The Growing Complexity of Internet Interconnection

Abstract:     
End-to-End (E2E) packet delivery in the Internet is achieved through a system of interconnections between heterogeneous entities called Autonomous Systems (ASes). The initial pattern of AS interconnection in the Internet was relatively simple, involving mainly ISPs with a balanced mixture of inbound and outbound traffic. Changing market conditions and industrial organization of the Internet have jointly forced interconnections and associated contracts to become significantly more diverse and complex. The diversity of interconnection contracts is significant because efficient allocation of costs and revenues across the Internet value chain impacts the profitability of the industry. Not surprisingly, the challenges of recovering the fixed and usage-sensitive costs of network transport give rise to more complex settlements mechanisms than the simple bifurcated (transit and peering) model described in many earlier analyses of Internet interconnection (see BESEN et al., 2001; GREENSTEIN, 2005; or LAFFONT et al., 2003). In the following, we provide insight into recent operational developments, explaining why interconnection in the Internet has become more complex, the nature of interconnection bargaining processes, the implications for cost/revenue allocation and hence interconnection incentives, and what this means for public policy. This paper offers an abbreviated version of the original paper (see FARATIN et al., 2007b).

Number of Pages in PDF File: 21

Keywords: internet interconnection, economics, public policy, routing, peering

JEL Classification: C78, D61, M21

Accepted Paper Series