Rothbard. You’ll see the logical progression that has resulted in the internet that is the greatest kryptonite to socialism there is because of CHOICE and TRADE.

    AND PLEASE RETRACT THIS HUGE STEAMING PILE.

  6. And BTW, the reason why the agreements are so complex and appear to a laymen to have a huge free component?

    GOVERNMENT TAXATION. They’re getting around taxes.

  7. Richard Bennett Thursday, October 25, 2012

    Anyway, it’s a good study.

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