Internet interconnection – the only constant in a sea of change

The Internet ecosystem has changed dramatically since the commercialisation of the Internet backbone just over 15 years ago. At that time Netscape had just been introduced, the largest Internet service provider (ISP) in the USA was still charging hourly fees, and broadband was not yet available. Since then, there has been an enormous increase in Internet traffic, a corresponding dramatic increase in the value of content, and new services and devices that add to the virtuous circle of unending growth (see Figure 1). In this sea of change, the only constant has been the ability of the ecosystem to evolve, driven by commercial considerations and not regulation.

Figure 1: Trends that have had an impact on the Internet ecosystem over the past 15 years [Source: Analysys Mason]

From a rather simple ecosystem with relatively clear and hierarchical relationships, the main players (end users, content providers, ISPs and backbone providers) have steadily adapted to changing market conditions, accommodating the increase in demand – and willingness to pay – for Internet services and the corresponding growth in traffic. Players have also engaged in vertical consolidation, with content providers starting to build their own networks and ISPs bypassing the backbone networks. In particular, these players have transformed the nature of their relationships, where necessary, in order to enhance connectivity and reduce their transit costs:

• The growing use of Internet Exchange Points (IXPs) around the world has facilitated distributed interconnection between peers and transit customers, but also helped in the efforts to reduce transit costs.
• The development of direct interconnections between ISPs and other ISPs (secondary peering) or content providers (typically with paid peering) has also helped to reduce transit costs.
• The building of private networks by content providers or third-party content delivery networks (CDNs) to supply content to ISPs has further reduced transit costs and the resulting revenues for backbones

In the same way that competing Internet backbones have developed peering arrangements as an input to the transit services that they sell to ISPs and content providers, the ISPs and content providers themselves have developed new arrangements in response to the changes in content traffic (notably the steep rise in video, as well as the rise of distribution models such as peer to peer). The main attribute that has characterised Internet interconnection arrangements is a flexible system within which players can adapt to changes in their own circumstances in a way that also furthers the mutual interests of the entire ecosystem.

The commercially driven evolution of Internet interconnection is very different from the regulation that governs interconnection of telecoms services, even though both may share the same network infrastructure and involve many of the same players. For example, during the past decade of evolution in the Internet described above, the US regulator (the FCC) has made countless attempts to modify the inter-carrier compensation system in response to changes in telecoms – and the process is still ongoing.

In contrast, since the commercialisation of the Internet backbone, the Internet ecosystem has long proven itself capable of developing and sustaining interconnection in the absence of sector-specific regulation – and now it has also shown that it can adapt well to rapid and profound market changes without regulatory intervention.

For more information about Analysys Mason’s capabilities in establishing an IXP, ranging from policy and regulatory issues through to planning and delivery, please contact us.