Carrier Channel: Power Shifting in IP Peering

Posted: 3/2003

Power Shifting in IP Peering

By Khali Henderson

The recent dispute between America Online Inc. and Cogent Communications Group Inc. has thrust peering policies into the spotlight. At issue has been AOL's assessment that Cogent must pay to peer with the ISP because it sends three times as much traffic to AOL as AOL sends back to Cogent.

Cogent inherited the peering arrangement with AOL when it acquired PSINet Inc. According to an article in the Washington Post, AOL told Cogent in December it would charge the carrier $75,000 a month to exchange traffic that previously had been free. When Cogent did not meet AOL's traffic ratio criteria after what AOL claims was two trial runs, its connection was cut off Dec. 16, the newspaper said.

Peering allows two providers exchanging large volumes of traffic to save money by connecting directly, rather than routing traffic through their paid transit lines. Peering does not provide access to the entire Internet, only the other ISP's customers. Peers can link up via a circuit-based connection, but usually connect less expensively where their networks run through the same data center or carrier hotel.

Unlike most bilateral agreements, peering is usually settlement-free, but not always. Paid peering arrangements, like the one AOL requested from Cogent, also exist. This became a common arrangement about five years ago among hosting companies and network service providers that hooked up at an exchange point.

"This is where the definition of peering started to get gray," says Jay Adelson, co-founder and CTO, for Equinix Inc., which operates 15 Internet Business Exchanges (IBXs) in six countries. Adelson says another shift is afoot as we see more and more peering relationships between network providers and content providers like Yahoo!, Google and Electronic Arts.

"I think it is an important fundamental shift in the Internet hierarchy and the way money travels on the Internet," he says. "You have got a company like Yahoo! that is pushing well over 8gbps of traffic, pushing almost half of that not only across connections that are direct, but across free connections. So, half of their Internet traffic, they don't have to pay for."

Interestingly, content providers are exempt from the traffic-balancing requirements ISPs impose on each other. "If a majority of ISPs pay [via transit] to get to Yahoo!, what is it worth to them to have a free connection? I am cutting my costs and in some cases significantly increasing my performance when I establish that direct connection," Adelson explains.

The company in the middle, the transit provider, however, does not benefit from this arrangement. These providers traditionally charged content providers to get to networks with users -- what Adelson calls "eyeball networks" like Earthlink Inc. and AOL -- and they charged eyeball networks to get to content providers. "They collected on both sides yet the value that they added was questionable once the Internet became so pervasive [and] the exchange points became so well populated," he says.

This leads to the question about whether a content provider can charge for access to its content and a last-mile network can charge for access to its users. The answer is, yes. Adelson says in the IBX, there is a provider paying for a direct connection to a content provider.

The money flow may seem backward to many in the telecom industry. Ultimately, it leads to the discussion of where the value lies on the Internet -- is it with the content, the last mile or the long haul? "The eyeball networks and the content providers have established themselves as the valuable commodities on the Internet today," say Adelson. "The intermediate network providers are really struggling to establish value in this level playing field."

A recent report from TeleGeography Inc., "U.S. Internet Geography 2003," notes IP transit prices have dropped 40 percent to 50 percent in each of the last two years. "Part of this plunge can be attributed to declining costs. Prices for fiber-optic capacity, the building blocks for IP networks, have plummeted by more than 70 percent per year," the report notes. "However, much of the decline in IP transit prices can be linked to intense competition."

TeleGeography says while the number of companies selling backbone access is likely to contract, a new breed of backbone operators may arise. "One possible path would lead to a new raft of national backbones designed less for selling wholesale access upstream than for serving an existing customer base of individual end users downstream," the report notes. The research firm cites AOL's rebuilding of a national network and the expanding RBOC networks as potential equals to today's top-tier ISPs.

Others cite Excite@Home's demise as being a wake-up call for the cable companies to build their own networks rather than pay transit providers.

"The playing field has become more and more level," adds Adelson. "Companies like AOL or Earthlink or others start to exert themselves and say, 'Look, I'm not one of those traditional transit players, but I have an eyeball network that is valuable. You don't need to go through one of these transit players, peer with me now.' Now, that's happened and the traditional hierarchy of 10-15 [big players] and everyone else was tiny has leveled out and has made it more and more possible for these partial transit and paid peering type of arrangements."

Partial transit is offering a subset of a routing table, e.g. just who they peer with, for a reduced price from transit -- a practice that is common in Europe as an alternative to the all-or-nothing policies of traditional peering and transit relationships in the United States.

"As these shifts to other forms of activity have happened, the amount of users that I reach through those traditional players has shrunken. Now, to get directly to user X, I have so many different ways to do it, including going directly to user X that I have to weigh out my cost benefit," says Adelson.