Lecture #8: Outline• Today:
—Costs of Internet Services– HW/SW
– Customer Support
– IP Transport
– Information 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 Agreements– Incentives
– Architectures
– Resale and Usage-Sensitive Pricing
Services offered by ISP
• Offered Service– Hardware,software
– customer support
– IP transport
– information content and provision
• how customer get the services– access link to the nearest node of ISP
– ISP arrange this connection ,and pass cost to customers
Costs of Hardware and SoftwareCustomer ISP
Dial up:Shell Account
1.Computer2. Modem3.Comm. software
1. Telephone lines2. Terminal Server (*)3. Modem pools(*)
Dial up:PPP or SLIP
1.Computer2. Modem3.Comm. software
1. In bound telephone lines2. Dial-up router (*)3. Links from router to
network(*)Leased line 1. Channel Service Unit
(CSU)/Data ServiceUnite(DSU)
2. Router
4. matchingCSU/DSU
5. internal links(*)6. additional port on router or
new router(*)
Variable 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
Costs of Customer Support• ISPs incur support costs when
– customer is acquired(service establishment)
– ongoing basis during business relationship
– service termination
• Service establishment– credit check
– consultation with customer on appropriate choice of service options
– set up billing record
– configuration of the ISP’s network to recognize the new customer
– Analysis of the network structure for possible upgrade
• Ongoing customer support:– Reconfiguration internet links or reassignment of
IP address when large corporate customers upgrade their LAN
– Network management and maintenance activity
Costs of Customer Support(Cont.)
• Service termination:– final setting of accounts
– reconfiguring routers and DNS
BARRNet Case Data• T1 Connectivity(1993)
– Full service: $ 17,000
– Port-only: $ 13,000 — user provide router, does configuration, management and
maintenance ==>$4,000
• Other unbundled options– basic internet connectivity package $1,500
— acquiring Internet number and domain name
— platform specification of DNS server
— configuration
— one person training in maintenance
– Deluxe internet connectivity package $3,000— security, config. News server, config. Packet filters
– consultation and training $125/hr
BARRNet 1996 Data
– T1 & 56 k Eqp. Install. > ongoing service charge
– low speed service = 0.5 ongoing service
• Observations– account activation is significant to customer’s cost
– Cost of standard support Customized advice
• Connectivity (1996)– Full service:
— Eqp. And Installation:$13,750,
— Service: $22,800 for two-year, prepaid
— for 14.4 kbps: $1,300
– Consultation $175 /hr
• support cost reflect to charge– Nonrecurring charge(installation fee) for equipment
and service activation
– ongoing charge for a year’s service
– different price policy for — different service
– secure mail server ,package filter …
— ownership and maintenance responsibility of hardware
– port-only ,full service
BARRNet 1996 Data
Cost of Transporting IP Packets over Private line
• IP Transport costs include:– leased-line tariffs
– the cost of routing hardware and software
– ongoing cost of monitoring the network
• Cost structure– NSFNET:80% for leased line,7% for network operating
center
– Mid-Level ISP: 25~40% of total costs
– Bandwidth a small portion of total costs
==> excess capacity in bandwidth
• Efficient BW use by statistical multiplexing
Sunk and Incremental Costs
• Cost of constructing fiber-optic links(Sunk cost)– major part: trenching and labor cost
– small part :fiber cost
• incremental cost of providing private line service:– lighting up fiber
– costs of customer acquisition
– ongoing cost of maintaining a customer account
• ==>install excess fiber (50-80% for Major Local Operating Co.)
• Private line tariffs must – contribute to the sunk cost (by nonrecurring charge)
Private Line Cost and Tariff
• Q: What will you do?– at low incremental cost of usage
– high sunk cost
– excess capacity
– recover 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 desirable
• Term commitment:– fixed costs of service activation and termination
• ISP with leased-line backbones– size their needs over a three-to-five ear period
– substantial excess capacity — the incremental cost is closed to zero
— sunk cost of IP transport is substantial
• Examples:– Sprint Nation wide link with high sunk cost and
high excess capacity
– small ISP/reseller with small sunk cost and large incremental cost— no volume and term discount
– =>different ISP with different cost structure and different pricing policy
Other Cost Structures
Q:Impact of Fast Packet Technologies & Multimedia Apps.
• Fast packet services:– Frame-Relay,SMDS,ATM
– statistically multiplexing variable or fixed -size pkt
– treat IP pkt as data unit,add own header
– less multiplexing gain
• Multimedia Applications
• cost structure
– connectivity among ISPs need lower costs— once an ISP pay a flat rate to connect to a fast packet
cloud
— the incremental cost of virtual connections to multiple ISPs are very small
– small ISPs can reach out to any one else on the backbone without investing backbone
Information content and provision
• cost of online service– local 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
service
Variable cost Step-wise Fix cost
Hardware and software support
Telephone line 1. router2. internal
link
None
Customer support Service creation ,duration ,termination
None None
Transport IPpackets(privateline)
incremental cost Routinghardware
Fiber-optic constructing
Informationcontent andprovision
Transporting &duplicationcost
None 1. Acquiring information content
2. Marketing sales administration
Economics of Interconnection
• 1986-1991– NSFNET as single backbone
— three layer hierarchy
— use GGP (Gateway-to-Gateway protocol)
– core gateway
• contain full routes
– non-core gateway
• partial routes +default route to core gateway
— core gateway +links formed the backbone
– Problem of Multiple backbone and multiple connection— routing will depend on host address ,not only the network
portion
– routing according to traffic condition
– routing table increase rapidly
— which backbone should carry the traffic?
– Settlements among interconnected networks
– EGP:— notion of an autonomous system
• 1991-1994– from the very beginning
— the key ISPs are inconsistent with each other
— ANS provided a bundle of services
– full routing,long haul transport
– ISP should purchase transport or routing from ANS
– for customer’s full access to all internet sites
– after that— new backbones are constructed
– interconnection agreement with ANS(bilateral)
– ISPs argued should be settlement-free
• benefit with each other
• not apply to transit traffic
— Formation of the Commercial Internet Exchange(CIX)
– reason:
• no transit traffic,no settlement
• inability of the new entrants to obtain interconnection agreement with ANS
– structure and mechanism:
• funding members:CERFnet,PSI,and AlterNet
• exchange traffic without regard to type and settlements
• router is managed by PSI
• other members leased private line from their network to the CIX router
— ANS join the CIX after 1993
— for reseller
– IN CIX,rules assured connectivity is direct
– join CIX and pay $7500 annual membership fee
• cost of reseller has gone up
• otherwise blocked at CIX routers
– AlterNet:
• requires reseller to purchase wholesale connection
• 3 times as much as retail connection
– PSI
• do not sell wholesale connection
– Sprint
• treat as customers
— The formation of Metropolitan Area Ethernet-East (MAE-East)
– developed by AlterNet,PSI,SprintLink
– distributed Ethernet service spanning a wide geographic area
– cloud service
– low cost compared to that of a physical connect to a router
– no multilateral agreement ,work out a set of bilateral agreement
– no settlements
– every provider accepts all traffic and delivers all traffic to any ISP with which a bilateral agreement exists
Analysis of Interconnection Agreements
• Disadvantage of CIX architecture– congestion on XIX router
– needless delay
– smaller regional network (or reseller) with smaller cost can offer lower prices
• solution:– setting up multiple interconnection points
– smaller ISP pay settlement to larger ISPs
– For reseller — prohibiting reseller
— raising price to reseller
• ISP using fast-packet services– ISP’s customers scattered different clouds
— ISP use internet protocol to integrate its network
— ISP provide customer support,some network management ,information content
— not provide multiplexing function(for reducing the cost ofunderlying transport)
– provided by the firms producing the underlying cloud
— costs of interconnection become symmetric
– every provider purchases access to the clouds
– no sunk cost with ISP
— This way ,CIX be an attractive model
— As transport charges falls
– price not proportional to their access speed
– reseller need to fond another profitable business
Interconnection agreement
• Interconnection agreement:– create network of networks
– Before:— connect to a service provider who connect you to the
NSFNET
– Now:— Fragmentation of internet’s WAN service market
— Each interconnection models have different technical,policy ,and economic costs and benefits
• NAPs: points entering interconnection agreement for backbone providers
Incentive for interconnection
• Network externality:– cost or benefit the user of a network derives from
an additional person using the same network
– positive for benefit— information provision,communication convenience,
application interoperability
— motivation factor for networks to interconnect
– negative for cost— resource limit
– application layer— Email
Interconnection Agreement
• New interconnection agreement considers– competitive business strategy
EX:provide unique content and not share
– government intervention:promote common carrier
• network provider decides how to interconnect with other networks
Four interconnection agreements models
• Peer-to-Peer Bilateral Model– Ex:For two NSPs or ISPs with similar size and
national reach
– network externalities are symmetric
– doubling the number of directly connected users through the interconnection point
– Elements make two firms peers:— size:decrease intermediary network
— experience:for successfully transport
— customer base:network externalities
• Hierarchical Bilateral Model– two party contract
– customer-provider relationship
– Ex:1.Internet Access Provider connecting to ISP2.small ISP connecting to a U.S backbone provider
– firms with a smaller network — gets more network externalities
— pays a large amount of the cost of connection
• Third-Party Administrator Model– interconnection point consists of more than two
networks
– Ex:CIX
– Third-party— operate the administration of the interconnection
— firm not operating a network
— route traffic between the interconnected networks
— acts as a common carrier,offering consistent prices
– Network Externalities— positive feedback
— increase when connected network increase