Interconnection, Peering and Settlements

Over the past century the telephony industry has developed a relatively sophisticated set of mechanisms for undertaking cost distribution across multiple service providers. The domain of operation of these models of interprovider interaction extends from those of two-party local transactions up through multiparty international transactions. The Internet industry presents a number of interesting counterpoints to this observation. The number of Internet service providers is now in the tens of thousands, operating within a business space that is predominantly deregulated. The great number of service providers and the sparse mesh of interconnection lead to a complex environment of interaction. Any particular Internet transaction commonly extends not only across the originating and terminating providers, but involves two or three transit providers as well. It is not uncommon to observe transit paths that entail over 10 service providers. To support this relatively complex environment of interconnection, the Internet industry makes use of only the most basic financial systems of cost distribution, most commonly based on the bilateral relationships of customer/provider and mutual peering. Similarly, the Internet industry uses a relatively small set of physical mechanisms for supporting interconnection, concentrating on the model of a co-location environment with a local LAN (local area network) switch. While such simple engineering and financial models do manage to support a very diverse Internet provider industry and also manage to support a diverse set of applications for a very large user base, some inevitable problems have arisen from this model. This paper examines the various engineering models that are used to support Internet provider interaction, looking at the evolution of the Internet exchange concept of the research Internet of the 1980s into the various forms of interprovider exchange evident in today's Internet. Above this engineering layer is placed a level of financial interaction between providers, commonly termed "financial settlement. " The paper will examine the various models of settlement commonly used in the communications industry, and then examine their applicability to the Internet environment. The requirements of a financial settlement will be examined, as will the relationship between retail service models and settlement models. The conclusion drawn in the paper is that the zerodollar peering relationship and the customer/provider relationship are the only models that are stable within the Internet environment, and other models of financial interaction pose excessive risk to one or both interconnecting parties. This polarization of the interconnection environment into just two models is an important feature of today's Internet industry. Such a conclusion is not without its consequences in terms of supportable services in the Internet. For example, widespread deployment of end-to-end quality of service is highly unlikely in such an environment, given that there is no stable mechanism of cost distribution to support the transit of elevated-quality packets. The conclusion also has a number of business outcomes, not the least of which is the long-term inability of such an Internet environment to support a highly diverse provider environment, and the current trend of aggregation within the Internet provider industry is seen as a natural file:///D|/docs/gih/papers/inet99/peering.htm (1 of 29)22/08/2003 8:00:03 AM Interconnection, Peering, and Settlements outcome of the current polarized interprovider peering environment. The paper will briefly examine these outcomes and look at the likely directions of the Internet provider industry as a consequence.