1. Vortex98 Laguna Niguel, CA May 1998 Economic Issues Facing Internet Hal R. Varian SIMS, UC Berkeley http://www.sims.berkeley.edu/~hal

2. Vortex98 Spring 98 2 Outline Interconnection Quality of Service (QoS) Implications for industry structure Residential broadband

3. Vortex98 Spring 98 3 Interconnection Bilateral interconnection –common Multilateral interconnection –uncommon –highly congested at 5 original NAPs –few new NAPs Why?

4. Vortex98 Spring 98 4 Metcalfe’s Law Value of network to user  kn Total value of network = kn 2 Large network connects to small one –big network: lots of users get a little extra value –small network: a few users get a lot of extra value Value of interconnect is the same!

5. Vortex98 Spring 98 5 Multi-party Interconnect Commercial Internet Exchange (CIX) Each paid $10,000/year for settlement-free peering Problem: not stable to competition –history of CIX –once connected, you create your own competition

6. Vortex98 Spring 98 6 Conclusion on Interconnect Bilateral interconnect may get by without settlement Multilateral interconnect can’t Will need settlements to support multi player interconnect Want: fair, reasonable, non-discriminatory terms

7. Vortex98 Spring 98 7 Quality of Service IP = no quality bits (best effort) Applications and users need different qualities Questions for ISPs –How much does it cost to provide different QoS? –How much will people pay for QoS?

8. Vortex98 Spring 98 8 Cost and Revenue Cost is an engineering question Revenue is an economic question –INDEX: www.index.berkeley.edu –Give 150 Berkeley people ISDN –Simulate service quality differentials bandwidth, congestion, delay to connect –Make them pay for quality bits

9. Vortex98 Spring 98 9

10. Vortex98 Spring 98 10 Demand for 128 KBS www.index.berkeley.edu Price (cents) Connect time (minutes/week) Estimated demand curve

11. Vortex98 Spring 98 11 Quality of Service No good ways to contract on QoS at interconnect Must specify: quality, measurement, accounting, paying for QoS Result: QoS disappears at administrative boundaries Aggravated by bill-and-keep

12. Vortex98 Spring 98 12 Impact on Market Structure Standard for QoS: quality could be maintained across admin domains No standard for QoS: quality can only be maintained within admin domain Hence: bigger firms can provide higher quality to more places Without QoS standards, tendency towards monopoly

13. Vortex98 Spring 98 13 Role of Standards With standards: competition within a market Without standards: competition for a market Conclusion: want standards for QoS –to provide better services to consumers –to maintain competitive market for ISPs

14. Vortex98 Spring 98 14 Residential Broadband Cable modems ADSL –ILECs who integrates with rest of network? –CLECs who pays for conditioning? Backbone meltdown

15. Vortex98 Spring 98 15