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Economic Issues Facing Internet

Economic Issues Facing Internet. Hal R. Varian SIMS, UC Berkeley http://www.sims.berkeley.edu/~hal. Outline. Interconnection Quality of Service (QoS) Implications for industry structure Residential broadband. Interconnection. Bilateral interconnection common

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Economic Issues Facing Internet

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  1. Economic Issues Facing Internet Hal R. Varian SIMS, UC Berkeley http://www.sims.berkeley.edu/~hal

  2. Outline • Interconnection • Quality of Service (QoS) • Implications for industry structure • Residential broadband

  3. Interconnection • Bilateral interconnection • common • Multilateral interconnection • uncommon • highly congested at 5 original NAPs • few new NAPs • Why?

  4. Metcalfe’s Law • Value of network to user = kn • Total value of network = kn2 • Large network connects to small one • big network: lots of users get a little extra value • small network: a few users get a lot of extra value • Value of interconnect is the same!

  5. Multi-party Interconnect • Commercial Internet Exchange (CIX) • Each paid $10,000/year for settlement-free peering • Problem: not stable to competition • history of CIX • once connected, you create your own competition

  6. Conclusion on Interconnect • Bilateral interconnect may get by without settlement • Multilateral interconnect can’t • Will need settlements to support multi player interconnect • Want: fair, reasonable, non-discriminatory terms

  7. Quality of Service • IP = no quality bits (best effort) • Applications and users need different qualities • Questions for ISPs • How much does it cost to provide different QoS? • How much will people pay for QoS?

  8. Cost and Revenue • Cost is an engineering question • Revenue is an economic question • INDEX: www.index.berkeley.edu • Give 150 Berkeley people ISDN • Simulate service quality differentials • bandwidth, congestion, delay to connect • Make them pay for quality bits

  9. Demand for 128 KBS • www.index.berkeley.edu Price (cents) Estimated demand curve Connect time (minutes/week)

  10. Quality of Service • No good ways to contract on QoS at interconnect • Must specify: quality, measurement, accounting, paying for QoS • Result: QoS disappears at administrative boundaries • Aggravated by bill-and-keep

  11. Impact on Market Structure • Standard for QoS: quality could be maintained across admin domains • No standard for QoS: quality can only be maintained within admin domain • Hence: bigger firms can provide higher quality to more places • Without QoS standards, tendency towards monopoly

  12. Role of Standards • With standards: competition within a market • Without standards: competition for a market • Conclusion: want standards for QoS • to provide better services to consumers • to maintain competitive market for ISPs

  13. Residential Broadband • Cable modems • ADSL • ILECs • who integrates with rest of network? • CLECs • who pays for conditioning? • Backbone meltdown

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