Table of contents
Part 1
What are ICT and internet policies?
Part 2
The internet, markets and access
Part 3
National ICT and internet policy and regulation
Part 4
Specific issues in internet policy and regulation
Part 5
Organisations active in ICT

 5. Network interconnections and exchanges

- Peering and transit: two different ways to interconnect
- Convergence – Internet telephony, radio, literature, music etc

The manner in which network interconnections occur lies at the heart of the economics of the internet. At each point where one network connects to another, there is a device called a router. Routers act like traffic signs, pointing the way to the IP address of the destination computer, and selecting the optimal route through the network using continually updated ‘routing tables’. In this way, if one route is blocked, then packets will be redirected along another. There are different classes of router for different levels in the network hierarchy described above.
The technical level exists alongside a level of financial interaction between providers, which has important policy implications. Under the settlement system of the telecom world, cash flows from the core to periphery of the network; but, says Tim Kelly, head of the ITU’s policy and strategy unit, in the internet world cash flows from the periphery to the core of the network.1
Essentially, at each point of interconnection between two networks there is either a peering relationship (which is free) or a customer/ supplier relationship (which is paid for).

Peering and transit: two different ways to interconnect

There are a number of different peering and transit arrangements that allow interconnection:

Private bilateral peering: Two ISPs negotiate a bilateral ‘private’ interconnection, using one or two leased lines, to exchange traffic between their networks. The term used for this is ‘peering’ because the interconnection takes place at the same level in the network hierarchy – the ISPs are peers. These exchanges are usually but not always free: the ISPs do not charge each other for traffic, and will split the costs incurred. In order to ensure there is no imbalance in the traffic flows, ISPs that enter peering relations are usually of similar size. Local (Tier 3) ISPs of equivalent size will therefore peer with each other, national or regional ISPs of equivalent sizes will peer with each other, and IBPs will peer with each other. The size of an ISP can be measured by the number of customers it has, the volume of traffic, backbone capacity, size and geographical reach of its network, or the number of content web sites.

In Europe, with so many different ISPs of different types, technical peering often involves a commercial transaction. The charges between two ISPs will depend on the relative size of each, which is measured according to a range of the factors mentioned above. Geoff Huston of Telstra describes how the peering discussions can develop2
: “In many ways, the outcome of these discussions can be likened to two animals meeting in the jungle at night. Each animal sees only the eyes of the other, and from this limited input, the two animals must determine which animal should attempt to eat the other!”.

A settlement-free peering relationship does not allow one ISP to transit traffic through a second ISPs network to an IBP, notes Clare Milne; this would be the equivalent of the first ISP piggy-backing on the network and paid-for transit agreed by the second ISP to the IBP.

Multilateral peering: In order to exchange traffic with as many networks as possible, it is beneficial therefore for as many ISPs as possible to share the same facility. These allow simultaneous peering between two or more Tier 3 ISPs. There are two types:

Internet Exchange Point (IXP): In order to achieve the most efficient interconnection, ISPs would seek to establish a point of presence (POP) or even locate their servers next to each other. Indeed, so-called collocation facilities provide exactly this under the same roof.

Internet exchange points (IXPs) are places where ISPs exchange traffic with one another. IXPs have rules guiding the interconnections, some are run on a not-for-profit basis as a consortium of local ISPs, and others are run on a commercial basis, where ISPs must pay to peer. As ISPs maintain POPs at such a facility, in commercially run IXPs customers pay the cost of a third party to manage the collocation facility (temperatures, uninterruptible power supplies, maintenance), typically by rack space (determined by how many racks they need to house their equipment).

There are over 150 IXPs around the world, examples of which are SAIX (South African Internet Exchange), the London Internet Exchange (LINX), Mae West, etc.3

Even when IXPs exist, they may not be a local company. In Brazil, for instance, there is one large IXP in São Paulo, run by an agency of the State of São Paulo government, which has ‘given’ it to a for-profit Miami-based operator. So the entire backbone traffic in Brazil is in the hands of a US company. This has implications for national sovereignty and control of national traffic.

Network Access Points (NAPs): A NAP has two distinct roles. It acts first as an exchange provider between Tier 3 ISPs that seek to enter into bilateral peering arrangements (an IXP), and second as a facility where Tier 3 ISPs purchase agreements with one (or more) Tier 1 internet backbone providers, which are also connected to the NAP. In this sense, Tier 3 ISPs gain access to the networks of larger IBPs.

Transit arrangement: In a transit arrangement, one ISP pays the other on a customer/supplier basis to carry its traffic. “Where a wholesale or retail service agreement is in place, one ISP is in effect a customer of the other ISP,” says Geoff Huston of Telstra. “In this relationship, the customer ISP (downstream ISP) is purchasing transit and connectivity services from the supplier ISP (upstream ISP).”

Because they are businesses, IBPs peer with other IBPs for free, but will charge Tier 3 and Tier 2 ISPs for access to their network. “Negotiations for peering do not just occur horizontally between ISPs but also vertically between ‘small local ISPs’ and ‘large national IBPs,’ notes Clare Milne in the DFID Internet Costs Study report.4
“In the latter case, the large national IBPs have a stronger bargaining position because they not only provide access to their customer and content base, but also act as a gateway to the rest of the Internet.”

In a transit agreement, two charges are made. First, the downstream ISP pays a network access charges (called ‘port charges’). Second, it pays for the capacity of the link (in Mbps) required. Under this customer/supplier relationship, connecting ISPs pay the full costs of the circuit to connect to the IBP. When international links are required, the downstream ISP therefore has to pay both halves of the international circuit, plus the costs to exchange the traffic. This happens even though the traffic then flows in both directions.

The issue of international internet connections has be-come highly controversial, as smaller ISPs in developing countries bear all the international costs of internet access. Transit arrangements inherently do not recognise the value that Tier 3 ISPs bring to the IBPs network (in terms of reciprocal access to their networks), despite the fact that onward connectivity is part of its onward proposition. Indeed, because ISPs pay all the cost to connect to IBPs (even though traffic flows in both directions), and an IBP in the USA will have multiple relationships with ISPs in different continents, it simply acts as a middleman offering connectivity to both third party networks and charging both in order to do so.

Yoshio Utsumi, Secretary-General of the ITU, summarised the situation during 2000: “At the moment, developing countries wishing to connect to the global internet backbone must pay for the full costs of the international leased line to the country providing the hub. More than 90% of international IP connectivity passes through North America. Once a leased line is established, traffic passes in both directions, benefiting the customers in the hub country as well as the developing country, though the costs are primarily borne by the latter. These higher costs are passed on to customers [in developing countries]. On the internet, the net cash flow is from the developing South to the developed North.”

In 2000, ISPs in Asia Pacific argued that they were paying a total of US$5 billions per year to IBPs in the US, and in 2002 African ISPs were paying up to US$500 millions a year. “The existence of reverse subsidies is the single largest factor contributing to high bandwidth costs,” says Richard Bell in his paper Halfway Proposition,5
“these reverse subsidies are costing the continent anything between US$250m and US$500m per annum”.

On the one hand, ISPs and internet users outside North America argue that they are effectively subsidising US ISPs and their customers. European ISPs first brought the issue up in the mid 1990s, followed by Asian ISPs,6
and now developing world ISPs are doing the same. On the other hand, IBPs in developed countries argue that they do not discriminate against developing countries. Rather, the bulk of the costs are incurred over the international leg because of geographic remoteness, the lack of telecommunications infrastructure and the lower levels of competition in developing countries. In both Europe and Asia, the circumstances have been mitigated considerably as ISPs have created national and regional IXPs, which reduce the importance of the middleman providers.

Convergence – Internet telephony, radio, literature, music etc

Another key issue is that of technological convergence, whereby different types of traffic are carried on the sameinternet protocol (IP) platform. Not only can different types of content be digitised, and then sent as packets (such as scanning photos and emailing them), but increasingly content is produced in digital form. Such content includes radio, literature, music, film, or games. Users can download these products over their internet connection rather than purchase them through retail outlets. The internet is an excellent distribution system: because it appears free to the user, and the links are paid for through bilateral or multilateral settlements between ISPs, the cost of distance has collapsed. In this way online radio stations, for example, can broadcast globally without the expense of transmitters, and online newspapers can charge readers subscriptions without having to print and deliver the newspaper. For the internet distributor, the only major expenses are the bandwidth of the leased line and server capacities that are required to cope with the volume of requests for data from that website.

The classic example is voice traffic. Internet telephony exploits the fact that, when carried over the internet, voice traffic bypasses the accounting rate system built up around the circuit-switched network. It works on the principle that network connections are free, and uses the public internet as its means of transmission. A user can send an email without directly having to pay any costs to transport it across the world, and the same applies for packets that carry voice conversations. In the digital cir-cuit-switched network, each call sets up a dedicated channel through the network for the duration of the call (including all the silences) and consumes a bandwidth of 64 Kbps. In a packet-switched network, each call consumes around 16 Kbps and when there is no activity (during silences), no packets are sent.

Internet telephony has developed through a number of different stages, from PC-to-PC telephony, to PC-to-phone telephony, to phone-to-phone telephony. It is particularly attractive to customers because the tariffs for international voice calls can be very expensive. However, the quality of calls has been a key issue because, unlike data streams which when delivered by the internet arrive by different routes in a different order and are then reassembled, in order to be intelligible voice conversations require a constant stream. Otherwise there is an echo, words get scrambled and some words do not arrive at all. Internet telephony is technically distinct from Voice over Internet Protocol (VoIP), which uses a private managed IP network in order to control the quality of the transmissions. Because of the efficiency of sending voice over an IP network, an increasing number of telephone companies are now using VoIP to carry their international traffic. By doing so they can squeeze much more traffic into the same international link.

Another example is the distribution of illicit or grey market products over the internet. Because of the lack of centralised governance over the internet, it is not only easier to evade detection but also harder to define jurisdictions and therefore to prosecute. The pornography industry, for example, has long exploited the global distribution powers of the internet, and the manner of delivery – such as (relative) anonymity. Indeed, the pornography industry has been at the forefront of the development of some technologies such as video conferencing and online electronic transactions. Another example of this is Napster, which allowed users to download MP3 music files for free and in so doing bypass commercial distribution outlets. Applications such as these use peer-to-peer (P2P) software, essentially a networking programme which allows a group of users to connect to each other’s computers and access files from each other’s hard drives. These work by allowing users to share files through swapping corresponding IP addresses of each other’s computers. The post-Napster p2p systems are extremely decentralised, with users’ own computers acting as the databases, and they work separately from, though often in collaboration with, the Web.

1T. Kelly . "Global Internet Connectivity and the Digital Divide", OECD Workshop on Internet Traffic Exchange, Berlin (2001).
2 ‘Interconnection, Peering and Settlements’ Geoff Huston, Telstra Australia. See or

3 Telegeography list of XPs
European IXPs:

4 C Milne, Antelope Consulting,

5 R Bell, “The ‘Halfway Proposition’”, African ISP Association, at

6 “International Charging Arrangements for Internet Services (ICAIS)” at

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