Understanding the game of bandwidth pricing

I thought about this long back - “Who pays to whom in case of internet bandwidth?” I have been working in this domain from sometime and so far I have learnt that it’s really complex. I will try to put a series of blog post to give some thoughts on this subject. Firstly we have to understand that when we talk about “bandwidth price” it’s often layer 3 bandwidth which you buy in form of capacity over ethernet GigE, Ten-GigE and so on (or STMs if you are in India). As we know from back school class in networking - layer 3 works over layer 2 and so to deliver “bandwidth” on layer 3, one needs layer 2 physical circuit. Price paid by companies on layer 2 Vs layer 3 varies significantly based on their location, type of business, their target goal etc. E.g a content heavy company like Google pays hell lot of money on layer 2 circuits while it is strongly believed among networking community that Google is a tier 1 network and hence a “transit free” zone and they do not pay any amount on layer 3. In general the trend is pretty much as big networks have larger network footprint and connected “PoPs” over layer 2 (leading to a higher layer 2 bill) while relatively lower layer 3 bill while small networks depend significantly just on transit bandwidth (in form of layer3) and have very low layer 2 footprint.  

What’s more interesting here is the trend on “Who pays for the layer 2?” Well it has relatively less clear trend and entire setup is based on fact that internet started in US and a significant content was hosted in US for a long time. Now overall that’s changing fast due to ways web is evolving but still if you consider traffic is flowing to/from Asia, you will often find that it’s on Asian telco’s layer 2 and not the Western telcos. E.g traffic from New York to Mumbai say between AT&T in New York to Tata Comm in Mumbai will be handed over to Tata’s PoP in New York and they will carry it all way down to Mumbai over their layer 2. While for packets travelling from Mumbai to New York, they will be carried over Tata’s layer 2 (yet again!) till New York and will be handed off to AT&T in New York. Now considering fact that Tata and AT&T both are Tier 1 settlement free ISPs, why it’s that only Tata pays? Same applies on relation between say NTT & Level3. And same even applies for traffic between small regional networks which eventually go via big tier 2 networks like say traffic flow between Level3 and Airtel etc (Airtel pays for layer 2).

Here’s list of reasons I can think off and have found so far in my numerous discussions with people around in industry:

  1. It has lot to do with sense of power. US is believed to be “Center of backbone” and over time that has changed a lot but still image stays like that.
  2. Except Singapore & Hong Kong most of other major regions in Asia do not much of content & infact consume significant content from Western world. E.g in case of India 70% of content still comes from outside (but don’t assume it to be 70% bandwidth since 30% of domestic hosted content has lot to do with CDN’s and way more % of traffic out on them).
  3. Most of countries in region are very restrictive in letting foreign player to get there and work (India, China, etc).
  4. There is no major exchange point acting as center of regional/global traffic exchange as like that of DE-CIX in Frankfurt or world famous 60 Hudson Street in New York.
  5. Somehow Asian businesses like this to continue and they have no issues in paying at layer 2 as long as they can keep their rivals away from domestic market.
  6. Western players like AT&T, Verizon, Century Link, Level3, Telia etc still stay in more dominant position as compared to Asian majors.

Will share more on this subject in upcoming blog posts.   Sidenote: Visited Amsterdam Botanic Garden today and ending this post with some of pics from there. :)   [gallery link=“file” ids=“3084,3063,3085,3086,3080,3089,3088,3087,3081,3082,3079,3078,3083,3062,3077,3076,3075,3074,3073,3072,3060,3061,3068,3069,3064,3070,3071,3065”]   Apart from that I also saw snowfall at Klagenfurt, Austria which was very nice experience. Here’s how it looked like: