Report: The Internet Runs (Mostly) on a Handshake

The network connections that tie the Internet together continue to function smoothly through a process that operates largely without contracts, according to a new report on Internet traffic exchanges by the Organisation for Economic Co-operation and Development (OECD.

The report by Dennis Weller of Navigant Economics and Bill Woodcock of Packet Clearing House provides a detailed look at the efficiency of how the Internet works – not just in a technical sense, but in terms of its business relationships. The key finding is that just 0.4 percent of Internet traffic agreements are based on paid peering, in which one party pays another to move traffic between their networks. More than 99.5 percent of the traffic exchanges that keep the Internet running are based on a handshake: concluded without a written contract, meaning that terms and conditions are generally agreed upon. This research was based on a survey of 142,000 peering agreements.

Cooperation Among Diverse Entities

The report's bottom line is that the commercial agreements over the past 20 years have created an efficient global market for connectivity based on voluntary, contractual agreements.  What’s more impressive, the study points out, is that this occurred in a highly competitive environment largely without regulation or central organization, and by diverse parties including providers Internet backbone, access, and content distribution services, as well as universities, NGOs, branches of government, individuals, businesses and enterprises of all sorts. “[This] extends far beyond the reach of any regulatory body’s influence. " the report notes.

The report compares the efficacy of the Internet model to traditional, regulated forms of voice traffic exchange. "If the price of Internet transit were stated in the form of an equivalent voice minute rate, it would be about USD 0.0000008 per minute—five orders of magnitude lower than typical voice rates," the OECD notes.

Technical innovation has also played an important role.

"Innovation by equipment manufacturers has made each new generation of transport facilities, routers, and storage less expensive and more efficient," the authors write. "Without these advances, no amount of investment would have been sufficient to accommodate the growth in traffic data throughput record of 2 terabits per second." That traffic data throughput record occurred at the DE-CIX internet exchange in Frankfurt, Germany.

Future Concerns

In the debate about the efficacy of the internet’s economic model of traffic exchange, the report reveals that the current model, with a hands-off approach to regulation, has worked extremely well, and that in this unregulated wild west, the massive growth of Internet infrastructure has kept pace with demand."This is a remarkable and under-recognized endorsement of the multi-stakeholder, market driven nature of the Internet," the report states.

But there are potential concerns on the horizon. “As incumbent networks adopt IP technology, there is a risk of conflict between legacy pricing and regulatory models and the more efficient Internet model of traffic exchange," the report notes, suggesting that “by drawing a bright line between the two models, regulatory authorities can ensure that the inefficiencies of traditional voice markets will not take hold on the Internet.”

While there is the occasional peering spat, by and large the model seems to be working. Commercial agreements over the past 20 years have created an efficient global market for connectivity, with the Internet traffic exchange market ensuring universal connectivity worldwide. The conclusions are that the basic architecture of the Internet has proven remarkably adaptable.

The full report is summarized at the OECD web site, where you can read the full report.