Interconnection agreements between Internet Service Providers (ISPs), transit providers, and content delivery networks (CDNs) allow broadband users to transmit traffic to, and receive traffic from, everywhere on the Internet. These agreements are based on a combination of technical issues (e.g. the locations to and from which the provider agrees to route traffic and the amount of traffic exchanged in each direction) and economic issues (e.g. the perceived value of the arrangement and any fees involved). Historically, interconnection agreements consisted of settlement-free peering agreements (between network providers at the same tier) and paid transit agreements (between network providers of different tiers). However, changes in Internet topology due to mergers between access and backbone networks and due to the proliferation of CDNs have resulted in most Internet traffic now flowing through interconnection points between access networks and CDNs. These traffic flows are often subject to a new category of paid peering agreements
Disputes over interconnection agreements have occasionally led to failures to augment interconnection capacity, which in turn have harmed the experience of consumers. This project will construct a modern model of Internet interconnection that incorporates both the relevant technical and economic factors. The model will be used to explain and guide new forms of Internet interconnection arrangements. The project will also develop methods to illustrate when Internet interconnection agreements may be used in anticompetitive and discriminatory manners
This project consists of two interrelated efforts. In the development of models of Internet interconnection, the project will investigate the cost factors that should affect interconnection arrangements, including the destinations to which a network operator will route traffic, the volume of traffic, the network cost along that path, and any transit payments required. The project will also investigate the value factors that may affect interconnection arrangements, including the destinations to which an interconnection partner will route traffic, the volume of traffic, and the value of that traffic based on the application. The project will then analyze the variation of the feasible ranges of prices for paid peering with network costs, the maximum that a party is willing to pay, routing and traffic ratios, and competitive pressures
Second, in the development of analytical models of competitive versus anticompetitive behavior, the project will evaluate the characteristics of a variety of interconnection agreements, including the minimum number of interconnection points, routing requirements, capacity augmentation requirements, determinants of payment, and conditions for termination. The project will examine the impact of interconnection prices on broadband providers, content providers, and Internet users, and the resulting impact upon engineering decisions.
The Effect of Paid Peering Fees on Broadband Prices and Consumer Surplus
Internet users have suffered collateral damage in tussles over paid peering between large ISPs and large content providers. Paid peering is a relationship where two networks exchange traffic with payment, which provides direct access to each other's customers without having to pay a third party to carry that traffic for them. The issue will arise again when the United States Federal Communications Commission (FCC) considers a new net neutrality order.
We first consider the effect of paid peering on broadband prices. We adopt a two-sided market model in which an ISP maximizes profit by setting broadband prices and a paid peering price. We analytically derive the profit-maximizing prices, and show that they satisfy a generalization of the well-known Lerner rule. Our result shows that paid peering fees reduce the premium plan price, increase the video streaming price and the total price for premium tier customers who subscribe to video streaming services; however, the ISP passes on to its customers only a portion of the revenue from paid peering. ISP profit increases but video streaming profit decreases as an ISP moves from settlement-free peering to paid peering price.
We next consider the effect of paid peering on consumer surplus. We find that consumer surplus is a uni-modal function of the paid peering fee. The paid peering fee that maximizes consumer surplus depends on elasticities of demand for broadband and for video streaming. However, consumer surplus is maximized when paid peering fees are significantly lower than those that maximize ISP profit. However, it does not follow that settlement-free peering is always the policy that maximizes consumer surplus. The peering price depends critically on the incremental ISP cost per video streaming subscriber; at different costs, it can be negative, zero, or positive.
Settlement-free Peering Policy Requirements
Peering between two networks may be either settlement-free or paid. In order to qualify for settlement-free peering, large Internet Service Providers (ISPs) require that peers meet certain requirements. However, the academic literature has not yet shown the relationship between these settlement-free peering requirements and the value to each interconnecting network. We develop two models to analyze the value to each network from the most common and important requirements in the United States. Large ISPs in the U.S. often require potential settlement-free peers to interconnect at a minimum of 6-8 locations. We find that there is a substantial benefit from this requirement to the ISP, but little incremental benefit from a larger number of interconnection points. Large ISPs often require that the ratio of incoming traffic to outgoing traffic remain below approximately 2:1. In the case of two interconnecting ISPs, we find that this requirement ensures a roughly equal exchange of value. We also show that it is rational for an ISP to agree to settlement-free peering if the content provider agrees to interconnect at a specified minimum number of interconnection points and to deliver a specified minimum proportion of traffic locally, but a limit on the traffic ratio is irrational.
This paper is intended for people with a background in networking::
This paper is intended for people with a background in communications policy:
Fair Peering Fees
Disagreements over peering fees have risen to the level of potential government regulation. ISPs assert that content providers should pay them based on the volume of downstream traffic. Transit providers and content providers assert that consumers have already paid ISPs to transmit the content they request and that peering agreements should be settlement-free.
Our goal is to determine the fair payment between an ISP and an interconnecting network. We consider fair cost sharing between two Tier-1 ISPs, and derive the peering fee that equalizes their net backbone transportation costs. We then consider fair cost sharing between an ISP and a transit provider. We derive the peering fee that equalizes their net backbone transportation costs, and illustrate how it depends on the traffic ratio and the amount of localization of that content. Finally, we consider the fair peering fee between an ISP and a content provider. We derive the peering fee that results in the same net cost to the ISP, and illustrate how the peering fee depends on the number of interconnection points and the amount of localization of that content. We dispense with the ISP argument that it should be paid regardless of the amount of localization of content.
Price versus Cost
Debates over paid peering and usage fees have expanded from the United States to Europe and South Korea. ISPs argue that content providers should pay fees based on the amount of downstream traffic they generate. In contrast, content providers contend that customers already pay ISPs for delivering the content they request, and therefore that peering agreements should be settlement-free. The issue has arisen in debates in the United States, Europe, and South Korea over net neutrality, universal service, and infrastructure funding. Regulatory entities are considering whether to regulate peering prices and/or impose usage fees.
A key part of the debate concerns whether the market determines the socially beneficial peering price, and if not, how much of a difference there is between the socially beneficial peering price and the market-determined peering price. Our objective here is to understand the range from a cost-based peering price to a profit-maximizing peering price.
First, we determine an ISP’s cost for directly peering with a content provider, by analyzing the incremental cost for transporting the content provider’s traffic when it directly peers with the ISP versus when it sends its traffic through a transit provider. We find that this cost-based peering price is positive if there is little localization of content, but it is zero (i.e., settlement-free peering) if there is sufficient localization of content. We also find that the required amount of localization varies with the number of interconnection points.
Next, we determine the peering price that maximizes an ISP’s profit using a two-sided market model in which a profit-maximizing ISP determines broadband prices and the peering price, and in which content providers determine their service prices based on the peering price. We find that the profit-maximizing peering price decreases with content localization.
These prices establish a range if the peering price is unregulated, from the cost-based peering price (at the low end) to the profit-maximizing peering price (at the high end). Regulatory oversight of peering prices may be warranted when there is a substantial difference between cost-based and profit-maximizing prices.
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