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The internet is like the old Soviet Union, except it works

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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, (s t) Sprint,(s s) 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.

9 Responses to “The internet is like the old Soviet Union, except it works”

  1. James Hancock

    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.

  2. elfonblog

    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.

      • Richard Bennett

        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. 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….