As more broadband networks connect directly to each other via peering agreements, the amount of money paid for internet transit could fall, according to a report from TeleGeography. That’s good for users of the internet, but will cut into transit revenue at companies that range from Level 3 and Cogent to ISPs. Of course, TeleGeography isn’t sure if this will take place. From its report:
As Internet service providers worldwide have gradually migrated from purchasing transit to establishing mostly free peering arrangements, the share of global Internet traffic connected via transit agreements declined from 47 percent in 2010 to 41 percent in 2014. As long as this relative decline of transit continues, TeleGeography forecasts that IP transit-related revenues will fall from $4.6 billion in 2013 to $4.1 billion in 2020. If the ratios of traffic routed via transit and peering were to stabilize at current levels, IP transit revenues would increase to $5.5 billion by 2020.
By cutting out the internet’s middlemen, peering agreements lower the cost of bandwidth and the cost of IP services. The TeleGeography report lays out the case for peering gaining ground over transit, and shows how it expects peering to grow. This is good for the internet as a whole, but this anticipated shift to peering over paying for transit has led to some behavior shifts that are causing harms for consumers. It also means trouble for existing transit providers, especially those without other lines of business.
Peering, the practice of two networks exchanging traffic directly either for free or for money, has been going on for decades. Historically, networks of a certain size would sign peering agreements because it would save them money. Instead of building out an internet pipeline to every endpoint, two networks meet in the middle and exchange traffic. In 2012, an OECD report found that peering has helped lower the overall cost of providing bandwidth and that most peering agreements are unpaid.
Transit, on the other hand, is when a company like Google or Disney pays a middle mile provider such as Level 3, Tata or Cogent to bring its traffic to the ISP. ISPs like AT&T, Verizon and Comcast also offer transit services. But as peering (most of it unpaid) rises, the demand for transit goes down. In many cases networks only peer with networks that meet some sort of minimum traffic level or at internet exchange points. So the growth in networks (driven by overall demand for broadband) and the rise of internet exchange points around the globe is causing peering to become more popular by making it possible for more networks to peer.
This is good for most participants on the internet but it’s obviously not good for transit providers. Many of them have seen this coming, which means they have branched out into other businesses such as providing CDN services, data center colocation — or in the case of U.S. ISPs doubling down on charging for peering. That’s not the primary reason that Netflix, for example, is having so much drama with ISPs over peering, but it doesn’t help either.