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

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.

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.