Why the economics of the Internet look totally different in North America

August 26

By now, you've probably read more than you ever thought you would about how the Internet works under the hood. We've seen Netflix and Comcast grapple over how much it should cost to send you episodes of "Orange is the New Black." We've seen federal regulators try to unpack that dispute by looking at the market for interconnection — that middle-mile part of the Internet that delivers Web content to your broadband provider, who then passes it along to your computer. We've seen a big debate about whether interconnection should be subject to the same net neutrality rules that the Federal Communications Commission wants to apply to the last mile of the Web.

The interconnection market might be complicated and opaque to most of us, but it's a vital part of our Internet experience — which makes a new blog post by the networking company Cloudflare so illuminating. Cloudflare is one of a number of companies that move data to and fro across the Web. Because so many other networks connect to it, the company has a good vantage point from which to observe global Internet traffic flows. And what it finds is that more companies in North America pay for interconnection than in almost any other region of the world.

There isn't really a clear takeaway from that statistic, unfortunately — it's likely to be picked up and used by everyone who has an opinion on how the Internet ought to work. For example, it potentially benefits those who argue that paid interconnection is so common in North America that it shouldn't be a big deal to expect similar payments between companies when it comes to, say, net neutrality or the kind of deal involving Comcast and Netflix. At the same time, the data might also be used by others to argue that North America's way of doing things is out of step with the rest of the world.

To understand what's going on here, let's go over briefly how interconnection brings you the traffic you request from providers like Netflix or Amazon.


(The Washington Post)

To send you your video or Web pages, content providers have to connect to your Internet provider. There are a number of ways this can happen, but let's consider two basic scenarios. In the first, Netflix pays to have third parties route your videos over the middle-mile Internet before the videos land at the feet of your ISP, who then carries the video to you. That indirect connection is called transit.

The second scenario involves connecting two companies' networks directly. Network geeks call this peering, and it's often carried out with a kind of gentleman's agreement that it happens for free so long as the amount of traffic flowing between the two companies is roughly equal.

What Cloudflare's analysis shows is that in North America (which basically means the United States, because Cloudflare operates only one Canadian data center and none in Mexico) companies engage in much more paid transit than free peering than in other regions of the world. Here's the breakdown according to Cloudflare's traffic observations:


(Cloudflare)

Now look at Australia, South America, Asia and Europe. There, it's a more even split.


(Cloudflare)

(Cloudflare)

(Cloudflare)

(Cloudflare)

What does all this mean? This is actually a sign of a functioning market, according to Matthew Prince, Cloudflare's chief executive. It means that buying access to the Internet is so cheap for many companies that it's not worth going through the hassle of setting up peering agreements to begin with. Even though peering is often free once it's been established, there are still nontrivial upfront costs, Prince said in an interview.

"The cost is a couple of things," Prince explained. "There's a cost to connect to whoever it is that's either maintaining a peering exchange or to directly connect with the other network, so there's some sort of fee for that. There's typically a cost for the actual cable that gets run — a data center will charge you what's called a cross-connect fee, and that has a cost to it. And then if you buy a router from, say, Cisco or Juniper, that might cost… When you have all those things combined, what it does is it suggests that if bandwidth is really cheap — if you add up those costs and it costs more than you'd pay for transit — then it's a rational decision to pay for transit."

In North America, the price of 1 Mbps of bandwidth for big networks is "well south of a dollar, which is remarkable," Prince added.

It's worth pointing out that paid transit is different from paid peering. When Netflix complains about paying Comcast, it's talking about the latter. Paid peering is a bit of separate beast.

Cloudflare's data offers more insight on the bigger picture, which is that paid transit is very common. That's a talking point often advanced by people who say Netflix is complaining a lot about nothing, or that efforts to ban "Internet fast lanes" overlook the fact that the Internet is already non-neutral thanks to paid transit. If there's already an existing market where companies pay each other to carry traffic, the argument goes, then what's the big deal about paid peering or, in the last-mile Internet, paid prioritization?

That's not to say that Cloudflare's analysis settles much about any of these debates. If anything, everyone will probably try to claim the findings as evidence to support their own positions.

 

Have more to say about this topic? We take your questions every week in our weekly livechatSwitchback, Fridays at 11 a.m. ETThe comment box is open, so submit your questions now.

Brian Fung covers technology for The Washington Post, focusing on telecom, broadband and digital politics. Before joining the Post, he was the technology correspondent for National Journal and an associate editor at the Atlantic.
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