Network economics and the Internet backbone

Why the fact that carriers are not making money operating Internet backbones is a problem for everyone

It's official: The carriers are not making money operating Internet backbones.

Why should you care? Because defying the laws of economics is a bit like defying the law of gravity -- it appears to work for a while, but you're in for an unpleasant surprise at the end.

Here's the issue: The carriers that are currently running Internet backbones are subsidizing that service from other offerings. Competitive pressures and new technologies, however, are driving the price of these offerings down -- at the same time that IPTV, Internet-based video on demand, and multimedia interactive games are driving Internet bandwidth requirements dramatically up. As a result, carriers will need to beef up their networks to handle the capacity.

And where's the financing for that investment coming from?

There are a couple of possible scenarios. Carriers could fund Internet-backbone investments from the pockets of their customers, but there are signs that gravy train is slowing to a stall. Enterprise users quite rightly object to paying top dollar for network services -- particularly in an environment where Internet services (for the present at least) are far cheaper and almost equally reliable. And consumers are already screaming about the "high" cost of broadband services.

Another option is for carriers to put in place a peering exchange -- similar to stock market trading exchanges -- that lets them pass traffic from one backbone to another at fair market rates. Currently, peering arrangements are one-off deals between individual carriers, and they typically don't differentiate between types of traffic. That's as if, instead of the New York Stock Exchange, you had two guys in a smoky back room making deals without distinguishing between blue chips and penny stocks.

The advantage of a peering exchange would be the ability to trade "like for like," at the lowest possible rates -- and thus would make operating Internet backbones profitable. Of course, that would require carriers to be able to charge differentially for different traffic types -- something the 'Net neutrality folks adamantly oppose. So what are the other options?

Carriers could bite the bullet and get out of the Internet backbone business altogether. (Frankly, I'm half-expecting this to happen). The logical next step? Government takeover. There's a long history of private innovations becoming so valuable to society that the government steps in to ensure service continuity. One good example: The New York City subways started out as private services and were taken over by the government.

Personally, I think this is a really bad idea -- and not just because I tend toward libertarian. Government-operated services tend to slow innovation dramatically, and there are the political implications of having governments (United States or others) with a direct window onto the world's communications networks.

What are the other options? Some say that if the current crop of carriers can't operate Internet backbones cost effectively, a new bunch will arise that can. I don't buy it -- the laws of network economics will apply to the new guys, too.

So what happens? Hmm. Brace yourselves for a sharp impact with reality.

Join the newsletter!


Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.
Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Johna Till Johnson

Network World
Show Comments

Brand Post

Bitdefender 2018

With determination and drive, you achieve outstanding performance! Get Bitdefender Total Security 2018 Now!

Most Popular Reviews

Latest Articles


PCW Evaluation Team

Andrew Teoh

Brother MFC-L9570CDW Multifunction Printer

Touch screen visibility and operation was great and easy to navigate. Each menu and sub-menu was in an understandable order and category

Louise Coady

Brother MFC-L9570CDW Multifunction Printer

The printer was convenient, produced clear and vibrant images and was very easy to use

Edwina Hargreaves

WD My Cloud Home

I would recommend this device for families and small businesses who want one safe place to store all their important digital content and a way to easily share it with friends, family, business partners, or customers.

Walid Mikhael

Brother QL-820NWB Professional Label Printer

It’s easy to set up, it’s compact and quiet when printing and to top if off, the print quality is excellent. This is hands down the best printer I’ve used for printing labels.

Ben Ramsden

Sharp PN-40TC1 Huddle Board

Brainstorming, innovation, problem solving, and negotiation have all become much more productive and valuable if people can easily collaborate in real time with minimal friction.

Sarah Ieroianni

Brother QL-820NWB Professional Label Printer

The print quality also does not disappoint, it’s clear, bold, doesn’t smudge and the text is perfectly sized.

Featured Content

Product Launch Showcase

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?