Economics and industry structure

David D. Clark

MIT

July, 2012

Some theory

Ronald Coase and the theory of the firm. Worth a Nobel prize…

Transaction costs are an important part of market structure. It is not just the cost of purchase, but search costs,

negotiation, etc. A competitive market implies transaction costs. If these costs are too high, costs can be lowered by

bringing the transaction inside the firm. Planning competes with competition for best cost solution.

Relevance to networks?

Well-defined interfaces reduce transaction costs. So firm boundaries tend to arise along technical

interfaces. Industrial modularity follows technical modularity.

Applications

TCP

IP

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Interfaces define the industry

ISPs exist because of IP, and the protocols that connect regions together. There is no fundamental reason why ISPs look the

way they do. Protocols define the services that can be

created across multiple regions. So by creating protocols, we create

opportunities for service (e.g. revenue) creation. Which are possible, which are dangerous?

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Region interconnection Old idea: BGP. New ideas:

Interconnection of advanced services Direct expression of business constraints Routing overlays Fault localization and correction Interconnection of traffic aggregates Short-term markets for service Security issues

Control of DDoS Detection of corrupted or untrustworthy regions

Services

A vague word: something that makes money. Technology: something that costs money. This is why everyone talks about services.

Applications implement services on top of the lower layer services. It is recursive.

Are services in the net a good or bad idea?

Case study: QoS

The current public Internet offers one class of service: “best effort”.

To support classes of applications, a richer and better specified set of services might be helpful. For example, VoIP and games benefit from a QoS

with controlled variance and low latency. In the 1990’s we developed tools for QoS.

Technical success. Commercial failure (in the public Internet).

Why the failure

My rude awakening to economics. Economist: “The Internet is about routing

money. Routing packets is a side-effect.” Economist: “You really screwed up the

money-routing protocols”. Me: “We did not design any money-routing

protocols”. Economist: “That’s what I said”.

The missing interfaces

Applications

TCP

IP

Technical interfaces: what arrangements are required among ISPs to provide QoS end-to-end?

Money interfaces: How will ISPs collect and share revenues from offering enhanced QoS as a service?

Our mistakes

Technical: we thought of it as the composition of PHBs, not the composition of ISPs. E.g domains, in the language of Nebula.

Money: we were clueless.

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Region interconnection Old idea: BGP. New ideas:

Interconnection of advanced services Direct expression of business constraints Routing overlays Fault localization and correction Interconnection of traffic aggregates Short-term markets for service Security issues

Control of DDoS Detection of corrupted or untrustworthy regions

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Economic viability and policy Fundamentals:

Different parts of the network are built by different actors.

Physical facilities (fibers, towers, etc.) require capital investment.

Investors must be motivated to invest.

Our preferences: Facilities owners must not control the future of

the network. Just invest in it.

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What happens today?

How do facilities owners operate and interact? One answer is that they become ISPs.

Measure/model usage Track customers and markets Control routing.

ISPs serve a critical business function today. They don’t just move packets, but manage capital

and risk. Important economic role.

But is this role fundamental?

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Some specific requirements ISPs must be able to model usage and demand

sufficiently well to make investment decisions. Users must be able to select among paths through the

network that avoid failures. The network design must allow users a degree of choice

among providers so as to impose the discipline of competition.

Is this an intrinsic tussle, or mitigated through good protocol design? I avoided saying “routing”.

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(A wrong way to say that…) ISPs must have control of routing to ensure that

forwarding paths align with business arrangements.

Users must have control over routing to allow them to route around failures and improve performance.

Users must have control of routing to allow user choice and the discipline of competition.

Routing is a mechanism, not a requirement. In a future network, might do routing differently, and

there would be no conflict…

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An alternative--virtual networks In a virtual network, facilities (routers, links, etc.)

are virtualized and then used by higher-level service providers to implement different networks, possibly using very different architectures. VPNs and overlays are a limited version of this idea

today. A new form of competition.

In a world of virtual networks, why would someone invest in expensive facilities? Owner does not control routing, so where should the

links go?

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Another new ideas: futures If investment in facilities is a “up-front” or “sunk”

cost, with a long period of depreciation and cost recovery;

And virtual networks anticipate flexible access to resources over a short term;

Then there must be some way to insulate facilities investors from risk so that they will invest.

Consider a futures market for bandwidth. Happens today with really expensive cables.

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A new interface

Do we need to standardize the interface that defines this futures market? Has a lot in common with other commodity markets.

Not sure, but if we do, it is an odd sort of standard. Not moving packets, but money.

Not just bandwidth, but in a location. Compare to spectrum auctions. “Path futures”?

How to motivate investment?

Broadband access is the critical issue. Will speeds (and other attributes) continue to

improve. Will penetration improve?

Cannot force an investor to invest. Typical facilities-based U.S. provider today.

Profitable. No return on investment.

Could services in the network be an answer? Today regulators are scared of services.

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Current regulatory approach

Mandatory facilities unbundling. As was called for in the Telecommunications Act of

1996 for access facilities. As is being done in Europe today for access facilities. Regulated rate of return or mandatory structural

separation. Does this stimulate investment? Weak argument.

Public sector investment. Failure so far… (a controversial statement, I know.)

Does this relate to architecture?

One might argue that it should not. Do not embed economic presumptions in an

architecture. Or a law, for that matter.

I would argue to do the opposite: Try to create diverse opportunities for

profitability. Try to avoid giving too much power to any one

actor.

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User path selection

Why? Impose the discipline of competition. Select paths with preferred service quality. “Route around” failures and attacks.

Today: overlay networks. Where will they go in the future, and what

needs will they address? Should they be seen as tools to “fight” my ISP

or as a cooperative tool?

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Multi-homing

To give the user control over path selection, it would be nice to give the user multiple physical paths into the network. I claim multi-homing must be a ubiquitous part

of a future network. What is the cost of having control over the

loading on the multiple paths? Premium or discount?

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My preference

Explicit path selection at the AS level. Implicit selection at the IP level. Use economic tools to make user path

selection a win-win for the parties, not a “hostile overlay”. Need to design the economic framework--it

will not emerge on its own, since it spans ISPs.

These schemes? XIA

Traditional actors. No vertical interfaces. SCION. Multiple PHBs—new services. No attention to money.

MobilityFirst New elements (caching). No attention to money.

Nebula Arbitrary PDBs. Business negotiation part of NVENT.

NDN No vertical interfaces.

PSIRP Topology manager might consider economics.