Critical Business Decisions for Internet Services

INTRODUCTION Critical business and user decisions greatly affect the development of the Internet infrastructure. Because the Internet marketplace is competitive and decentralized, an Internet Service Provider or other business' Internet interconnection agreements determines user performance, cost structure, and ultimately profitability. As the Internet evolves from best effort services to integrated services, the interconnection agreements become even more important. The Internet is characterized by decentralization and growth. Decentralization allows for heterogeneity of users and applications ranging from electronic mail to the World Wide Web. Decentralization has also led to heterogeneous network designs and scalable interconnection agreements. The Internet continues to grow as measured by the number of users and hosts, the amount and types of traffic, the advertising volumes and transactions, and the size of the Internet industry. With continued growth, some expect the Internet to become even more fragmented, although others see evidence of a trend towards consolidation. 1 Save for a few centralized functions such as allocation of Internet Protocol (IP) addresses, Domain Name Service (DNS), and distribution of routing tables, the Internet has consistently followed a decentralized administration philosophy. 2 Plans for decentralization of some of these functions are being discussed. 3 This article examines the ability of Internet interconnection models 4 to incorporate technological innovations such as integrated services. 5 The point of interconnection is an illuminating focus for Internet analysis. Interconnecting networks must cooperate to exchange information to help the Internet function. Interconnection points must also relay the bits and bytes of an e-mail message or a Web session across different networks. Assessment by Internet Service Providers (ISPs) of a range of technology, policy, management, and economic factors determines how and where interconnections occur. Integrated and differentiated services on the Internet represent an important development since they make possible new applications, such as real-time video or voice. Integrated services also fundamentally change the economics of Internet interconnection agreements, and more broadly require new business models, and likely a new industrial structure and regulatory framework to enable growth. 6 This article presents four models of interconnection agreements for Internet Service Providers and describes interconnection point pricing policies. To anchor these theories within the reality of the current interconnection marketplace, the article includes empirical analysis of the evolving Internet interconnection business environment. The article continues by detailing the emergence of integrated and differentiated 3 services. Finally, drawing upon incomplete contracts theory, an integrated analysis of these elements is …