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The manner in which service providers including Internet Service Providers (ISPs) are structured and interrelated has considerable influence upon your Internet experience and pricing. We will have a look into what they do, how they go about it and those factors that have direct bearing upon their pricing structures at the peer, wholesale and consumer levels.

Let us start by having a look at service provider (including ISPs) tier classification and service provider (also including ISPs) peering. The short view is that tier categorization is a means for classifying service providers based upon their structure capacity and size while peering is something that they do.

Tiers

There are three distinct tiers of service providers (including ISPs) with each being characterized and differentiated in a number of different ways including:

• Customer base size
• Internet backbone accessibility
• The arrangements they have with one another
• Wholesale capabilities
• Consumer relationship
• Their reach
• Physical connectivity
• Peering
• Services offered

Tier 1 Providers – The Tier 1 category of service providers is mainly comprised of the larger ISPs and telecommunications companies and organizations. As with Telstra in Australia, many of the early Tier 1 service providers throughout the world were government funded.

Tier 1 service providers typically provide the infrastructure that permits and “glues” together all of the countless number of networks and Internet accessible devices (servers, workstations, PCs, PDAs, laptops etc) that together comprise that vast internetwork that we call “The Internet”.

Because it was the traditional telecommunications companies/organizations that implemented the telecommunications infrastructure (telephone system) long prior to the arrival of the PC & the Internet they were ideally placed to exploit this new exponentially growing entity we know as the Internet.

Tier 2 Providers – By definition Tier 2 service providers are that group of service providers who engage in the practice of peering with other networks, yet still need to purchase IP transit (usually from a Tier 1 provider) in order to reach some portion(s) of the Internet.

Without doubt it is the Tier 2 ISPs that are the most common of the three Tier categories of Internet Service Provider (ISP) providing Internet access services in existence today are the Tier 2 ISPs. The reason for this is that it is much easier for a Tier 2 ISP to purchase transit from a Tier 1 carrier/ISP/network than it is to peer with them and then attempt to push into becoming a Tier 1 carrier themselves.

Tier 3 Providers – This brings us to the final category of service provider namely; Tier 3. It is generally considered that the term Tier 3 service provider does by default encompass those carriers, ISPs or networks that solely purchase IP transit from other carriers, ISPs or networks (typically Tier 1 or Tier 2 service providers) in order to reach the majority of the Internet.

Tier 3 ISPs generally service a select group of customers from within a localized geographical area (pockets) such as within the confines of a single metropolitan area. They may therefore be looked upon as being “boutique” ISPs and their long-term viability is by no means certain.

Peering

The term peering is used to describe a system of voluntary interconnection of administratively separate Internet networks for the purpose of exchanging traffic between the customers of each network.

In the strictest sense peering is “settlement free” or “sender keeps all”. Thus; no party to a peer group pays transit charges/fees to any other party of that peer group for that traffic exchanged between them. All member parties of a peering group are free to derive revenue from its own customers.

However; marketing, the “spin doctors” and commercial pressures have resulted in the term “peering” being used even when there is some form of settlement involved. As a result the term “settlement-free peering” is now coming into common usage to unambiguously describe the pure “cost-free peering” condition thereby overcoming the confusion that has arisen out of this misuse of the term “peering”.

Physically Interconnected Networks

Until recently ISP peering has demanded the physical interconnection of all member networks. Routing information was exchanged between all interconnected networks using the Border Gateway Protocol (BGP) routing protocol. On a more formal note the peering agreements entered into by the various peering group members varied from a simple statement and “handshake” to contracts and Service Level Agreements (SLAs) of varying thickness and complexity.

The Advent of Wireless Networking

With the arrival of affordable wireless networking technologies such as; wireless MAN, WAN, & Metro connectivity the need for permanent physical connectivity is no longer mandatory.

IP Transit

IP Transit is the term used to describe the wholesaling of Internet bandwidth. In practice we tend to see ISPs of a higher tier ranking selling bandwidth to subordinate ISPs and content providers of a lower tier ranking or sometimes to an ISP of equal tier ranking. This latter aspect usually arises when one ISP wishes to reach parts of the Internet for which it has no direct access itself but another ISP does.

Peering Agreement Failure – One reason that a peering agreement between the 2 ISPs of equal ranking may not be reached upon is that the ISP that already has direct access to that part of the Internet that the second ISP wishes to access may already have agreements in place that allow it to access the other ISP’s network; even if indirectly via another ISP. Therefore this ISP has more to gain by not entering into a peering agreement with the second ISP.

IP Transit Agreements – While an IP transit agreement can contain a considerable number of terms, conditions, provisos, stipulations, responsibilities, obligations, metrics etc its distinguishing feature is a formalized structured billing system that is mutually agreed upon by all parties implicit in the arrangement.

IP Transit Pricing – Pricing structure is generally based on megabit(s) per second per month metrics (Megabit/Sec/Month) with the purchaser generally required to commit to purchasing base volumes and set minimum volumes of bandwidth. Purchasing larger volumes of bandwidth or increasing the tenure of the content generally means a reduction in the Megabit/Second/Month cost values.

Best-Effort – Modern IP transit agreements typically provide service level guarantees to almost all of the major Internet Exchange Points within a continental geography such as North America. However; it should be noted that these service level agreements still provide only a best-effort delivery service since they do not guarantee service from the Internet Exchange Point to the final destination.

Free ISP Model – The Free ISP Model is a new phenomenon whereby new players are using the Free ISP Model in their attempts to gain subscribers. The consumer of their service does not pay monthly fees and to some extent they don’t pay for download volume. Instead the ISP gains their revenue by way of advertising.

Virtual ISPs – The virtual ISPs purchase wholesale IP transit from a major carrier (Tier 1 ISP) and then resell it to the consumer. These virtual ISPs are for all intents and purposes the new “middle men” of Internet service provisioning. By outsourcing their Internet infrastructure newer ISPs can gain benefits from greater economies of scale, dynamic cost structuring and carrier grade Service Level Agreements (SLAs).