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The Evolution of Internet Interconnection from Hierarchy to  Information Economics and Policy 25 (2013) 235–245 Contents lists available at ScienceDirect Information Economics and Policy journal homepage: www.elsevier.com/locate/iep The evolution of Internet interconnection from hierarchy to ‘‘Mesh’’: Implications for government regulation ⇑ Stanley M. Besen a, Mark A. Israel b, a Charles River Associates, United States b Compass Lexecon, United States article info abstract Article history: The Internet has evolved from a ‘‘hierarchy’’—in which interconnection was achieved by Received 12 July 2012 having Internet Service Providers (ISPs) purchase transit services from top-level backbones Received in revised form 9 July 2013 and top-level backbone providers engage in direct settlement-free peering—to a ‘‘mesh’’ in Accepted 10 July 2013 which peering occurs among a much larger number of participants and some peering Available online 24 July 2013 arrangements involve payments from one peer to another. In this new environment, back- bone providers, ISPs, and suppliers of content have a far wider array of interconnection Keywords: alternatives, both technical and financial, than they did only a short time ago. As is often Internet transit the case, the introduction of new alternatives and contractual arrangements has led to calls Internet peering Secondary peering to regulate which alternatives and arrangements are acceptable. In this paper, we explain Settlement-free peering why such regulation would be harmful, as it would (i) reduce the incentives of industry par- Regulation ticipants to minimize total costs; (ii) lead to higher access prices to end users; (iii) result in Regulatory costs prices that do not adequately reflect costs; and (iv) create regulatory inefficiencies. We also ISP explain why the alternative interconnection arrangements to which Content Delivery Net- CDN works (CDNs) (and their content provider clients) and ISPs generally have access already impose limits on the exercise of market power, thus obviating any need for regulation. Ó 2013 Published by Elsevier B.V. 1. Introduction arrangements take a wider variety of forms. Significantly, the system has adapted to the rapid changes in both the A decade or so ago, the Internet could be fairly described amount and nature of Internet traffic with few, if any, gov- as a system in which interconnection was achieved by hav- ernment restrictions on the nature and form of the intercon- ing Internet Service Providers purchase transit services from nection arrangements that are permitted. top-level backbones and having top-level backbone provid- This paper describes this evolution in some detail and ers engage in direct settlement-free peering with one an- explains why an attempt to impose detailed regulation other. In the intervening period, however, this hierarchical on Internet interconnection would be an extraordinarily system has been displaced by one with a far richer array difficult undertaking. Regulation of interconnection would of arrangements – what might be thought of as a ‘‘mesh’’ – reduce the incentives of industry participants to minimize including peering among a much larger number of partici- total costs, lead to higher access prices to end users, result pants, secondary peering, and peering arrangements that in prices that do not adequately reflect costs, and create involve payments from one peer to another. Moreover, this regulatory inefficiencies. There is no compelling reason to system has continued to evolve as industry participants dis- bear such regulatory costs: The alternative interconnection cover new and creative ways to interconnect and financial arrangements to which Content Delivery Networks (CDNs) (and their content provider clients) and Internet Service Providers (ISPs) generally have access already impose lim- ⇑ Corresponding author. Address: Compass Lexecon, 1101 K Street NW, 8th Floor, Washington, DC 20005, United States. Tel.: +1 202 589 3484; its on the exercise of market power. Hence, detailed gov- fax: +1 202 589 3480. ernment regulation of Internet interconnection would be E-mail address: [email protected] (M.A. Israel). likely to do more harm than good. 0167-6245/$ - see front matter Ó 2013 Published by Elsevier B.V. http://dx.doi.org/10.1016/j.infoecopol.2013.07.003 236 S.M. Besen, M.A. Israel / Information Economics and Policy 25 (2013) 235–245 2. Transit and peering primer Throughout this period, networks typically exchanged traffic through two types of commercial arrangements 2.1. Traditional transit and peering arrangements adopted through bilateral negotiations. The first was transit, where one IP network (such as a local ISP) pays The Internet consists of approximately 40,000 networks another IP network (such as a national backbone pro- (‘‘autonomous systems’’ or, ‘‘ASs’’) around the world that vider) to arrange for the transmission of traffic between have agreed to use a common protocol and addressing sys- its end users and all other sites on the Internet. The sec- tem known as the Internet Protocol (‘‘IP’’).1 In the first dec- ond was peering, where two IP networks exchange traffic ade of the commercial Internet, the relationships among from and to each other’s end users (or the end users of these IP networks were largely ‘‘hierarchical’’: business and their respective transit customers). ‘‘Settlement-free’’ residential users typically connected to the Internet via a lo- peering, in which no cash payments are made between cal Internet service provider (‘‘ISP’’), and each local ISP typi- the parties exchanging traffic, has been the norm for net- cally relied on one or more national backbone providers for work providers that exchange roughly comparable vol- connections to other ISPs.2 For example, if a residential sub- umes of traffic.4 scriber wished to download content from a website, his re- Internet backbones have always been divided into sev- quest would travel from his home to his ISP, which would eral classes, determined primarily by their reach, extent of hand it ‘‘up’’ (sometimes through a separate regional access connectivity with other networks, and settlement relation- provider) to an Internet backbone provider. Unless that back- ships that, for the most part, are privately negotiated and bone provider also served the (typically different) ISP that not publicly disclosed. According to Peyman Faratin and served the content provider, it would hand the request to an- David Clark, ‘‘[t]he so-called Tier 1 ISPs are the set of ASes other backbone provider, which, in turn, would hand the re- that do not purchase transit from any other AS, and thus quest ‘‘down’’ to the content provider via the latter’s ISP. The must peer with every other Tier 1 ISP. The Tier 1 ISPs col- content provider, in turn, would reverse the process when lectively form a complete mesh of peering arrangements. transmitting the requested content back through the latter Tier 1 ISPs are large, with global scope.’’5 Today, ten net- ISP and backbone operator to the residential end user. The works are generally viewed as Tier 1 backbones: Deutsche following diagram illustrates the basic hierarchical structure Telekom, Level 3, AT&T, Verizon, CenturyLink, Inteliquent, of these inter-network relationships:3 Sprint, NTT, TeliaSonera, and Tata.6 Tier 2 networks typically 1 See CIDR Report for April 9, 2012, http://www.cidr-report.org/as2.0/ peer with some networks and purchase transit from others, (viewed April 9, 2012). 2 See, e.g., Christopher S. Yoo, ‘‘Network Neutrality or Internet Innova- while Tier 3 networks generally only purchase transit. tion?,’’ Regulation, at 22-24 (Spring 2010) (hereinafter, ‘‘Yoo, Regulation’’); Stanley M. Besen, et al., Evaluating the Competitive Effects of Mergers of Internet Backbone Providers,2ACM Transactions on Internet Technology 187, 4 See Bruce M. Owen, The Internet Challenge to Television at 202 (1999) at 189-90 (2002) (hereinafter, ‘‘Besen et. al.’’). Some commentators use the (‘‘The big ISPs...connect with one another and exchange roughly equal term ‘‘ISP’’ to encompass both local access providers and backbone volumes of traffic. It is customary for such ‘peer’ networks not to pay one providers. Ultimately, it would be futile to attach precise definitions to another for accepting the other’s traffic, presumably because transactions terms describing various types of IP networks because major IP network costs can be avoided in that way with no significant revenue loss on either operators are increasingly likely to perform multiple roles in the Internet, side’’). including local access, long-haul transport, and content distribution. 5 Peyman Faratin, David Clark et al., The Growing Complexity of Internet 3 Craig Labovitz et al., ATLAS Internet Observatory Annual Report, at 9 Interconnection, 72 Communications & Strategies 51, at 55 (4Q 2008) (2009),<http://www.nanog.org/meetings/nanog47/presentations/Monday/ (hereinafter, ‘‘Faratin and Clark’’). Labovitz_ObserveReport_N47_Mon.pdf>(hereinafter Labovitz I) (visited 6 For a list of Tier 1 networks see http://en.wikipedia.org/wiki/ March 24, 2011). Tier_1_network (visited April 9, 2012). S.M. Besen, M.A. Israel / Information Economics and Policy 25 (2013) 235–245 237 2.2. Recent developments in peering and transit relationships networks, so they now have significantly more ‘‘backbone’’ facilities, which makes it easier for them to connect di- 2.2.1. Description of recent developments rectly with a greater number of other networks. Second, In recent years, several new types of commercial the aggregation of content has enabled the ‘‘disintermedi-
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