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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At its core, the research is attempting a big change — building out communications networks that won’t need to convert information back to electronic bits. It’s all photons, no electrons. Eliminating that conversion would cut down on latency, energy and eventually cost if this research can be commercialized. Of course, today’s networking infrastructure is built around zipping electrons over copper and other conductive materials, so that would need to change, but light in the form of fiber optics is encroaching because of its greater capacity and speed.

Currently, long-haul pipes and some last-mile access networks use fiber. On those networks, the bits travel as far as possible in the form of light waves before getting converted back to electronic information to be sent further or read by the communications or data center gear. But as our computing and broadband networks become more distributed and need to share more and more information in real time, networks are getting bogged down.

That’s why startups like Lightwire (purchased by Cisco) Kotura and Luxtera are trying to build silicon photonics to bring light onto the silicon chip for faster on-chip communication. Even companies such as Plexxi are trying to bring fiber gear into the data center to add capacity and speed to scaled out networks. In broadband networks, I’ve covered the move to a terabit age, and companies from Google and Verizon to Ciena and Infinera are all delivering products and services to make that a reality.

That’s the big picture. At the micro level, this research has shown that people can build a device that allows light to interfere enough with existing light waves to allow it to change state. When an electron changes state on a chip, it’s represented as a zero or one — the basis for all of our computer programming. If light can switch physical states, then it too can store data.

From the news release discussing the research:

Glass optical fibers carry many communication channels using different colors of light assigned to different channels. In optical cables, these different-colored light channels do not interfere with each other. This non-interference characteristic ensures the efficiency of a single optical fiber to transmit more information over very long distances. But this advantage also harbors a disadvantage. When considering computation and signal processing, optical devices could not allow the various channels of information to control each other easily…until now.

The net result is faster and more efficient networking, something we can all get behind. Eventually. Currently, the new optical-relay device operates 1 million times per second and the goal is to get it to switch states several billion times per second. However, the current device is fast enough to start using it to connect fiber networks directly to broadband radio networks without the electronic conversion. Here’s a link to the original paper published Thursday in Nature for those who want to learn more.

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A year ago, Kroes, who is also the EC’s digital agenda commissioner, outlined a plan under the Connecting Europe Facility fund that would offer roughly €9.2 billion from 2014 to 2020 in government loans, aimed at building out better broadband.One of the rationales for the investment was Europe’s young cloud computing industry would benefit, a conversation we’ll have at our Structure:Europe conference in Amsterdam on Oct. 16 and 17.

Voting on the proposal is due by the European Parliament and ministers of member states at the end of this month. On Tuesday, as part of a conference supporting the initiative, Kroes presented detailed plans to key industry stakeholders for the first time.

Her argument is that the fund’s €9.2 billion in government loans can unlock between €50 billion and €100 billion in actual broadband spending over the six years of the program. Kroes is selling it with strong language that paints broadband as the gateway for communities and organizations to the 21st century. From her post:

“Already today we see the havoc when broadband networks get congested. But with Internet use doubling every 2-3 years, those networks need a serious upgrade. Without investment, we condemn our citizens to slow connections with frequent blackouts; we make our businesses less competitive and less productive; we force our public authorities to meet 21st century expectations using 20th century systems.

“On 12 July I set out the regulatory framework to encourage private investment in broadband. But the fact is private money can’t do it all: broadband needs public support through financial instruments. If we fail to invest, millions in less populated areas will find themselves on the wrong side of the digital divide, cut off from tomorrow’s opportunities. That’s bad for our economy, and bad for our society.

This refrain should be familiar to U.S. citizens, or even those in Australia – countries that have recently proposed public money for faster broadband access. Ironically, the governments in places outside the U.S. seem to be more aware of the challenge in getting private companies to invest in rural areas where the cost of deploying fiber for a few homes doesn’t make economic sense — or would totally crush the business models of the incumbent providers.

Unlike Australia, the EU isn’t proposing that the government build out the infrastructure. Instead, it’s proposing a series of loans and grants to incentivize private-sector investment, similar to what the U.S. did with its broadband spending under the American Reinvestment and Recovery Act (ARRA) in 2009.

Unfortunately, building out broadband networks is a highly unique situation in rural areas, where the costs are high and the end-customer has to be willing to pay (maybe more than the going rate in a more densely populated area) for access. Getting connectivity all the way to the home may also require further municipal or taxpayer investment. As this example of a successful ARRA-backed broadband stimulus project indicates, success is possible, but it’s also highly specific. And while that is one success, other projects have so far failed, providing a fiber backbone to nowhere.

I’m beginning to think this half-in and half-out approach to giving loans for broadband funding is the worst of both worlds. Taxpayer dollars are spent building out infrastructure, but the private companies that those dollars go to don’t necessarily have the experience or willingness to create a viable business built on the loan. Sure, taxpayers spend less, but the net result is they end up with nothing. Hopefully if the EU goes ahead and approves this plan, it can learn from some of America’s mistakes.

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The mobile industry is set to hit what I call its fourth revenue curve, where they will derive their sales from providing services such as payments, software and mHealth as opposed to providing voice, texting or bulk data. How they handle this fourth curve will determine if operators continue to dominate the value chains or become irrelevant. Here’s what’s at stake.

In 2012, the global mobile services revenue will hit $1.5 trillion. This is after last year’s landmark total global mobile operator revenue exceeded $1 trillion — a new industry high. But that peak isn’t guaranteed to last.

The four revenue curves explained

For much of the last three decades, voice has dominated the revenue streams for almost all operators. However, in 2013, the global voice revenues will fall below the 60 percent threshold. So far, the drop in voice revenues has been compensated by the rise of messaging revenues and the data access revenues. However, some nations and operators have started to experience declines in messaging revenues as well.

The sigmoid or the S-curve growth has been well understood and applied to various disciplines. If we segment the operator revenues by voice, messaging, and access and correlate them with subscription growth, in most cases, as the subscriber penetration approaches the 70-90 percent band in a given revenue segment, revenue hits a peak, stagnates for a bit and declines. The amount of time the revenue curve stays in the stagnation phase depends on the market competitive dynamics and usage profile of the subscribers in a given country.

The first revenue curve of voice is already in decline for a majority of the developed markets like the U.S., Japan, and Western Europe. The second revenue curve of messaging is on the decline in some nations like the Philippines, Netherlands, Taiwan, Spain, and Italy while approaching saturation in countries such as the UK, France, and the U.S. Both of these curves are on the rise in developing countries, which are still in the subscriber growth phase.

The third revenue curve of data access is in the growth mode around the world for all nations; however, the margin pressure on this revenue base is the strongest of the three as the operators rush to meet the growing data demand that is doubling every year in most major markets. We are likely to see this growth continue for the next 3-4 years before this curve also starts approaching its peak.

The fourth curve

When that happens, all three revenue curves will be in decline. This means that the net revenue for some of the operators will decline, in some cases precipitously. This will happen to operators around the world at different time intervals, unless the fourth revenue curve starts to take shape in the near term to help cushion the decline.

The fourth curve is quite different from the previous three. It primarily consists of value-added (VAS) and over-the-top (OTT) services such as VoIP, IP messaging, cloud, mHealth, telematics, advertising, payments, commerce, etc. As such, the fourth curve is not a single curve but rather a combination of dozens of smaller curves.

The barriers to entry are low and the main competitors are not fellow operators but well-funded Internet players like Google and Facebook. The business model is less about metered access and more about value creation.

The growth of revenue in this fourth curve will be critical. For some operators, a weak fourth curve will be fatal. They won’t be able to arrest the fall in the overall net revenue and investor pressure will force them to consolidate or learn to live with lower margins or go out of business.

Handling the fourth curve: Adapt or die

Based on the strategy chosen, the operators will likely fall into three major buckets: access only, enabler, and digital lifestyle solution providers. To be an effective and a long-term competitor on the fourth curve, operators have to become OTT players themselves. This requires innovation, financial muscles, and a ruthless mindset to capture its share from the value chain.

The operator might play all three roles depending on a given vertical in a given country. However, without playing a significant role in the latter two categories, operator revenues over the long haul will start to resemble those of utilities – billions of dollars in revenue but the margins might shrink to 8-12 percent from the current 30 to 40 percent.

Greater competition on the fourth curve works in the best interests of the consumer. Given that the service layer is detached from the access layer, the choice of solutions across any given vertical will be good for the consumer. The startup ecosystem will also benefit from a more diverse telecom services landscape as the number of potential customers and acquirers will increase. Regulators will have their work cut out for them to keep the market fair and competitive.

An operator’s ability to recognize the importance of the fourth curve in its long-term survival plans will pretty much define their role in the ecosystem. Many will fail and get assimilated by the tides of consolidation. But, some will move and adapt, either forced by the financial climate or the desire to innovate, and launch new services that fuels their growth for the next decade. Indeed their future will be defined by how they react to the 4th wave of mobile.

Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in the mobile industry. He has served as an advisor to senior executive management of several Fortune 100 companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. He is author or editor of 8 mobile related books and more than 125 research papers and articles.

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Last week’s announcement that a $200 million broadband investment fund is in play courtesy of Gigabit Squared is part of a quiet trend of communities searching for new ways to fund broadband.

Technologies such as desktop PCs, local area networks and mobile applications moved from their infancy to full-blown industries thanks to venture capitalists, investment firms and angel investors who drop big-to-huge bucks on promising startups. For better or worse, these investors drove industries to maturity. Expect the investment scenario for broadband to be different.

Few view broadband networks as startup businesses, but maybe more should. Many communities believe broadband is critical infrastructure, the same as water, electricity and highways. Enlightened communities also know these networks are business operations, even when in pursuit of the common good. The networks must generate revenue, though the financial goal for community-run and muni-run networks is more sustainability for the infrastructure rather than profit.

Gigabit Squared views broadband networks as technology ventures in need of investors and investments, but in a different vein than VCs. Gigabit Squared CEO Mark Ansboury explains that the company targeted private companies for investments that have a business stake in the growth of networks rather than aloof VCs only concerned with the IPO payday.

Gigabit Squared is similar to angel investors who value bringing their time and expertise into the thick of things to help startups. However, the amount of each investment in a broadband network is higher, and the experience the company brings is broader than what comes with typical angel investments.

Think different – more than a slogan.

These towns called on someone who cared about their broadband quality.

“Non-traditional” business  investments in broadband have been around for a while. Early in 2011, Corning, Inc. invested $10 million to three rural upstate New York countiesto build a fiber network, including the county from which Corning operates.  “We saw this as an investment not only in the community’s future, but in Corning’s future,” says Corning’s Dan Collins.

This “we win, the community wins” philosophy was showcased at last week’s Freedom to Connect conference in Washington, D.C., as a session panelist described how his software company is investing an undisclosed amount to build a fiber network throughout San Leandro, Calif,. Pat Kennedy, CEO of OSIsoft, says his company needs gigabit speed to continue to grow and compete effectively. Kennedy feels that, as a longtime resident, property owner and successful business in the city, he should give something back to the city. Lit San Leandro is his investment. How many communities could move their broadband projects forward by finding more such investors?

Here’s another example. Four friends in Emporia, Kan. who until several years ago held management roles in a successful small local telecom company, had become very unhappy with the poor quality of broadband in their town of 30,000. The large incumbent refused to upgrade its network to address the community’s needs. So the four started a new company – Valu-Net, LLC – with $500,000 of their own money. Then they proceeded to raise an additional $6.3 million from investors who had to put in at least $50,000 to participate.

This is more traditional tech startup fundraising. What wasn’t typical were the investors. Co-founder Rick Tidwell states, “The people who put money in … you wouldn’t expect to have this much to invest. There were small business owners, farmers who’d done well. Mostly average Emporia residents who invested because they believe in the founders and believe that it [the network] eventually helps the community.”

Issuing municipal bonds to fund networks is on the wane because of politics and the poor economy. But what if communities flip the script, take government out of the picture (directly), create a nonprofit corporation that is owned by local citizens and businesses, and replace bonds with promissory notes. You would have ECFiber in Vermont. To date the not for profit corporation has raised over $2 million for a fiber network selling $2,500-notes to rural residents who average two notes per purchase.

Make a deal for better broadband.

Flip the script again. IPOs are the stuff of legend in the tech industry. In England, Broadband for the Rural North, LTD (B4RN) sold enough shares of stock to finance its initial network buildout. The main fact is when communities think outside of the box, good things can happen.

Control vs capital.

While these are definitely winners, from the perspective of those who champion the public good, the level of success is directly dependent on control. As with traditional tech startups, whether you take investment money – and from which investors – often comes down to how much you give up in exchange for the money.

How much communities control and direct the use of the network depends on who calls the shots. As Ann Millspaugh, Online Community Manager for EdLab Group, said after listening to Ansboury last week, “It seems like Gigabit Squared’s comprehensive, integrated buildout will make the community dependent on its infrastructure. The lack of transparency and input towards management/governance easily could lead to characteristics that have been defining the digital divide, particularly fiber deployment to areas that will be most profitable, and unchecked pricing structures.”

The trick for building networks that maximize benefits for the public good seems to be to create a strong governing body for the organization that owns the network, whether a co-op, nonprofit, community foundation, even a public-private partnership. Community stakeholders can’t be so enamored with the technology that they don’t pay close attention to the design of the infrastructure and business practices. How communities respond to options such as Gigabit Squared likely will depend on how they resolve the issue of control.

Craig Settles is a consultant who helps organizations develop broadband strategies, host of radio talk show Gigabit Nation and a broadband industry analyst. Follow him on Twitter (@cjsettles) or via his blog.

Handshake image courtesy of Shutterstock and skyshak roman.

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So as the Senate gets ready to meet, Public Knowledge, Free Press, the New America Foundation and Consumers Union sent a letter to the Senate Commerce Committee asking it to quiz ISPs about their caps. The letters essentially ask why such caps are necessary given that caps are a bad way to deal with network congestion (rate limiting during times of peak demand is a better option). They also asked what I think of as the Comcast question. From the letter:

Recently, Comcast began offering an Internet-enabled streaming service through Microsoft’s Xbox device, for customers that subscribe to both Comcast’s monthly cable television package and its monthly broadband service. This online video offering will not count against consumers’ monthly broadband data caps, even though the service is provisioned over the very same networks that Comcast claims are so prone to congestion.

This development casts additional doubt on the justification for data caps. That two identically sized data streams traveling over the same infrastructure could produce such disparate outcomes for the consumer provides an indication of the true motivation for these caps: discouraging consumers from using the online video services that compete with Comcast’s monthly cable package.

We’ve written a lot about the implementation of caps here and here. Despite the fact that some ISPs have decided not to implement caps and Comcast’s exceptions to its own capping rules, there’s a simple rationale behind the data cap: it can be used to create a walled garden. I hope the staffers and legislators at tomorrow’s hearing will take a look at the letters, as well as our coverage, and ask ISPs the hard questions.

And for anyone else interested in this topic, check out the 56-page white paper released Monday on caps from Public Knowledge. What’s notable here is that the report also takes on the question of wireless data caps. And while the report concludes that usage-based broadband on wireless networks makes more sense, it also offers ways to make such caps less onerous for the consumer. Of course, suggestions such as “preventing artificial scarcity” and implementing a more granular approach to caps, such as only using them during times when the network is congested, requires a sophisticated level of governmental oversight and scrutiny. I’m not sure the wireless guys would be willing to give into such overnight; nor would the government really want to regulate carriers that closely.

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According to leading analyst firm, Point Topic, the country’s alternative network operators have increased their residential customer base by 85 percent since mid-2011, and had around 8,400 fibre-based superfast end user connections at the end of 2011. These include fibre-to-the-cabinet, fibre-to-the-premises and fibre-to-the-building providers whose customers are receiving download speeds of at least 25Mbps.

Companies such as Call Flow Solutions and Rutland Telecom are providing service in suburban and semi-rural areas of the U.K where large ISPs such as BT or Virgin are not. Analogs in the U.S. would be networks from Sonic.Net, BendBroadband in Oregon, Google’s efforts in Kansas City, and an array of municipal networks, such as those in Chattanooga, Tenn., and Lafayette, La. But ultimately, while niche superfast networks are great for those that have them, a patchwork broadband strategy isn’t ideal.

Huge differences in speeds can create chicken and egg problems for towns with superfast connections and no one to connect with, as Chattanooga is finding. Additionally the economics of rolling out superfast broadband mean that dense areas are less expensive to wire, while rural and spread-out areas cost a lot, especially in the U.S. A national plan helps average out the costs, while cherry picking dense areas means any provider trying to connect rural or suburban areas will have to pay more and possibly charge more to offset those costs.

That being said, the investment in superfast broadband at a national level is expensive — for the U.S. the high-end network estimates come in at $100 billion – so perhaps we’ll have to take what we can get and hope firms such as Sonic.Net and Google, or cities like Chattanooga can help upend the traditional telco model.

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The company that sells a 1 Gbps connection for $20 a month is happy admitting to the world that they are selling a “big dumb fat pipe”. I don’t expect AT&T or Verizon or British Telecom are doing that. After all, their copper/fiber is special, handcrafted in factories high up in Italian mountains. The Hong Kong service provider, however, has a different take:

[At] Hong Kong Broadband Network, a wholly owned subsidiary of City Telecom, we are proud to be a Big Fat Dumb Pipe provider, easily handling average bandwidth consumption of over 100GB/month per user across our 600,000 plus FTTH/B customer base.

At HKBN, we embrace Over-The-Top (OTT) content providers who help fill up our excessively Big Fat Dumb Pipes. We happily co-exist with OTT providers, as together we create value for our customers. Our superior bandwidth capability is the LUCA (Legal Unfair Competitive Advantage) that drives our industry leading 17.5% return on equity1,” said Mr. Lo Sui Lun, Chief Technology Officer of HKBN. (HKBN Press Release, PDF.)

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Flygrip $29.95

I was amazed as to how quickly I fell in love with the Flygrip’s simplicity of design and elegance It’s a clip that sticks on the back of an existing iPhone case, or Flygrip’s custom case. While it adds some bulk to the back of the case, it actually isn’t annoying. Quite the opposite. Fully retracted, it allows you too hold your iPhone securely with your ring and forefinger, leaving the rest of your hand able to type. Being able to text and tweet easily on the go made me a believer out of me.

Not only does it make the iPhone easier to hold, but the Flygrip can also act as a kickstand for both portrait and landscape mode, which made catching up on email during lunch an absolute breeze. At $29.95, it’s affordable, and you don’t have to give up your existing case.

xPrintServer $149.95

Although Apple’s AirPrint only supports a limited set of printers, iOS products like Readdle’s Printer Pro and desktop products such as Ecamm’s Printopia have extended the iPad’s print capabilities. Lantronix has a desktop-and device-independent solution to make existing network printers available to any iOS device also on the network. The device supports up to 10 printers, and retails for $149.95. It’s a great option for small businesses that want to quickly and easily make their existing printers available to employee devices.

Prizm Stand $24.95

The Prizm series of iPhone and iPad stands from Hub Innovations is another simple, elegant product. The stand is made up of two metal pieces that come together to hold your iOS device in place while charging or just on display. Starting at $24.95, they come in a variety of colors and can be custom engraved.

I liked that these stands didn’t suffer from the feature bloat or bling overload of most other accessories at the show. This is the type of holder you’d use at home or at your business to frame your iPad with style and without stealing the focus of what’s on the iPad screen. In fact, the metal can be engraved with company information to help provide a custom branding solution. They were at hit with show-goers, so it stands to reason they’d succeed with customers and clients, too.

Wormhole Switch $39.95

One of the few non-iOS focused innovations at the show was the Wormhole Switch by j5create. This product uses an attached of USB connectors to not only control another computer’s keyboard and mouse, but also transport data between computers while avoiding the network entirely.

Even the fastest broadband networks can’t match raw USB speeds, and anyone who’s transferred a large file over a home network knows how much it slows things down. While other USB-direct connect options exist, this product makes it easy for even novices to set up, with software that loads directly from the device.

At a reasonable price of $39.95, the time you’ll save waiting for files to transfer is well worth the cost.

iKeep Charger $49.99

The iKeep Charger is a combination iPhone and micro USB charger conveniently connected to a retractable cord with a carabiner hook for clipping onto a bag, belt loop, etc. The AC plug folds invisibly into the unit, making it easy to quickly charge your iPhone or other devices while on the go without adding bulk. Unlike the iPhone’s stark black and white options, the iKeep Charger comes in eight different colors to match your outfits, or simply your personal taste.

There are my top picks from the show. What stood ou to you? Let us know in the comments.

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