- Email: [email protected]
Peering and roaming on the Internet
ARTICLE IN PRESS
Telecommunications Policy 32 (2008) 1–3 www.elsevierbusinessandmanagement.com/locate/telpol
Editorial
Peering and roaming on the Internet Over the last decade the Internet has grown to the point of pervading everyday commodities in developed countries’ households and of transforming, with different diffusion rates and adoption modalities,1 the communication landscapes in their developing counterparts. The number of broadband subscribers in the OECD countries increased by 26% from 157 million in December 2005 to 197 million in December 2006 and broadband penetration rates rose, in these countries, from 13.5 subscriptions per 100 inhabitants in December 2005 to 16.9 1 year later. The other side of this success story is expressed by a growing preoccupation that, while still coping with increasing users’ numbers y in many ways the Internet only just works. The number of ways in which it ‘only just works’ seems to be increasing with time, as non-critical problems build’ (Handley, 2006, p. 129). While computer scientists have long been recognising the technical challenges brought forward by Internet growth, the economic analysis of the incentives underlying the capacity of the ‘network of networks’ to keep working, and hopefully not ‘just working’, is still unsatisfactory. While there has been an important number of seminal papers2 focusing on the economics of interconnection in the Internet, the analysis of the formation, stability and efficiency of bilateral and/or multilateral linkages among competing players, delivering global Internet connectivity (a composite service hosting a growing number of applications enabled both through fixed and wireless access), remains an open challenge. This special issue of Telecommunications Policy3 presents contributions aiming to move the frontier of this challenge one step forward by focusing on the economic agreements that make the ‘just working’ notion of the Internet possible. In particular, it focuses on three sets of interconnection choices: (a) whether two operators should agree to directly exchange traffic destined to each other without using the services of an intermediary and usually forbearing the exchange of money (peering), (b) whether Web sites should establish new direct bilateral links, thereby increasing web connectivity and (c) whether competing mobile operators should set up roaming and sharing agreements to provide full coverage for mobile Internet access. The common theme unifying most of the papers in this issue can be found in the analysis of the role played by the asymmetry between providers in shaping their incentives to reach these agreements. These contributions analyse asymmetry through the lenses of different game theoretic equilibrium concepts, spanning between static and repeated bilateral interconnection games, to games of global networks of relations and of endogenous network formation. This collection provides an example of how different typologies of network games can be of use in understanding and informing competition policies addressing concerns about interconnection practices among unequal players in the Internet. The first paper by Narine Badasyan and Subhadip Chakrabarti entitled ‘A simple game theoretic analysis of peering and transit contracting among Internet service providers’ addresses the role of asymmetry between Internet Service Providers (ISPs) in their choice of whether or not to establish a peering relation between them. 1
For example through Tele-centers. See for example Besen, Milgrom, Mitchell, and Srinagesh (2001), Cre´mer, Rey, and Tirole (2000), D’Ignazio and Giovannetti (2006), Economides (2006), Foros and Hansen (2001), and Giovannetti (2002). 3 The initial contributions originate from a Conference organised by the EU project ‘CoCombine: Competition Contents and Broadband for the Internet in Europe’ hosted at the University of Cambridge, see www.cocombine.org. 2
0308-5961/$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.telpol.2007.11.006
ARTICLE IN PRESS 2
Editorial / Telecommunications Policy 32 (2008) 1–3
This is accomplished by focusing on interconnection cost differences resulting from traffic imbalances. Since peering contracts necessitate joint agreements the paper explores two separate equilibrium concepts: Bilateral Nash equilibrium (see Goyal & Vega-Redondo, 2004), which considers the possibility of two-player joint deviations; and Nash equilibria with transfer arrangements (see Bloch & Jackson, 2004). The main conclusion of the paper is that, if one provider incurs most of the transporting costs under the peering agreement due to traffic imbalances, it has a valid competitive reason to refuse peering and, thus, there is no need for regulatory policies encouraging it. The second paper ‘Bill-and-Keep peering’ by Gireesh Shrimali and Sunil Kumar addresses a situation where ISPs who have access to a transit ISP capable of handling their traffic for a fee agree, instead, to carry traffic originating from a peer through a ‘Bill-and-Keep’ contractual framework where no money changes hands between the peers. The main result of the paper is that Bill-and-Keep peering is the fair and efficient outcome if the transit ISP charges for both inbound and outbound traffic and transit charges as well as costs of peering are symmetric. The paper also addresses the role of complementarity between providers at the operational level, as measured by improvement in quality of service. The third paper by Steffen Lippert and Giancarlo Spagnolo ‘Internet peering as a network of relations’ also addresses the role played by providers’ asymmetry in defining their optimal peering strategies. It is of particular interest that, by using recent results from theoretical work on networks of long-term cooperative relations (see Lippert & Spagnolo, 2005) and focussing on multilateral agreements, the authors reach opposite conclusions from those obtained through the analysis of the peering incentives in bilateral only agreements. The authors focus on optimal interconnection strategies for asymmetric ISPs when quality maintenance is not easily monitored, so that there is scope for moral hazard in the form of interconnection quality degradation. In this setting the authors show that if ISPs consider the entire set of their peering policies, not just the bilateral ones, it becomes possible to sustain multilateral high-quality interconnection through peering among asymmetric peers without the need to introduce side payments. This result rests on the idea that a closed network of peering relations facilitates information sharing even across asymmetric peering partners, thereby fostering cooperation in terms of high interconnection quality maintenance. Interestingly, while other contributions in this issue support the efficiency of bilateral paid peering between asymmetric ISPs, Lippert and Spagnolo show that this can, on the contrary, have negative effects on the sustainability of the overall peering network since it may prevent more efficient multilateral peering agreements. The fourth paper by Simona Fabrizi and Bruno Wertlen ‘Roaming in the mobile internet’ focuses on a different type of traffic exchange agreement: roaming and infrastructure sharing for Internet access among competing mobile operators. The paper studies the incentives for these operators to compete for market share and coverage when they are free to enter into coverage sharing agreements and to negotiate a reciprocal roaming charge. These charges, paid by the networks for any cross-access, also play a relevant role in decisions about network coverage. Different networks are assumed to be completely compatible, in terms of the users’ needs for Internet mobile roaming, so that consumers can access any content from wherever they are. This feature of network compatibility also provides the main conceptual link between the incentives for reciprocal roaming charges and those for bilateral paid peering between ISPs analysed in other papers in this issue. The authors find that when a sharing agreement exists operators always agree on inflated roaming fees that can therefore be used as a collusive device. Finally, the fifth paper by Daniel Sgroi ‘Social network theory, broadband and the world wide web’ focuses on the issue of whether to establish or to delete a bilateral link between web nodes. Contrary to other papers in this issue, the focus of this contribution does not tackle the role played by asymmetry between sites in shaping their bilateral choice of whether or not to establish a link. The focus is, instead, on how different Internet features will affect the resulting asymmetry of the future Internet morphology. The paper is, however, still closely related to the other contributions in this issue, both those focusing on bilateral interconnection choices (since it studies equilibrium morphologies based on the individual bilateral incentives to set up links) and those taking a social network perspective, given that the paper considers the role and effects that multilateral links exert on the informational complexity and connection speed of each web node.
ARTICLE IN PRESS Editorial / Telecommunications Policy 32 (2008) 1–3
3
Sgroi’s contribution focuses on endogenously emerging network morphologies by using the notion of network stability, here modified to incorporate complexity concerns (see Jackson & Wolinsky, 1996). Armed with these equilibrium concepts, the paper compares two well-known and likely configurations for the evolution of a network: the complete network and the fully-connected star. The author finds that when connection speeds are low neither the star network (the most asymmetric one) nor the complete network is a stable configuration while, when connection speeds increase, for example as the result of the broadband diffusion process, the star network will emerge as the most likely equilibrium configuration. This result can be read as a snapshot of the Web in the near future, becoming increasingly asymmetric and dominated by a single-central site, perhaps a search engine. This finding could however have a different interpretation: Internet Exchange Points (IXPs) have grown in recent years to become the most relevant hubs for the exchange of Internet traffic in Europe and they represent a relevant hope for reducing traffic and interconnection costs in developing countries. They are often based on a star-type morphology whereby the central node is not a dominant competitor but an Exchange Point co-managed by the participating ISPs. The main role of this central node is to interconnect ISPs multilaterally mainly according to Bill and Keep principles in a cost-effective way. Acknowledgement Thanks are due to Professor Doug Pitt for his meticulous help in the editing of the papers for this Special Issue. References Besen, S., Milgrom, P., Mitchell, B., & Srinagesh, P. (2001). Advances in routing technologies and Internet peering agreements. The American Economic Review, 91(2), 292–296. Bloch, F., Jackson, M. (2004). The formation of networks with transfers among players. FEEM working paper, 80.04. Cre´mer, J., Rey, P., & Tirole, J. (2000). Connectivity in the commercial Internet. Journal of Industrial Economics, 48(4), 433–472. D’Ignazio, A., & Giovannetti, E. (2006). From exogenous to endogenous economic networks: Internet applications. Journal of Economic Surveys, 20(5), 757–796. Economides, N. (2006). ‘The economics of the internet backbone’, forthcoming. In S. Majumdar, I. Vogelsang, & M. Cave (Eds.), Handbook of telecommunications economics, Vol. 2. North Holland: Amsterdam. Foros, Ø., & Hansen, J. (2001). Competition and compatibility among Internet Service Providers. Information Economics and Policy, 13, 411–425. Giovannetti, E. (2002). Interconnection, differentiation and bottlenecks in the Internet. Information Economics and Policy, 14(3), 385–404. Goyal, S., Vega-Redondo, F. (2004). Structural holes in social networks. Working paper. /http://www2.warwick.ac.uk/fac/soc/economics/ forums/conferences/game_theory/goyal.pdfS. Handley, M. (2006). Why the Internet only just works. BT Technology Journal, 24(3), 119–129. Jackson, M. O., & Wolinsky, A. (1996). A strategic model of social and economic networks. Journal of Economic Theory, 71, 44–74. Lippert, S., Spagnolo, G. (2005). Networks of relations and social capital. CEPR discussion paper no. 5078.
Professor Emanuele Giovannetti Department of Economics, University of Verona, Viale dell’Universita, 4-37129 Verona, Italy E-mail address: [email protected]
Telecommunications Policy 32 (2008) 1–3 www.elsevierbusinessandmanagement.com/locate/telpol
Editorial
Peering and roaming on the Internet Over the last decade the Internet has grown to the point of pervading everyday commodities in developed countries’ households and of transforming, with different diffusion rates and adoption modalities,1 the communication landscapes in their developing counterparts. The number of broadband subscribers in the OECD countries increased by 26% from 157 million in December 2005 to 197 million in December 2006 and broadband penetration rates rose, in these countries, from 13.5 subscriptions per 100 inhabitants in December 2005 to 16.9 1 year later. The other side of this success story is expressed by a growing preoccupation that, while still coping with increasing users’ numbers y in many ways the Internet only just works. The number of ways in which it ‘only just works’ seems to be increasing with time, as non-critical problems build’ (Handley, 2006, p. 129). While computer scientists have long been recognising the technical challenges brought forward by Internet growth, the economic analysis of the incentives underlying the capacity of the ‘network of networks’ to keep working, and hopefully not ‘just working’, is still unsatisfactory. While there has been an important number of seminal papers2 focusing on the economics of interconnection in the Internet, the analysis of the formation, stability and efficiency of bilateral and/or multilateral linkages among competing players, delivering global Internet connectivity (a composite service hosting a growing number of applications enabled both through fixed and wireless access), remains an open challenge. This special issue of Telecommunications Policy3 presents contributions aiming to move the frontier of this challenge one step forward by focusing on the economic agreements that make the ‘just working’ notion of the Internet possible. In particular, it focuses on three sets of interconnection choices: (a) whether two operators should agree to directly exchange traffic destined to each other without using the services of an intermediary and usually forbearing the exchange of money (peering), (b) whether Web sites should establish new direct bilateral links, thereby increasing web connectivity and (c) whether competing mobile operators should set up roaming and sharing agreements to provide full coverage for mobile Internet access. The common theme unifying most of the papers in this issue can be found in the analysis of the role played by the asymmetry between providers in shaping their incentives to reach these agreements. These contributions analyse asymmetry through the lenses of different game theoretic equilibrium concepts, spanning between static and repeated bilateral interconnection games, to games of global networks of relations and of endogenous network formation. This collection provides an example of how different typologies of network games can be of use in understanding and informing competition policies addressing concerns about interconnection practices among unequal players in the Internet. The first paper by Narine Badasyan and Subhadip Chakrabarti entitled ‘A simple game theoretic analysis of peering and transit contracting among Internet service providers’ addresses the role of asymmetry between Internet Service Providers (ISPs) in their choice of whether or not to establish a peering relation between them. 1
For example through Tele-centers. See for example Besen, Milgrom, Mitchell, and Srinagesh (2001), Cre´mer, Rey, and Tirole (2000), D’Ignazio and Giovannetti (2006), Economides (2006), Foros and Hansen (2001), and Giovannetti (2002). 3 The initial contributions originate from a Conference organised by the EU project ‘CoCombine: Competition Contents and Broadband for the Internet in Europe’ hosted at the University of Cambridge, see www.cocombine.org. 2
0308-5961/$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.telpol.2007.11.006
ARTICLE IN PRESS 2
Editorial / Telecommunications Policy 32 (2008) 1–3
This is accomplished by focusing on interconnection cost differences resulting from traffic imbalances. Since peering contracts necessitate joint agreements the paper explores two separate equilibrium concepts: Bilateral Nash equilibrium (see Goyal & Vega-Redondo, 2004), which considers the possibility of two-player joint deviations; and Nash equilibria with transfer arrangements (see Bloch & Jackson, 2004). The main conclusion of the paper is that, if one provider incurs most of the transporting costs under the peering agreement due to traffic imbalances, it has a valid competitive reason to refuse peering and, thus, there is no need for regulatory policies encouraging it. The second paper ‘Bill-and-Keep peering’ by Gireesh Shrimali and Sunil Kumar addresses a situation where ISPs who have access to a transit ISP capable of handling their traffic for a fee agree, instead, to carry traffic originating from a peer through a ‘Bill-and-Keep’ contractual framework where no money changes hands between the peers. The main result of the paper is that Bill-and-Keep peering is the fair and efficient outcome if the transit ISP charges for both inbound and outbound traffic and transit charges as well as costs of peering are symmetric. The paper also addresses the role of complementarity between providers at the operational level, as measured by improvement in quality of service. The third paper by Steffen Lippert and Giancarlo Spagnolo ‘Internet peering as a network of relations’ also addresses the role played by providers’ asymmetry in defining their optimal peering strategies. It is of particular interest that, by using recent results from theoretical work on networks of long-term cooperative relations (see Lippert & Spagnolo, 2005) and focussing on multilateral agreements, the authors reach opposite conclusions from those obtained through the analysis of the peering incentives in bilateral only agreements. The authors focus on optimal interconnection strategies for asymmetric ISPs when quality maintenance is not easily monitored, so that there is scope for moral hazard in the form of interconnection quality degradation. In this setting the authors show that if ISPs consider the entire set of their peering policies, not just the bilateral ones, it becomes possible to sustain multilateral high-quality interconnection through peering among asymmetric peers without the need to introduce side payments. This result rests on the idea that a closed network of peering relations facilitates information sharing even across asymmetric peering partners, thereby fostering cooperation in terms of high interconnection quality maintenance. Interestingly, while other contributions in this issue support the efficiency of bilateral paid peering between asymmetric ISPs, Lippert and Spagnolo show that this can, on the contrary, have negative effects on the sustainability of the overall peering network since it may prevent more efficient multilateral peering agreements. The fourth paper by Simona Fabrizi and Bruno Wertlen ‘Roaming in the mobile internet’ focuses on a different type of traffic exchange agreement: roaming and infrastructure sharing for Internet access among competing mobile operators. The paper studies the incentives for these operators to compete for market share and coverage when they are free to enter into coverage sharing agreements and to negotiate a reciprocal roaming charge. These charges, paid by the networks for any cross-access, also play a relevant role in decisions about network coverage. Different networks are assumed to be completely compatible, in terms of the users’ needs for Internet mobile roaming, so that consumers can access any content from wherever they are. This feature of network compatibility also provides the main conceptual link between the incentives for reciprocal roaming charges and those for bilateral paid peering between ISPs analysed in other papers in this issue. The authors find that when a sharing agreement exists operators always agree on inflated roaming fees that can therefore be used as a collusive device. Finally, the fifth paper by Daniel Sgroi ‘Social network theory, broadband and the world wide web’ focuses on the issue of whether to establish or to delete a bilateral link between web nodes. Contrary to other papers in this issue, the focus of this contribution does not tackle the role played by asymmetry between sites in shaping their bilateral choice of whether or not to establish a link. The focus is, instead, on how different Internet features will affect the resulting asymmetry of the future Internet morphology. The paper is, however, still closely related to the other contributions in this issue, both those focusing on bilateral interconnection choices (since it studies equilibrium morphologies based on the individual bilateral incentives to set up links) and those taking a social network perspective, given that the paper considers the role and effects that multilateral links exert on the informational complexity and connection speed of each web node.
ARTICLE IN PRESS Editorial / Telecommunications Policy 32 (2008) 1–3
3
Sgroi’s contribution focuses on endogenously emerging network morphologies by using the notion of network stability, here modified to incorporate complexity concerns (see Jackson & Wolinsky, 1996). Armed with these equilibrium concepts, the paper compares two well-known and likely configurations for the evolution of a network: the complete network and the fully-connected star. The author finds that when connection speeds are low neither the star network (the most asymmetric one) nor the complete network is a stable configuration while, when connection speeds increase, for example as the result of the broadband diffusion process, the star network will emerge as the most likely equilibrium configuration. This result can be read as a snapshot of the Web in the near future, becoming increasingly asymmetric and dominated by a single-central site, perhaps a search engine. This finding could however have a different interpretation: Internet Exchange Points (IXPs) have grown in recent years to become the most relevant hubs for the exchange of Internet traffic in Europe and they represent a relevant hope for reducing traffic and interconnection costs in developing countries. They are often based on a star-type morphology whereby the central node is not a dominant competitor but an Exchange Point co-managed by the participating ISPs. The main role of this central node is to interconnect ISPs multilaterally mainly according to Bill and Keep principles in a cost-effective way. Acknowledgement Thanks are due to Professor Doug Pitt for his meticulous help in the editing of the papers for this Special Issue. References Besen, S., Milgrom, P., Mitchell, B., & Srinagesh, P. (2001). Advances in routing technologies and Internet peering agreements. The American Economic Review, 91(2), 292–296. Bloch, F., Jackson, M. (2004). The formation of networks with transfers among players. FEEM working paper, 80.04. Cre´mer, J., Rey, P., & Tirole, J. (2000). Connectivity in the commercial Internet. Journal of Industrial Economics, 48(4), 433–472. D’Ignazio, A., & Giovannetti, E. (2006). From exogenous to endogenous economic networks: Internet applications. Journal of Economic Surveys, 20(5), 757–796. Economides, N. (2006). ‘The economics of the internet backbone’, forthcoming. In S. Majumdar, I. Vogelsang, & M. Cave (Eds.), Handbook of telecommunications economics, Vol. 2. North Holland: Amsterdam. Foros, Ø., & Hansen, J. (2001). Competition and compatibility among Internet Service Providers. Information Economics and Policy, 13, 411–425. Giovannetti, E. (2002). Interconnection, differentiation and bottlenecks in the Internet. Information Economics and Policy, 14(3), 385–404. Goyal, S., Vega-Redondo, F. (2004). Structural holes in social networks. Working paper. /http://www2.warwick.ac.uk/fac/soc/economics/ forums/conferences/game_theory/goyal.pdfS. Handley, M. (2006). Why the Internet only just works. BT Technology Journal, 24(3), 119–129. Jackson, M. O., & Wolinsky, A. (1996). A strategic model of social and economic networks. Journal of Economic Theory, 71, 44–74. Lippert, S., Spagnolo, G. (2005). Networks of relations and social capital. CEPR discussion paper no. 5078.
Professor Emanuele Giovannetti Department of Economics, University of Verona, Viale dell’Universita, 4-37129 Verona, Italy E-mail address: [email protected]