internet economics: cost structures and interconnection agreements shi-chung chang yi-nung yang

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  • Internet Economics:

    Cost Structures and Interconnection AgreementsShi-Chung Chang Yi-Nung Yang

  • Lecture #8: OutlineLast TimeBundlingTwo-part TariffNon-uniform Pricing

  • Lecture #8: OutlineToday:Costs of Internet ServicesHW/SWCustomer SupportIP TransportInformation Content and Provision

    Reading Assignment:P. Srinagesh, Internet Cost Structures and Internnection Agreements, Internet Economics, eds. By McKnight, J. P. Bailey, MIT Press, 1997, pp. 121-154.J. P. Bailey, The Economics of Internet Internnection Agreements, Internet Economics, eds. By McKnight, J. P. Bailey, MIT Press, 1997, pp. 155-168.Interconnection AgreementsIncentivesArchitecturesResale and Usage-Sensitive Pricing

  • Services offered by ISPOffered ServiceHardware,softwarecustomer supportIP transportinformation content and provisionhow customer get the servicesaccess link to the nearest node of ISPISP arrange this connection ,and pass cost to customers

  • Costs of Hardware and SoftwareVariable Costs: computer memory, disk space, number of incoming telephone lines

    ==> substantial costs are borne by the user, not by ISP!!Leased lines: eqp. Cost for 56kbps $2,500 for T1 $5,700



    Dial up:

    Shell Account


    2. Modem3.Comm. software

    1. Telephone lines

    2. Terminal Server (*)

    3. Modem pools(*)

    Dial up:

    PPP or SLIP


    2. Modem3.Comm. software

    1. In bound telephone lines

    2. Dial-up router (*)

    3. Links from router to network(*)

    Leased line

    1. Channel Service Unit (CSU)/Data Service Unite(DSU)

    2. Router

    4. matching CSU/DSU

    5. internal links(*)

    6. additional port on router or new router(*)

  • Costs of Customer SupportISPs incur support costs when customer is acquired(service establishment)ongoing basis during business relationshipservice terminationService establishmentcredit checkconsultation with customer on appropriate choice of service optionsset up billing recordconfiguration of the ISPs network to recognize the new customerAnalysis of the network structure for possible upgrade

  • Costs of Customer Support(Cont.)

    Ongoing customer support:Reconfiguration internet links or reassignment of IP address when large corporate customers upgrade their LANNetwork management and maintenance activityService termination:final setting of accountsreconfiguring routers and DNS

  • BARRNet Case DataT1 Connectivity(1993) Full service: $ 17,000 Port-only: $ 13,000 user provide router, does configuration, management and maintenance ==>$4,000Other unbundled optionsbasic internet connectivity package $1,500acquiring Internet number and domain nameplatform specification of DNS serverconfigurationone person training in maintenance Deluxe internet connectivity package $3,000security, config. News server, config. Packet filtersconsultation and training $125/hr

  • BARRNet 1996 Data T1 & 56 k Eqp. Install. > ongoing service chargelow speed service = 0.5 ongoing service

    Observationsaccount activation is significant to customers costCost of standard support Customized advice

    Connectivity (1996) Full service: Eqp. And Installation:$13,750, Service: $22,800 for two-year, prepaidfor 14.4 kbps: $1,300

    Consultation $175 /hr

  • BARRNet 1996 Datasupport cost reflect to chargeNonrecurring charge(installation fee) for equipment and service activationongoing charge for a years servicedifferent price policy for different servicesecure mail server ,package filter ownership and maintenance responsibility of hardwareport-only ,full service

  • Cost of Transporting IP Packets over Private lineIP Transport costs include:leased-line tariffsthe cost of routing hardware and software ongoing cost of monitoring the networkCost structureNSFNET:80% for leased line,7% for network operating centerMid-Level ISP: 25~40% of total costsBandwidth a small portion of total costs ==> excess capacity in bandwidth

  • Sunk and Incremental CostsEfficient BW use by statistical multiplexing Cost of constructing fiber-optic links(Sunk cost)major part: trenching and labor costsmall part :fiber cost

    incremental cost of providing private line service:lighting up fibercosts of customer acquisitionongoing cost of maintaining a customer account==>install excess fiber (50-80% for Major Local Operating Co.)

  • Private Line Cost and Tariff Private line tariffs must contribute to the sunk cost (by nonrecurring charge)Q: What will you do?at low incremental cost of usagehigh sunk costexcess capacityrecover the incremental cost (by monthly charge based on airline mileage)==> discount based on volume and term commitmentse.g. AT&T 57% discount to > $1 million/mon. for 5 years

  • Volume discount:large customers are desirableTerm commitment:fixed costs of service activation and terminationISP with leased-line backbonessize their needs over a three-to-five ear periodsubstantial excess capacity the incremental cost is closed to zerosunk cost of IP transport is substantial

  • Other Cost Structures

    Examples:Sprint Nation wide link with high sunk cost and high excess capacitysmall ISP/reseller with small sunk cost and large incremental costno volume and term discount=>different ISP with different cost structure and different pricing policy

  • Q:Impact of Fast Packet Technologies & Multimedia Apps.Fast packet services:Frame-Relay,SMDS,ATMstatistically multiplexing variable or fixed -size pkttreat IP pkt as data unit,add own headerless multiplexing gainMultimedia Applications

    cost structure

  • connectivity among ISPs need lower costsonce an ISP pay a flat rate to connect to a fast packet cloudthe incremental cost of virtual connections to multiple ISPs are very smallsmall ISPs can reach out to any one else on the backbone without investing backbone

  • Information content and provisioncost of online servicelocal and long-distance transport (8~10 %)acquiring information content (40~45%)sales,marketing and administration (45%)Charge for connecting time or transported volume

  • Cost classification

    Cost type


    Variable cost


    Fix cost

    Hardware and soft ware support

    Telephone line

    1. router

    2. internal link


    Customer support

    Service creation ,duration ,termination



    Transport IP packets(private line)

    incremental cost



    Fiber-optic constructing

    Information content and provision

    Transporting & duplicationcost


    1. Acquiring information content

    2. Marketing sales administration

  • Economics of Interconnection1986-1991NSFNET as single backbonethree layer hierarchyuse GGP (Gateway-to-Gateway protocol)core gatewaycontain full routesnon-core gatewaypartial routes +default route to core gatewaycore gateway +links formed the backbone

  • Problem of Multiple backbone and multiple connectionrouting will depend on host address ,not only the network portion routing according to traffic conditionrouting table increase rapidlywhich backbone should carry the traffic?Settlements among interconnected networksEGP:notion of an autonomous system

  • 1991-1994from the very beginning the key ISPs are inconsistent with each otherANS provided a bundle of servicesfull routing,long haul transportISP should purchase transport or routing from ANSfor customers full access to all internet sitesafter thatnew backbones are constructedinterconnection agreement with ANS(bilateral)ISPs argued should be settlement-freebenefit with each othernot apply to transit traffic

  • Formation of the Commercial Internet Exchange(CIX)reason:no transit traffic,no settlementinability of the new entrants to obtain interconnection agreement with ANSstructure and mechanism:funding members:CERFnet,PSI,and AlterNetexchange traffic without regard to type and settlementsrouter is managed by PSIother members leased private line from their network to the CIX routerANS join the CIX after 1993for resellerIN CIX,rules assured connectivity is directjoin CIX and pay $7500 annual membership fee cost of reseller has gone upotherwise blocked at CIX routers

  • AlterNet:requires reseller to purchase wholesale connection3 times as much as retail connectionPSIdo not sell wholesale connectionSprinttreat as customersThe formation of Metropolitan Area Ethernet-East (MAE-East)developed by AlterNet,PSI,SprintLinkdistributed Ethernet service spanning a wide geographic areacloud service low cost compared to that of a physical connect to a routerno multilateral agreement ,work out a set of bilateral agreementno settlementsevery provider accepts all traffic and delivers all traffic to any ISP with which a bilateral agreement exists

  • Analysis of Interconnection AgreementsDisadvantage of CIX architecturecongestion on XIX routerneedless delaysmaller regional network (or reseller) with smaller cost can offer lower pricessolution:setting up multiple interconnection points smaller ISP pay settlement to larger ISPs

  • For reseller prohibiting resellerraising price to resellerISP using fast-packet servicesISPs customers scattered different cloudsISP use internet protocol to integrate its networkISP provide customer support,some network management ,information contentnot provide multiplexing function(for reducing the cost of underlying transport)provided by the firms producing the underlying cloudcosts of interconnection become symmetricevery provider purchases acces


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