My Blog
Q: DrPeering -
How does having a strong regional Internet Exchange Point improve the regional Internet?
What is the effect of peering on the transit prices in nearby countries?
As an incumbent in a developing Internet Peering Ecosystem, we enjoy strong pricing power. But we now have to project the decline of our transit pricing, they say, due to the dropping price of peering and transit in far away countries !
What are the dynamics at play here? Why does peering, a completely different interconnection system, in a distant country, have any affect on the price of transit in my home market ?
Sue Ho-Jornt
A:
Sue -
This is a really interesting question to explore here. I can illustrate the effect with an example that came up...
I spoke with an ISP network engineer building from Romania who was building into Frankfurt. He said that they were paying about $6000/month for a 10G circuit into the DE-CIX. Why were they paying for a circuit into Frankfurt? Because the price of transit in Romania was very high, and it was cheaper to pay for the transport costs and buy transit (and peer) in Frankfurt.
So the question I pondered is:
Do strong regional IXPs have a “Gravitational Pull” on the price of Transit in the region?
I believe the answer is, yes, that peering greases the skids of dropping transit prices in the region. I often see the Internet Peering Ecosystems go through the following phases:
1) An risk-taking ISP feels that it is paying too much in transit fees and looks to buy transit (and perhaps peer) in a better transit market.
This Romanian ISP might pay $10,000/month ( transport, equipment, colo, 10G port, etc.) to build into Frankfurt to buy $2/Mbps transit.
If they can buy 5Gbps at $2/Mbps then have a total cost of $20,000/mont ($10,000/month for transport + $10,000/month for 5G of transit in that remote market) which works out to $4/Mbps for transit. If transit in the home market is more than $4/Mbps, then an ISP will do this. As the ISP can peer traffic away for free at that location, the price will drop even further.
Let's assume the price of transit is $10/Mbps in Romania. The sequence of events continues as follows.
2) This Romanian ISP buys transit for $4/Mbps, and sells transit in their home market for $8/Mbps and still make a healthy margin. Other ISPs see what this ISP is doing and follows suit, building into Frankfurt to get that cheap transit to resell. Over time, these ISPs all peer more of their traffic away, continuing to drop their total cost of accessing the Internet.
3)The incumbent ISP in Romania sees its larger customers buy transit in the more attractive market and drops its price in response.
Over time, the market price of transit in Romania drops towards that $4/Mbps price point. It drops toward the average cost of traffic exchange, demonstrating that the cost of peering and transit in a remote location can directly affect the price of transit somewhere else.
Peering Dynamics At Play Here
1)Transport getting cheaper and enabling the business case for peering.
Discussions with European ISPs led to the following approximations on transport pricing: ISPs utilizing a local 10G circuit into a local exchange point might see a price of $2000/mo, while coming in from an adjacent country might cost $4000/mo and coming in from far away (but still within Europe) might result in a cost of $6000/mo. These are rough numbers but they seem to be about right, so I show them in the diagram below as t, 2t, and 3t.
The cost of transport (t) is variable here. The other costs of peering (colo, IX membership fees, peering ports) are generally fixed for all participants at any particular IXP in Europe - they do not discriminate.
Therefore, a key driver for dropping Internet costs in your home transit market, is the cost of transport into and out of the country.
2) Peering Ports are getting cheaper and enable the business case for peering.
The European IXes are generally not-for-profit associations and therefore continually drop their peering port pricing to avoid making a profit and losing their not-for-profit status. A 10G peering port that used to cost $10,000 per month just a few years ago now costs $1400-$2300 across Europe. So in addition to buying cheap transit, an ISP from Romania can also peer away some of its traffic very inexpensively.
The lower the total cost of peering remotely, the lower the price of transit in that remote market, the lower the price of transit that this Romanian ISP can offer in its home country.
Transit Prices have always declined in competitive markets.
3)Other Home Market Drivers
Other factors include the amount of local content, the percentage of traffic served only by the incumbents, the number of Tier 1 ISPs, the number of Tier 2 ISPs and their home market strength, inclination to peer and for a peering community to come together, etc.
Summary
The Gravitational Pull of Peering on regional transit prices is real. It is enabled by the dropping prices of international transport and it is powered by the dropping price of transit along with the continually dropping cost of peering in other markets.
Therefore, as the incumbent, you can approximate that in a rational market, you can hold a transit price as high as
[ RemoteMarketTransitPrice (T) +CostOfRemotePeering (t) ] / CapacityOfTransport
Since the costs of transit have always dropped, I agree that you can expect that they will continue to drop. If this Romanian ISPs can buy transit in Frankfurt for $2/Mbps and it costs $10,000/mo to offload 5Gbps on a 10G circuit, you might see transit in your Romanian market drop down towards $4/Mbps or so in the next year or so.
This would be the logic I would use to make your estimation. Thanks for the question Sue!
PS - I am using round numbers for clarity, your actual numbers will of course vary.
How are Internet Transit prices affected by the presence of Internet Peering?
Peering Gravitational Pull on Transit Prices
January 27, 2012
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