Q:

DrPeering -

What is the outlook for peering in 2014 ?

Is the peering value proposition growing, declining, or staying about the same?

Adam and Barbara Maitland

Betel & Juis Ltd.

A:

Adam and Barbara - thanks for the question. It is time to pull out my crystal ball.

First, since Internet Transit is an alternative to peering, let’s first take an educated guess at Internet Transit prices into 2014.

Transit in 2014

The Tier 1 ISPs in mature Internet Peering Ecosystems will try and hold their ground on price in 2014. As in 2013, we will continue to see this as a bifurcated Tier 1 pricing model in the market across commit levels. For example, content providers with less than 10G will continue to have a hard time getting below $2/Mbps from Tier 1’s like Level 3. Only when buying more than 10G will they see pricing towards the $1/Mbps price range from the Tier 1’s. Of course, at the extreme end of the scale, those buying on the scale of Apple, Facebook, Microsoft, Netflix, etc. in the 100+ Gbps range, will see $0.40/Mbps price points throughout 2014 from the Tier 1 ISPs.

These same content providers will have no problem though getting a 1G service for less than a dollar from the bottom feeders.

Across the board in 2014, Internet Transit prices will be very inexpensive but with a few exceptions. For example, I gave a talk for the US Telecom folks in Lake Tahoe a few years back when a rural Texan ISP approached me and said “We don’t see prices anywhere that low - we pay $75/Mbps! because there is only AT&T there.” Less mature peering ecosystems likewise will see prices into the hundreds of dollars per Mbps. The good news for these folks is,

“the bottom feeders are coming to town.”

Peering in 2014

So with these low prices, is peering done?

Peering between ISPs in the U.S. and across Western Europe is pretty much done, in the sense that most ISPs that need to peer with each other are already doing so. Major Internet Peering Ecosystems across Asia, such as Japan, Hong Kong, etc. and parts of Eastern Europe and Russia, are also mature peering ecosystems, as evidenced low Internet Transit prices.

Peering makes sense financially if enough traffic can be exchanged to cover the costs of peering. Peering also makes sense when the value derived from peering, including the performance benefits, the security benefits, and the operations benefits exceed the cost of peering. (I am giving a webinar October 30 called “How Peering Improves Security,” and it will be available for on demand replay.)

So let’s look at some drivers for peering in 2014.

1) Internet Traffic Always Grows so Peering Value Always Grows

Internet traffic has always grown, and will continue to grow through 2014, so the amount of traffic one can peer away for free will continue to grow, and therefore the benefits of peering will continue to grow as well.

Even more, the value of peering tends to get compounded as peering coordinators add additional peers over time. For example, most network operator in the first few years will grow their 10% peering to 25% peering as shown in the figure below for example. The benefits will compound into the future because the peered traffic volume not only grows with traffic volume, but grows at a faster rate over time as more peers are added. This compounding makes these major market IXPs even more valuable to the current peers and to the prospective peers projecting out the long-term benefits of peering.

But transit prices are so low, won’t rational peers pull out of IXPs?

It depends.

1. • Some can peer away enough traffic to completely cover the cost of peering.
   

2. • Some will peer no matter what purely for performance or security reasons.
   

3. • Some will continue to peer, even when it is more expensive to do so, because they don’t want to signal to the market that they are in a decline or running out of money.
   

4. • Some will keep peering because they don’t realize that peering is more expensive than transit ; they don’t do the math.
   

And some will pull out of peering and simply resell someone else’s network. Those that go this route better have a strong differentiator because otherwise they have repositioned themselves as a commodity Internet reseller riding the price curve to zero.

For all of these reasons, the normal Internet growth curve will drive the peering market segment growth.

2) Remote Peering Grows the Peering Market

Remote Peering enables large enterprises, content providers, e-commerce and portals, to start peering without having to be a network operator. Without the cost of routers, colocation space, and a large network team, these companies will be able to directly connect their content to the core of the Internet. This leads to more peers, more traffic, and therefore a greater peering value proposition for peering at the IXPs. Because of remote peering, the proportion of content providers and enterprises peering at the exchanges will grow in 2014.

Network savvy enterprises will internally justify peering for the security benefits of peering, the control over routing, and bypassing the commodity Internet for direct access to their customers and service partners.  In addition, small Content Providers and Cloud Services Providers in particular will start remote peering with relevant niche trading partners to help them scale and connect their network services attachments directly to customers and partners. With peering seen as strategic, these new peering participants will bring new traffic and new routes to the peering points in 2014 through 2017.

3) Emerging Regional Growth Drives Traffic and Routes to Mature IXPs

Peering ecosystems across Africa and elsewhere will continue to extend their network reach into mature ecosystems to obtain inexpensive transit. While this may slow the rate of local ecosystem growth, it will continue to drive the value of the mature IXPs. These new routes and increased traffic volume results in lower prices back in the local market, better performance, and stronger regional IXPs. Bottom line - the growth in other regions will increase the peering value proposition at the mature IXPs.

As a result, for example, expect to see many more customers connecting to the large European IXPs and the emerging strong regional IXPs on other continents as well.

4) New Traffic and Applications Drive Distributed Peering Growth

New traffic will drive Internet traffic volume. Video and whatever is next, will drive new peers into the peering ecosystem with massive traffic volumes. Video is already 50% of all Internet traffic, and I believe the video distributors will drive wider distribution of peering points, perhaps helping to establish credibility for many more IXPs into the Tier 2 and Tier 3 cities. Within a few years, these new IXPs will exchange as much traffic as the larger U.S. IXPs in Tier 1 markets today.

The distribution of IXPs into the Tier 2 and Tier 3 cities will make it less expensive for the new peers to start peering and thus drive peering growth.

5) New Power Requirements Drive Distributed Peering Growth

Compounding this aforementioned new traffic and application distribution effect, power requirements for these dense server deployments will also lead to peering growth. I continue to predict that there will be a new Request For Proposal put out for the next generation Tier 1 ISP interconnect points, backed by the large scale cable companies and content companies. They will deploy dense server clusters close to, maybe within, this much more widely distributed ecosystem of IXPs.

So my future view is that the eight interconnection regions where the Tier 1 ISPs peer, will evolve to 80 IXPs across North America, each supporting massive clusters of Netflix and YouTube videos along with whatever else the Internet consists of. Given that these two content providers represent 50%+ of the Internet traffic, Google and Netflix have the clout to drive the market towards making these 80 IXPs the must-be locations. There are other initiatives in the workings as well. The point is, the Tier 1 ISPs might originate this RFP, but it is the two content companies that have the power to drive fundamental changes to the peering ecosystem.

Summary

In December of 2014 you will agree with me that 2014 was one of the most exciting times to be in the peering sector. You will agree that the underlying peering foundations shifted, assumptions were tested, new players emerged, and the peers, applications and traffic took full advantage of the changes.