Internet Business Models and the Competitive Dynamics of the Backbone Market
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Transcript of Internet Business Models and the Competitive Dynamics of the Backbone Market
Internet Business Models and the Competitive Dynamics of the Backbone
Market
Michael Kende
9 April 2001
Introduction
Analysys is Europe’s leading independent telecom strategy consulting and research company, with 240 staff in 10 offices around Europe, Asia, and the United States. Clients include operators, policy-makers and regulators.
Authors have a wide range of experience in analyzing the Internet backbone market in Europe and the United States
Analysys was invited to discuss the competitive dynamics of the Internet backbone market
Agenda
Overview of the Internet
Peering
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
Agenda
Overview of the Internet
Peering
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
The Internet can be broken into four types of players
Internet backbone providers
Internet service providers (ISPs)
Content providers (e.g. web sites)
End-users
Overview of the Internet
Internet service providers (ISPs) enable end-users to access the Internet
ISPs have two types of customers
Dial-up customers using their personal computers with modems
Businesses and other large organizations using direct leased line connections
ISPs combine two inputs
Access facilities (e.g. modems)
Backbone services
Overview of the Internet
Internet backbone providers connect end-users with each other and content
Overview of the Internet
Web site
ISP
ISP
Web site
Transport Router
Internet backbone market has an impact on ISPs’ costs
Internet backbones charge ISPs a monthly fee for wholesale access to the Internet
Internet backbones require two inputs to provide wholesale access to the Internet
Transport
Connectivity to other backbone providers
Overview of the Internet
Connectivity makes the Internet the “network of networks”
Overview of the Internet
Web site CISP A Backbone 1
A
FED
B C
Web site B
Backbone 2
Traffic from ISP A can only reach Web site C.
ISP D
Agenda
Overview of the Internet
Peering
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
Internet backbone providers have opposing incentives
Backbones compete with one another for customers
Traffic exchange requires co-operation among backbone providers
Connectivity is not regulated
In place of regulation, a system known as peering has evolved
In the peering system, backbones connect when it is mutually beneficial
Peering
In a peering relationship, backbones only exchange traffic between their own
customersWeb site C
ISP B
ISP A Backbone 1
Backbone 2 Backbone 3
A
ZYXW
B C
Web site D
Peering
connection
Backbone 3 will not pass traffic from backbone 2 to
backbone 1
Peering
Peering is a mutually beneficial relationship
Traffic is exchanged on a settlements-free basis
Peering is based on a perception of equality along several measures
A measure of the flow of traffic at a point of connection between networks
A comparison of the geographic size of networks
A comparison of the size and composition of customer bases
Peering
Any analysis of the Internet backbone market must be dynamic
Static focus on peering issues ignores important forces
Dynamic nature of Internet constrains action of any one backbone provider
Direct constraints from new entrants
Indirect constraints from input suppliers and customers
Peering
Agenda
Overview of the Internet
Peering
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
Access to two inputs is required to enter the Internet backbone market
Connectivity
peering is not the only option
Transport
long distance telecommunications infrastructure (e.g. fiber or satellite)
Entry into the backbone market Overview
Peering may not always be mutually beneficial
Peering may enable one backbone to “free-ride” off the other
Peering can provide a smaller backbone with free access to a larger backbone
Peering may require one backbone to utilize more capacity than another
One backbone may refuse to peer with another to prevent free-riding
Entry into the backbone market Connectivity
Example of free-riding between networks of different size
Web site CISP A Backbone 1
Backbone 3
A
ZY
B C
Web site D
Traffic from ISP A to Web site B will pass between points A and B in both directions
Entry into the backbone market Connectivity
Transit is a comprehensive alternative to peering
In a transit relationship, one backbone agrees to route another backbone’s traffic to all points on the Internet
The transit provider is paid for these services
Transit customer can provide backbone services and grow to qualify for peering
Entry into the backbone market Connectivity
Example of a transit relationship
Web site C
ISP B
ISP A Backbone 1
Backbone 2 Backbone 3
A
ZYXW
B C
Web site D
Peering
Connection
Backbone 3 will take traffic from backbone
2 to backbone 1
Transit
Connection
Entry into the backbone market Connectivity
Backbone providers have incentives to compete on transit prices
Transit customers provide revenues for backbones
Transit customers improve the bargaining position of backbones in peering negotiations
Entry into the backbone market Connectivity
Long distance infrastructure is the core of a national Internet backbone provider
Long distance infrastructure markets can support multiple competitors
Fiber optic technologies enable economical overbuilds of existing networks
Regulations often enable entrants to lease capacity from incumbents to complete national build-out at affordable rates
Entry into the backbone market Infrastructure
The competitive dynamics of the Internet provide for numerous means of
entry Entrants can connect to existing backbones
through different means
Peering
Transit
Infrastructure is increasingly available
Leasing of existing infrastructure is regulated
Technology enables new entrants to build their own infrastructure
Entry into the backbone market Conclusion
Agenda
Overview of the Internet
Peering models
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
Competitive constraints on backbones
Competitive constraints Overview
Customer forces
Content
providers
ISPs
Technical
substitutability
Mem
ory/
processing
Multi-
homing
Inpu
t sup
plie
rsLo
cal
Inte
r-na
tiona
l
Backbone
provider
Input suppliers compete indirectly with backbone providers
Local transport
As an increasing amount of Internet usage is local, traffic can bypass national backbone provider’s network
Local telcos can use market power over last mile as leverage against national backbone providers
International transport
International traffic can bypass national backbone provider’s network
Competitive constraints Input suppliers
Customers are increasing their bargaining power with backbones Local content is increasing
Demand of end users for high-quality local content bestows market power on providers
Local content providers can leverage this market power in negotiations with backbone providers
ISPs have powerful brand names
Local telcos have entered the market, and other ISPs have national and international presence
These ISPs can negotiate advantageous terms with backbone providers
Competitive constraints Customer forces
Advanced storage and processing technologies reduce the need for
backbone transport
Usage of servers near end users
content providers can push content out to mirror sites
users can pull content in to cache sites
In both cases, content is only transported on backbone network once
Competitive constraints Technical substitutability
Diagram of the use of mirroring and caching
Web site CISP ABackbone 1
A
FED
B C
Web site B
Backbone 2Content from Web site B is pushed to a mirror site closer to ISP D
ISP D
Mirror
Cache
Content from Web site C is pulled by ISP A to a cache closer to its users
Competitive constraints Technical substitutability
End users can multi-home to reduce reliance on backbone networks for
connectivity
Multi-homing involves an ISP or content provider directly connecting to more than one backbone provider
As a result, traffic goes directly to the terminating backbone without passing through a peering connection
Companies such as InterNAP sell multi-homed connections to end-users
Competitive constraints Technical substitutability
Diagram of multi-homing
Web site C
ISP A
Backbone 1
A
FED
B C
Backbone 2
By multi-homing to both backbones, ISP A is directly connected to Web site C and ISP D, without any peering ISP D
Competitive constraints Technical substitutability
Agenda
Overview of the Internet
Peering
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
Comparison of Internet and telephony Internet and telephony share the same basic
infrastructure
Local
Long distance
International
Telephony services are typically regulated while Internet services are not
Input availability
Competitive dynamics of Internet markets
Comparison with telephony
Input availability for Internet backbones reduces need for regulations
Transport
Telephony regulations provide access to existing transport capacity
New technologies lower cost of building new transport capacity
Connectivity
Peering is one option
Peering policies increasingly being made public
Transit access makes entry and growth possible until smaller backbones qualify for peering
Comparison with telephony Internet not regulated
Dynamism of Internet services reduces need for regulation
Basic telephony services are static
Voice call between two users is live
There is no means to reduce reliance on network for end-to-end call
Internet services are dynamic
Internet content can be stored
Storage technology (mirrors and caches) increase competitive pressures on Internet backbone providers
Comparison with telephony Internet not regulated
Agenda
Overview of the Internet
Peering models
Entry into the backbone market
Competitive constraints on backbone market
Comparison with telephony
Analysis of Brazilian market
Analysis of Brazilian Market
Market Overview
Analysis of Entry
Competitive Constraints
Analysis of Brazilian market
Brazilian Internet market is growing
Wave of investment since market restructuring in 1998
Number of lines has risen from 14.8 million in 1996 to 33.2 million in 2000
Number of dial-up Internet users has risen from 471,000 in 1996 to 3.7 million in 2000
Source: Economist Intelligence Unit (2000)
Analysis of Brazilian market Market overview
Necessary infrastructure is available
Incumbents must make infrastructure available to Internet companies
Entrants building facilities
Local entrants include MetroRed, Diveo, and AT&T
Long distance entrants include Intelig, Global One, and Impsat
International entrants include 360networks and Global Crossing
Analysis of Brazilian market Analysis of entry
Connectivity options are available
Embratel sells dedicated access to its backbone to customers and competitors alike
Peering is taking place
Embratel and RNP
Regional backbones connecting to increase their coverage
Analysis of Brazilian market Analysis of entry
Existing backbone providers face competitive constraints
Input providers
ISPs such as Terra are growing and moving into backbone markets
Local incumbents will be free to provide national backbone services soon
While existing national backbone providers grow, utilities are beginning to enter the market with their own facilities
ISPs are beginning to multi-home and use content storage technologies to reduce reliance on backbones
Analysis of Brazilian market Competitive constraints
Conclusion
There are increasing signs of competition between backbone providers
Investments in infrastructure
Internet usage is growing
Competition is likely to increase in the future when local telcos enter the market
This competition provides for affordable Internet access services from ISPs
Analysis of Brazilian market