Peering agreement

What Is a Peering Agreement?

A peering agreement is a mutual, often non-financial, arrangement between two or more network operators, such as Internet Service Providers (ISPs), to directly exchange Internet traffic. This direct exchange, rather than routing traffic through a third-party network, is a fundamental component of network infrastructure and a key aspect of network economics. The primary goal of a peering agreement is to enhance the efficiency of data transmission by reducing latency, improving network performance, and lowering operational costs associated with moving data across the internet. In essence, networks agree to carry each other's traffic without charging the other party, particularly when the traffic volumes between them are roughly balanced.¹⁴

History and Origin

The concept of direct interconnection through peering agreements emerged in the early days of the commercial internet, following the shift from government-funded networks like NSFNET. As commercial Internet Service Provider (ISP) businesses grew in the late 1980s and early 1990s, the need for direct traffic exchange among these burgeoning networks became apparent. A significant development was the formation of the Commercial Internet eXchange (CIX) in 1991. CIX was established by early commercial Internet operators to facilitate the free exchange of TCP/IP traffic, including commercial traffic, which was previously prohibited on the NSFNET backbone.¹³ This marked a pivotal moment, laying the groundwork for the modern structure of internet traffic exchange and setting the precedent for "settlement-free" peering, where networks agree not to charge each other for traffic exchanged.¹² Over time, Internet Exchange Points (IXPs) also emerged as neutral locations where multiple networks could connect and peer, further decentralizing and strengthening the Internet backbone.¹¹

Key Takeaways

• A peering agreement is a direct and often free exchange of internet traffic between two networks.
• Its main benefits include reducing network latency, improving performance, and achieving cost efficiency.
• Most peering agreements are "settlement-free," meaning no money is exchanged for the traffic itself.
• Peering is crucial for the global digital economy by ensuring seamless data flow.
• Disputes can arise if traffic volumes become significantly imbalanced, potentially leading to "paid peering."

Interpreting the Peering Agreement

A peering agreement signifies a mutual recognition of value between the participating networks. When two networks enter a peering agreement, it implies that the benefits of direct connection and reduced reliance on third-party transit providers are reciprocal. For an Internet Service Provider (ISP), a successful peering agreement means that data destined for the peer's network or its customers can travel more directly, avoiding potentially congested or expensive intermediary routes. This direct path can significantly improve the end-user experience, offering faster speeds and lower bandwidth costs.¹⁰ The existence of numerous, robust peering agreements contributes to the overall health and resilience of the internet's interconnected fabric, reducing single points of failure and optimizing data flow for millions of users.⁹

Hypothetical Example

Consider two hypothetical Internet Service Providers, "AlphaNet" and "BetaConnect," operating in neighboring regions. Both ISPs have a significant number of subscribers and generate substantial internet traffic. Initially, when an AlphaNet subscriber sends data to a BetaConnect subscriber, this traffic might travel through a larger, "transit" provider's network, incurring costs for one or both ISPs and adding potential network latency.

To improve efficiency and reduce expenses, AlphaNet and BetaConnect negotiate a peering agreement. They establish a direct physical connection, perhaps at a shared data centers or Internet Exchange Point. Under this peering agreement, they agree to exchange traffic between their respective networks freely, without payment to each other, as long as the traffic volumes remain roughly balanced. Now, when an AlphaNet user accesses a server hosted on BetaConnect's network, the data flows directly between them, enhancing speed for the users and reducing operational costs for both companies, which positively impacts their profitability.

Practical Applications

Peering agreements are fundamental to the operational and business strategy of nearly all large-scale internet entities. They are primarily applied in:

• Internet Service Providers (ISPs): ISPs use peering to connect their networks directly with other ISPs, enabling their customers to access content and services hosted on different networks more efficiently. This reduces their reliance on costly upstream "transit" providers.⁸
• Content Delivery Networks (CDNs): Large content providers, such as streaming services or major websites, often establish direct peering relationships with ISPs globally. This allows them to deliver content closer to the end-user, improving streaming quality and loading times. A notable example involved disputes where Netflix agreed to pay Comcast for direct interconnection to ensure smooth content delivery to its subscribers.⁷ This illustrates how, in some cases, traffic imbalances can lead to paid peering arrangements.
• Cloud Providers: Major cloud service providers peer with ISPs and other networks to ensure high-speed, low-latency access to their cloud-hosted applications and data for their clients.
• Internet Exchange Points (IXPs): These neutral facilities provide a common meeting ground for hundreds of networks to establish peering agreements, fostering local internet ecosystems and reducing the need for international transit for local traffic.⁶ The role of Internet Exchange Points is pivotal in facilitating direct interconnection and improving routing efficiency.⁵

These applications underscore how peering agreements are not just technical arrangements but also critical components of a company's capital expenditure and operational budget planning, directly impacting service quality and financial performance.

Limitations and Criticisms

While peering agreements offer significant advantages, they are not without limitations and can lead to complex issues, particularly in the realm of network economics.

One common critique arises when traffic flows between two peering networks become significantly imbalanced. Traditionally, peering is "settlement-free" based on the idea that the mutual benefit of exchanging traffic equally outweighs the cost. However, if one network consistently sends far more traffic to another than it receives, the receiving network may argue that it is incurring disproportionate costs and may demand payment, leading to "paid peering" or even disputes.⁴ This dynamic became particularly visible with the rise of bandwidth-intensive content providers like streaming services, leading to disagreements with large Internet Service Provider networks. Such disputes highlight the financial tensions that can emerge despite the intent of mutual benefit.

Another limitation is the potential for anticompetitive behavior. Larger, more dominant networks might refuse to peer with smaller, emerging networks or demand payment for peering, potentially hindering competition and market entry. This can force smaller networks to pay for transit, increasing their operational costs and impacting their revenue streams. The economics of Internet peering are complex, and the power dynamics between network providers can influence whether peering is settlement-free or paid.³ Furthermore, while peering aims to optimize data paths, the sheer number of networks and the evolving nature of traffic can make ideal peering arrangements challenging to maintain, potentially leading to sub-optimal routing or increased network latency if agreements are not continuously managed or if disputes arise.

Peering Agreement vs. Transit Agreement

While both a peering agreement and a transit agreement involve the exchange of Internet traffic between networks, their fundamental nature and economic implications differ significantly.

A peering agreement is akin to a handshake deal between two networks of roughly equivalent standing who see mutual benefit in direct connectivity and cost efficiency. They agree to exchange traffic primarily to improve performance for their respective customers and reduce reliance on third parties.² In contrast, a transit agreement is a commercial service where one network pays another (typically a larger backbone provider) for the ability to reach all parts of the Internet that the transit provider can access. It's a fundamental service for smaller or regional Internet Service Provider (ISPs) that do not have direct connections to all other networks globally.

FAQs

Q: Why do networks enter into peering agreements?

A: Networks enter into peering agreements primarily to improve the performance and reliability of their services, reduce network latency, and lower operational costs. By directly exchanging traffic, they avoid having to pay third-party providers to carry that traffic.

Q: Are all peering agreements settlement-free?

A: Most traditional peering agreements aim to be settlement-free, meaning no money is exchanged, especially when the traffic volume between the networks is roughly balanced. However, if one network sends significantly more traffic to another, or if there's a significant power imbalance, "paid peering" arrangements can be established where one party compensates the other.¹

Q: What is an Internet Exchange Point (IXP) in relation to peering?

A: An Internet Exchange Point (IXP) is a physical location where multiple networks, including Internet Service Providers and content providers, can physically connect and establish peering agreements with each other. IXPs facilitate local traffic exchange, reduce transit costs, and enhance the overall resilience and efficiency of the internet for a given region.