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Internet Interconnection Challenges: Economic Implications & Quality of Service

Explore economic issues facing internet interconnection, implications for industry structure, quality of service considerations, and residential broadband challenges. Learn about bilateral and multilateral interconnection, Metcalfe's Law, Commercial Internet Exchange, QoS standards, and impact on market structure. Gain insights on demand dynamics, cost, revenue, and the role of standards in maintaining a competitive ISP market. Addressing backbone issues, cable modems, ADSL, ILECs, CLECs, and the importance of standards for enhancing service quality and fostering competition.

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Internet Interconnection Challenges: Economic Implications & Quality of Service

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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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