Peering vs Transit

Traffic volume (in Gbps)

$/Mbps

The unit cost of Peering** with a 10G port: the more traffic you peer across the peering port, the cheaper the unit cost of traffic distribution.

The Price of Transit*

Peering Breakeven Point: where an ISP is indifferent between peering and simply buying transit.

You are a Peering Coordinator. Why should you care about the price of Internet Transit?

The price of Internet Transit is relevant to the Peering Community since the alternative to peering is to simply send traffic to an upstream transit provider. So when doing the financial analysis of peering versus simply sending the traffic to an upstream ISP, Peering Coordinators do a side-by-side comparison between the two.

What was most striking about the last ten years researching Internet Peering was the rate at which Transit Fees dropped. My first data point is from 1998 : I remember at an AboveNet datacenter tour Patrick Gilmore was claiming that the transit fees that AboveNet was charging was $1200/Mbps plus rack fees.

Later in 1998. as I started researching Peering and Transit, and documenting the processes and the business cases behind the Peering and Transit. I started hearing a consistent theme.

Peering people in 1998 Peering Coordinators said “$1200/Mbps is the price you pay if you don’t negotiate at all ! I got it from _____ for 20% less than that.”

Transit Providers uniformly stated “No one is making any money at $1200/Mbps. I know that customers are paying more than that.”

In 2004, Peering Coordinators said “Transit is going for $120/Mbps for almost no commit. Then, the reply in the Peering Community was “I got a much better price than that. You must not have negotiated.”

And again, the Transit Providers insisted “The market price is much higher than that; no one is making any money at $120/Mbps”

In 2008, transit prices seem to start around $12/Mbps, a price Peering Coordinators said was too high and that they negotiated much better prices than that.

And the transit providers of course asserted that no one was making any money selling at $12/Mbps, and the market paid more than that.

Read about the “Cogent throws down pricing gauntlet” http://telephonyonline.com/mag/telecom_cogent_throws_down/ in June 2008 to see the details.

April 2009 UPDATE: Rumors from the field suggest that we are seeing wholesale pricing tending towards $2-$4/Mbps. The ISP folks claim that those offering these prices in many cases can not sustain these prices, and that in 6 months many of the networks offering these prices will be acquired or out of business.

So, don’t take these prices as absolutes, but do recognize the historic transit pricing trend as unmistakably downward.

When I chaired the NANOG Peering BOF, I consistently asked the Peering Community the question: “Where are transit prices going? Continuing their decline? Flattening out? Rising?

So in the Transit Pricing Trend*** graph above, I projected the historical trend out to 2014 and assumed that the price of Internet Transit will continue to decline out to 2014, when the price of Internet Transit will be less than $1.20 per Mbps.

Internet Exchange Points have dropped prices over time as well, usually with the European exchange points taking the lead. It was only in 2008 that Equinix and Switch & Data (PAIX) (the dominant IXes in North America) dropped their 10G peering ports from over $10K/month down to $2500 per month.

Of course, Peering Coordinators will claim that this will happen sooner than that, or that it has already happened.

*Source: Contributed from the field, Level 3 Pricing “Full Speed with High Speed IP”, Sept 30, 2008, 1 yr term. XO Price list from Dec ’08 “XO High-Speed DIA Promotion” with similar pricing; term unspecified.

** Source: $4500 is $2500 10G port (EQIX/PAIX pricing) plus $2000 for approx. cost of colo, equipment, member fees, etc. Divide the Cost of Peering by the amount of traffic peered to get unit cost.

***Transit Trends based on authors discussions from 1998-2009. Peering pricing based on presentations and conversations at GPF 4 in Dominican Republic Jan 2009.

Criticism of Model 1. In the first model, we are ignoring the cost of extending the network into the IX. There are many methods of peering including:

1)Having a POP at the colocation center with a cross connect to the switch (i.e. Model 1),
2)Private peering in a building where both parties are present, (Model 1 with a cross connect fee instead of port and member fee),
3)Private peering at a building where one or the other party are present (so the one party has to extend their network and one of them pays the cross connect fee),
4)remote peering to a public IX peering port, (Model 1 with network extension fees),
5)extending the network in specifically for public peering,

Cost of Peering. Peering costs generally include at least a fixed monthly fee for a peering port on a shared peering fabric, and in some cases a membership fee. In this first (simple) model we will assume that the ISP doing the analysis is already at a colocation site that has a public peering fabric. For the first model, let’s assume the cost of a 10G port, membership fees, and other misc. expenses add up to $4500 per month.

The graph below shows the costs of send traffic through peering or transit services in 2009, assuming you are already at a colo with an IX.

The peering and transit lines intersect at a point called the Peering Breakeven Point, the point where an ISP is indifferent between peering and buying transit. Beyond this point, peering can save the ISP money, up until the capacity of the 10G port. Here we see the break even point about 500Mbps.

The Peering Breakeven Point allows us to make statements like

“Peering makes sense for us if we can peer at least 500Mbps, assuming the cost of peering is $4500/month and the price of transit is $9/Mbps.

Price of Transit. Here is a September 2008 pricing sheet from Level 3 that demonstrates the tiered pricing structure common in the market today. The greater the commit, the lower the price of transit.

So Model 1 may fit if you have for example already extended your network footprint into Telehouse London as part of your global footprint and you join the LINX and get a cross connect to the switch.

But what if you are already present at a colocation center and you are considering extending your network into a different colocation center solely to peer some of that traffic away for free?

but, in order to peer, we need to extend a 10G network umbilical ($5000/month) into another colocation center ($2000/month) that has an IX. Let’s assume there is no association fees, but the IX has a 10G port fee of ($3500/month). Let’s throw in the amortized cost of some equipment, about $500/month. We see now the monthly cost of peering is $11,000 per month.

When we plug these numbers in we see the expected Peering Breakeven Point shift towards over to $11,000/$8=1.375Gbps. That is, if you can peer at least this much traffic, the peering build probably makes sense.

It is interesting to note that there is a lot of headroom for additional peering to be supported in the infrastructure as shown in the graph below.

Criticism of Model 2. We don’t take into account a couple points.

1)If you can peer away 1Gbps of traffic, you are probably buying 4 or more Gbps of transit as an alternative, therefore the comparison should be against buying transit at $6/Mbps instead of $8.
2)When colocated at an IX, or extending into an IX, one has access to lower cost transit. Some in the peering community commented that this can be 40-50% less. This should be taken into account when extending peering in (don’t just peer - also buy transit there), and in Model 1 the prices for transit should be 50% less.

We will refine these points into a future Model 3. Thanks to Richard Steenbergen and others who provided valuable feedback into these models.

Extend 10G into Colo with Internet Exchange Point

Let’s assume for Model 2 that we are already colocated in the region.

James Blessing (consultant, Garou Ltd) makes a few points: “On the peering vs transit model you've

only handled one element of the build process ( i.e. getting rid of existing traffic). There is a case for a

speculative build where you are providing transit services to smaller tier2 or tier3 networks as you can

pick up additional networks not currently available, reduce the AS path and hopefully pick up traffic not

already seen on the network. This effectively means you reduce the entry point for a build dependent

on new customer traffic capture.

The other thing that you've done in model 1 is assume a 10G port that gains 500Mbps . If thats the

case, as a network you could build with a 1G port (at a lower cost) and the economics come closer to

peering being the best choice.

Pricing Update 4/28/09 - Race-to-the-bottom - Anonymous: Large Deals (75G-100G+) with Tier 1 ISPs yield ~ $2.50-$3.00/Mbps depending on region. As a result, there are increasing tensions in the Tier 1 club between those accepting these types of deals and the rest of them carrying the brunt of the costs of these types of deals...those on the other end of the free peering relationships with the folks accepting these low price deals. They lose the deal but still carry the bits. For deals at a carrier neutral IX, the load on the Tier 1 ISP could be as little as sending those revenue generating bits across a fiber to the Tier 1 ISP with the customers attached; almost $0 cost. This is the the nature of the Tier 1 Peering Ecosystem; in the Tier 1 ISP cloud, all are trying to catch revenue and with little expense offloading those bits - it leads to a race-to-the-bottom. See the Ask Dr. Peering article for illustrations.

Anonymous: Comcast is offering paid peering in the $2/Mbps range as part of its strategic 4 yr plan for Comcast to be a Tier 1 ISP.

Anonymous: CDN pricing seems to be 5-10 cents/GB on the low side, and as high as 25 cents/GB on the high side.

NOTE: These prices are over a year old now - prices now range $2-$9/Mbps, but we don’t have price sheets on file to demonstrate these new price points yet.

Pricing update coming soon:

First pass 2010 Market Prices:

$1.50/Mbps Transit,

2.5 cents/GB downloaded CDN

$2500 MRR/10G Peering Port