Internet Industry Competition Dynamics: Peering Limitations, Exposure, and Counter Strategies

Article excerpt


The Internet industry is vertically integrated with Internet Backbone Providers (IBPs) and Internet Service Providers (ISPs.) Although there are many ISPs and IBPs in each stream, both markets are considered independent oligopolies in that there are a few dominant competitors in each market. It is generally accepted that the Internet industry structure has evolved into a four-tier hierarchical structure. The synergistic and codependent nature of the Internet industry is the key element in understanding the competitive environment in which both IBP's and ISP's cooperate. Peering is an efficient way to exchange traffic freely within the access tier, nevertheless competitive constraints limit within tier exchanges. This paper combines the value chain model, competitive force model and a game model to illustrate the interconnection competitive perspective between IBP and ISPs and demonstrate why peering is difficult in the local access market.


The Internet is a system that makes it possible to send and receive information among all the individual and institutional computers associated with it. It is called a network of networks. As a rough approximation it can be said the Internet infrastructure industry are classified into two categories: Internet Backbone Providers (IBPs) that transfer communications in bulk among network exchange points, and Internet Service Providers (ISPs) that (1) receive communications from individuals or institutions and transfer them to an IBP's network, and (2) receive communications from IBPs and transfer them to their destination.

The number of ISPs increased rapidly from the mid 90' and the structure of the industry continues to change. It is widely accepted that today's Internet industry is a vertical structure: over 40 Internet Backbone Providers (IBPs) including 10 top-tier backbones constitute the upstream industry (Kende, 2000) and over 10,000 ISPs for accessing the Internet make up the downstream industry (Weinburg, 2000). A backbone provider service is critical for any ISPs desiring to connect to the Internet. There are manifold interconnections between ISPs and IBPs. Moving data from one interconnection (tier-to-tier, i.e., IBP-to-ISP, IBP-to-IBP, ISP-to-ISP) to another is the catalyst changing the Internet market structure. There are two kinds of interconnection methods among IBPs and ISPs: peering and transit. Peering interconnection is exchanging traffic without a fee and transit interconnection is exchanging traffic with a fee. The only difference among these types is in the financial rights and obligations that they generate to their customers (Weiss & Shin, 2004). Peering in a backbone market occurs between IBPs but in a local access market peering is rare. In this first part of this paper, we survey the dynamic Internet industry from the point of interconnection strategy and analyze it using a competitive force model. In the latter part we analyze an Internet interconnection market using a game theory. In conclusion, this paper presents support for Internet policy makers to review the Internet interconnection policies.


History of Interconnection

To understand the relationship between peering and transit, it is necessary to review the situation before the commercialization of the Internet in 1995. During the early development of the Internet, there was only one backbone and only one customer, the military, so interconnection was not an issue. In the 1980s, as the Internet was opened to academic and research institutions, and the National Science Foundation (NSF) funded the NSFNET as an Internet backbone. Around that time, the Federal Internet Exchange (FIX) served as a first point of interconnection between federal and academic networks. At the time that commercial networks began appearing, general commercial activity on the Internet was restricted by Acceptable Use Policy (AUP), which prevented the commercial networks from exchanging traffic with one another using the NSFNET as the backbone (Kende, 2000). …


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