Internet of Things (IoT), Future Networks (FN) and the Economics of Virtual Networks

24 Pages Posted: 30 Mar 2016 Last revised: 13 Aug 2016

Date Written: August 15, 2016


The Internet of Things (IoT) gains momentum. Developments regarding smart grids, intelligent transportation systems and low power networks for smart cities constitute drivers in the evolution of network industries. IoT creates new requirements for ICT data transmission: in addition to real-time and data geopositioning, new service characteristics result from the change of the traditional sender-receiver perspective of TCP/IP towards content relevancy for many users (e.g. cloud computing) and dynamic changes of the state of devices. The future development and success of IoT hinges critically on the provision of heterogeneous Quality of Service (QoS) requirements which cannot be provided by best effort TCP/IP Internet (ITU-T 2015; ISO/IEC 2012). Alternative network logistics (virtual networks) dealing with heterogeneous Quality of Service (QoS) requirements of network traffic may require fundamental deviations from traditional Internet architectures. Corresponding logistics operating over joint physical infrastructures gain increasing attention under the heading of Future Networks/FN (ITU-T 2011, ITU-T 2015). The goal of this paper is to focus on the economic mechanisms of how the potentials of QoS differentiation in the context of FN can be fully exploited and incentivized within innovative All-IP-based QoS traffic architectures.

It is shown that a proper division of labor between entrepreneurial decision making of network providers and standardization procedures of standard committees is inevitable. While the evolution of the IP protocols (IPv4, IPv6, Locator/ID Separation Protocol) enables path dependent standard setting processes, entrepreneurial decisions regarding network investments should be market driven and depend on the opportunity costs of network usage.

FN may entail a large variety of network services implemented via the concept of virtualization of different application service networks which are all competing for the same All-IP based infrastructure capacities. A large variety of different QoS requirements emerges in particular due to IoT as well as various (tele-)communications services. Thus, the traffic architecture should be capable of providing a variety of application services within FN. The question of how to solve the network capacity allocation problem must be addressed. The underlying resource allocation problem in FN permits economic priority ordering between different virtual networks. By means of network economic analysis we derive QoS-differentiated pricing based on the opportunity costs of network usage required in the provision of different virtual networks. As a corollary, questions regarding capacity allocation for cloud computing, cooperation and coordination between different virtual networks, division of labor between intra-virtual network capacity allocation and total bandwidth consumption based on the All-IP based infrastructure capacities are approached.

Keywords: Internet of Things, Future Networks, All-IP Infrastructures, Virtual Networks, Traffic Quality Differentiation, Internet Pricing

Suggested Citation

Knieps, Guenter, Internet of Things (IoT), Future Networks (FN) and the Economics of Virtual Networks (August 15, 2016). TPRC 44: The 44th Research Conference on Communication, Information and Internet Policy 2016, Available at SSRN: or

Guenter Knieps (Contact Author)

University of Freiburg ( email )

Platz der Alten Synagoge
Freiburg, D-79085

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