Internet traffic as cost driver for telcos - not

One of the longer-running debates in the Internet infrastructure area is the cost impact of Internet services and content delivery by 3rd party providers on local ISPs and telco's IP access network and peering points. Or, taking the opposite view, how 3rd party services and content delivery from the likes of Google/YouTube, Netflix and for instance via the Akamai CDN, has been the key driver helping local ISPs and telcos in actually selling and getting traction for their Internet access services and bundles.  No attractive Internet services and content over the Internet, no local uptake in telco broadband offerings and Internet access business to the residential and business market...

I won't reference the main cases and "conflicts" going on in this area, as I'm sure readers of this blog are mostly familiar with the YouTube and Netflix peering and transit discussions with local or regional ISPs, but rather look into the argument that network build and provisioning of network capacity to 3rd party Internet services and content delivery (that is, 3rd party to the local ISP and telco) are a main or large cost driver to the local ISP or telco.

Firstly, a very rough guide to Internet services or content delivery, using the first, middle and last mile analogy:

1. First mile Internet services and content delivery: All things involved with service and content design, build and preparation for delivery, storing and hosting the service or content in one or several data centers, one or several clouds, for service and content origin.  Internet access capacity from the hoster on to the Internet for service and content distribution.
• Many ISPs and telcos are in the data center or hosting business, so this a source of income for many ISPs and telcos.
  
2. Middle mile service and content delivery: All things to do Internet/ISP traffic exchange (free peering, paid peering, paid transit) and service/content delivery via one or several Content Distribution Networks (CDNs) or via cloud providers. Handover to local access network for end-users, operated by local ISP or telco.
• As above, many ISPs and telcos are in the Internet peering (achieving Internet traffic aggregation for improved transit position towards peers, not necessarily direct money), transit, CDN and/or cloud business themselves mostly through wholesale set-ups, so this is also a source of income for many ISPs and telcos.
  
3. Last-mile service or content delivery: All things to do with delivery of services and content to the local end-user, by fixed or mobile broadband.  Will in many cases be done via a mix of locally deployed 3rd party CDNs or ISP caches, a mix of layer 3-5 load balancing by 3rd party or ISP.  And for content provisioning, adaptive streaming taking end-user bandwidth and client processing capability into the equation (negotiated with content origin or CDN edge caches in question).
• Main source of income for most ISPs and telcos, based on selling local access bundles, 3rd party service add-ons and ISP bundled services like TV or IP in various forms, music services, sponsored tablets and smartphones tied to broadband subscription of some sort and voice over IP services. 

Looking at this, it's possible to make the argument that ISPs are uniquely positioned to cash in on and control the distribution of 3rd party services and content deliveries )(overlooking that Internet majors seldom hosts with local heros that much), but still there is dissatisfaction with how 3rd party service providers and content services like Netflix and YouTube wrecks ISP and telco backbones and economies. Why is that?

Looking at ISP cost categories and drivers, they can be divided as follows (not necessarily in order of cost impact):

1. FTEs and man-hours: Skilled personnel needed to design, deploy and operate quite complex network structures in the backbone and local access areas, protect from Internet hacking and DDoS attacks.
2. Network equipment: Routers, switches, firewalls, control planes, backbone fiber, local access network, POP and (over-)capacities at major national and international peering and transit locations, DCs and co-lo space for network equipment.
   
3. IT IS and back-office IT systems for service authentication, service provisioning, billing and help-desk.  A major cost driver for most telcos and ISPs, as service complexity, number of integration points, legacy IT IS systems and integration of virtual network functions seems to multiply out of control weekly.
   
4. Internet transit and peering capacity, off-net capacity: ISPS and telcos needs to buy Internet CDN, peering and/or transit network capacity with or from 3rd parties. This is the cost element that is most often brought forward by ISPs and telcos in the "OTT is eating my network" debates and arguments.

Looking at these costs elements and drivers, one can argue that

1. FTEs and man-hours per ce are under control, and going down due to outsourcing of many network operations tasks. Key challenge seems to be number of FTEs needed for a certain operational capability, not the salary levels per FTE in itself.
   
2. Network equipment: Overall trend is for this kind of equipment following Moore's law, giving ISPs and telcos ever more processing power or networking capacity. Same downward price points for DCs and co-lo.
   
3. Internet peering/transit and CDN price points are involved in a race to the bottom giving Mbps or that GB/month pricing that would have been unthinkable some few years ago.  Although a bit old, have a look at "Internet Transit Prices - Historical and Projected" and for CDN pricing, "CDN Pricing Stable: Survey Data Shows Pricing Down 15% This year"

This leaves IT IS and back-office IT systems as the fall-guy, and here the legacy plus complexity spiral has most companies, not only ISPs and telcos, but banks, insurance, governments and institutions trapped.  IT IS remains a key cost driver for most companies, whereas Internet giants like Amazon, Google, Netflix and Facebook has achieved rapid service development, service provisioning and roll-out and consistent service performance (equals commercial success) precisely because they have managed to get their IT IS systems under control or rather, into a flexible and adaptable software development process environment being at the forefront of cloud developments. And IT IS then becomes a competitive and cool tool rather than some boring way in the back back-office legacy and career ending thing.

An additional argument that can be made is also the overall cost savings ISPs and telcos have been able to achieve using Internet and tcp/ip technologies (IP on everything, everything on IP...), and not things like pre-Internet ISDN and ATM, OSI-stacks, for integrated services networks and one network for multiple services that we all take for granted today. Imagine a competitive IT IS stack for OSI on ATM versus one control plane for IP-based networking.

In summary: ISPs and telcos stand to gain the most from adopting SW development processes, environments and cloud technologies on par with Internet giants to simplify their IT IS stack, speed up service delivery and competitiveness.  Not being competitive in this area is a far greater threat than Internet 3rd parties consuming too much bandwidth without paying for it.

Erik Jensen, 27.1.2014