How the Internet Economy Works: Bandwidth

The internet is made of thousands of networks, and a complex web of economic considerations has developed to support the free flow of information. How bandwidth is “manufactured” and then allocated is far more complex than how a packet gets from here to there.

Most people know certain things about the Internet. They know that cables run under the sea, that wires come into your homes, and that modems carry the digital signals to your devices.

But they’ve probably never heard of Internet Exchange Points, and that’s where the magic of the Internet really happens.

Internet Exchange Points (aka IXPs) are the manufacturing floor of the Internet — that is where bandwidth is created and deployed. And bandwidth is just like water and oil and other economic goods: If your country has a lot of it, prices fall; if it doesn’t have a surplus, prices go up. And that has a big impact on the web companies that buy bandwidth.

The Netherlands, for example, is a large net-exporter of Internet bandwidth, using only half of what it produces domestically. That means that large companies like Disney, Google and Netflix can buy ports there at rates that are significantly lower than in some other places and that have dropped by 50 percent in the last year. But where there isn’t an Internet Exchange Point and competition can’t flourish, prices remain high. That’s what you see in places like Mexico. More on that below.

Though Internet Exchange Points are a key building block of the Internet economy, you’d never guess it from where they’re located. They don’t remotely resemble other temples of commerce. You don’t see people standing in them yelling at each other, like you would at a stock exchange. Instead, they can be located inside a beat-up building near a railroad track. Sometimes there’s not a single human being in the vicinity.

A report I covered earlier from the OECD lays out in awesomely clear detail why Internet exchange points are so essential for every geography that values the Internet. They not only facilitate the creation of bandwidth, they lower the cost of transit/bandwidth for businesses and consumers and help create redundant networks and limit or diminish the power of monopoly telecommunications providers.

by Stacey Higginbotham, GigaOM | Read more:

Photo: Om Malik