Internet traffic exchange: 2 billion users and it’s done on a handshake

That’ll be $0.0000008 for transit or 100,000 times more for voice, please

Today’s post is written by Rudolf Van der Berg of the OECD’s Science, Technology and Industry Directorate

Every day one Exabyte of data is said to travel over the Internet – enough data to fill 300,000 of the world’s biggest hard disks or 212 million DVDs. And astonishingly, according to Internet Traffic Exchange: Market Developments and Policy Challenges a new OECD report on Internet traffic exchange, most of the thousands of networks that exchange this traffic do so without a written contract or formal agreement.

The report  provides evidence that the existing Internet model works extremely well, has boosted growth and competition and brought prices for data down to 100,000 times less than that of a voice minute. A survey of 4300 networks, representing 140,000 direct exchanges of traffic, so called peerings, on the Internet, found that 99.5% of “peering agreements” were on a handshake basis, with no written contract and the exchange of data happening with no money changing hands. Moreover, in many locations, multilateral agreements are in place, using a so-called route server, where hundreds of networks will accept to exchange traffic for free with any network that joins the agreement. 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.

These peering agreements save both parties money and improve quality for their users at the same time. The alternative is to pay third parties, so-called transit providers, which still remains necessary to reach all networks. Paying for transit currently costs between $2 and $150 per Mbit/s per month, depending on country and competition, irrespective of whether a network sends or receives it.

Under the current system, operators have an incentive to invest and expand their network to reach new peers and cooperate with other networks to establish new Internet exchange points (IXPs) in areas where there are none, because they save on transit costs. Indeed peering locations have been established in every corner of the world and large content providers and Content Distribution Networks have expanded their networks into these locations – in both developed and developing countries. This has saved them and their customers, including the ISPs they peer with and their customers, millions of dollars every year, while greatly increasing quality of service.  Expanding IXPs helps keep local traffic local, unburdens interregional links and stimulates investment in local networks. It is for this reason that the OECD has encouraged countries to develop and use IXPs for more than 15 years.

The Internet has thus developed an efficient market for connectivity based on these voluntary contractual agreements. Operating in a highly competitive environment, largely without regulation or central organisation, the Internet model of traffic exchange has produced low prices, promoted efficiency and innovation, and attracted the investment necessary to keep pace with demand.

For example, if the price of Internet transit were stated in the form of an equivalent voice minute rate, it would be about $0.0000008 per minute – or 100,000 times lower than typical voice rates. By contrast, interconnecting voice services on traditional telecommunication networks has been contentious, requiring strong regulatory oversight, with contracts between networks sometimes totaling hundreds of pages and expensive computer systems calculating the incoming and outgoing revenues.

The findings lend support to the conclusions of a June 2011 OECD High Level Meeting on the Internet Economy, which endorsed principles for Internet policy making that have since become an OECD Council Recommendation. Key among that guidance for policy makers is the need to ensure a multi-stakeholder approach to Internet policy making, and, whenever possible, avoid regulation.

The evidence gathered in Internet Traffic Exchange demonstrates that Internet traffic exchange is the archetypical example for this approach. Not only has the open model of the Internet supported two billion users in an incredibly short period of time, it also lends itself to supporting the type of innovation and competition that will drive growth for the next two billion users.  Importantly, it has done this through a mixture of multi-stakeholder participation and self-governance. The current model of Internet traffic exchange can only exist in an environment that stimulates market entry and investment.  This requires that regulators allow telecommunication and non-telecommunication operators to enter into the market, to compete and to interconnect. Indeed where development of the Internet has been less than satisfactory this often stems from a lack of sufficient liberalization.

Given the enormous difference in performance between the heavily regulated telephony sector and the performance of the Internet sector, the report says:  “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.”

Useful links

To share best practice in this area, the OECD together with BEREC (the telecommunication regulators of the European Union area) organized two workshops on Internet traffic exchange in 2011 and 2012. Some of the presentations of these meetings can be found here.

The Relationship between Local Content, Internet Development and Access Prices (with UNESCO and ISOC)

Developments in Mobile Termination

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60 comments to “Internet traffic exchange: 2 billion users and it’s done on a handshake”

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  1. JRHulls - 22/10/2012 Reply

    Brilliant article. The most striking thing about the internet is that it began with a very pure approach of providing a robust network to distribute information, with no input from the financial sector, with the incentives coming from the US Government, and is still run without central management, other than establishment of standards by the non-profit ad-hoc Internet Engineering Task Force comprised of engineers, where participation and access is based only on the ability to make technical contributions.

    Now, in the US we see increasing attempts by private telecoms to carve out control of access to the internet, and by governments to exert the same level of control for political reasons. It is great to see OECD taking such an enlightened position to preserve a system that is based on the principal of optimizing information exchange, rather than market forces to extract profits from such flow. Free markets motivated by social benefit are entirely different from free markets where the main motivation is financial profit.

    • Rudolf van der Berg - 22/10/2012 Reply

      Thanks for the praise, it of course should go to the authors of the report, Dennis Weller and Bill Woodcock.

      Just as a general point, though I have personal knowledge of how social the Internet’s peering and transit community can be over a beer and I know of the peering cruises and other events that create this community, I do want to point out that running the internet is a business. Establishing a peering is a commercial decision, based on how much money is saved in transit and how much it costs to set it up. That is why Internet Exchange Points exist in many countries as they allow one connection to connect to hundreds of networks.

      But of course to be able to save money and gain financial profit it doesn’t help being a jerk to your peers.

      • JRHulls - 25/10/2012 Reply

        I agree that there is a huge amount of financial interplay on the Internet. However, I would compare the Internet management to the International Civil Aviation Organization, which sets the standards for flying all over the world. The ICAO is not a for-profit organization, but it is what enables airlines, as profit making ventures, to access global markets, as well as allowing private flight operations which includes everything from multi-million dollar executive jets to the smallest private plane.

        It also restricts pilots from being jerks, at least while in flight.

  2. Srinivas Kumar - 29/10/2012 Reply

    I remember reading about ‘digital waste’ in one of the OECD Insights blogs –

    I quote from the above blog:

    ‘There’s also what’s sometimes called “digital waste”, the terabytes of forgotten emails, photos, videos and so on kept online. It all has to be physically stored somewhere, along with the files we actually use, and server farms and the data centres that host them have an impact on the environment through the electricity generated to run the equipment and cool the buildings. Google for instance said that its offices and data centres emitted over 1 million tons of carbon in 2010, claiming that the figure would have been twice as high without efforts to reduce its footprint.’

    It may not be a good idea after all to price it so low!

  3. Martin Hannigan - 28/01/2014 Reply

    Great article. It may be worth your while to pay attention to Open-IX, a standards development organization that has rose in North America to address the great divide between the European and North American interconnect model and creating open standards (same handshake practice) to enable a level playing field and help the Internet to grow:

    • Rudolf van der Berg - 30/01/2014 Reply

      Hi Martin,

      Thanks for the compliments. Have a look at the report too, you surely know of the authors. We are aware of OpenIX here. It is a fascinating development seeing European IX operators and some of their models spreading around the world.

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