How Transit Works, What It Costs And Why It's So Important

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Includes: CCOI, LVLT
by: Dan Rayburn

One infrastructure service that has gotten a lot of coverage in the media lately is transit, with many using the term incorrectly or defining it as something it's not. I thought it might be helpful to explain what transit it, the different types of transit services sold, a list of providers who sell it, what it costs and why it is so important to the Internet. There are a lot of pieces that make up the Internet including products like wholesale, transit, wavelengths, backhaul and others, which all share the same underlying optical transport infrastructure, which is the foundation for all Internet and IP services. Many of these terms are used interchangeably, but they shouldn't be as they all provide a very different function in the market.

In its simplest definition, transit is a "network that passes traffic between networks in addition to carrying traffic for its own hosts." The Internet is made up of a collection of networks, and in order to get traffic from one end user to another, all service providers, hosting providers and ISP networks need to have an interconnection mechanism. These interconnections, which allow the sharing of traffic, can be either direct between two networks or indirect via one or more other networks that agree to take the traffic. Many of these network connections are indirect as most providers don't have a global network footprint and as a result, the traffic will be sent through several different interconnections to reach the end user.

The commercial interconnect relationships that allow networks to directly and indirectly connect are referred to as peering and transit relationships. While both those terms are often used interchangeably, they aren't the same thing and they are many flavors of each. Peering is when two or more networks interconnect directly with each other to exchange traffic. While many think peering is "free" to both networks, that's almost never the case. Like transit, there are many types of peering both public and private, and paid and settlement free. Peering is between two networks whereas transit allows you to connect to multiple networks.

Transit is where one network agrees to carry traffic that flows between another network and all other networks connected to it. No single provider in the market connects directly to all the other networks on the Internet, so any network that provides transit will deliver part of their traffic indirectly through multiple other transit networks. Transit providers' routers lets other networks carry traffic to the network that has bought the transit and get a fee for that service. It sounds complicated, but really all the transit provider is doing is allowing multiple networks to exchange traffic with one another.

Some have written that transit allows two networks to exchange "bandwidth," but that's not accurate. Transit allows providers to exchange traffic, but bandwidth and traffic are not the same things. When it comes to how transit is sold, companies can buy full transit, partial transit, select routes, on-net routes, etc. and ISPs will create the service and pricing around the customer request. Transit deals vary greatly, in size, type, price and performance and are not a one-size-fits-all model. Many transit deals are alike, but transit relationships also vary greatly based on the region of the world you are buying transit.

There are a lot of transit providers in the market, but many get confused as some companies just sell transit, while others sell a wider portfolio of products. For example, one of Cogent's (NASDAQ:CCOI) core products is selling transit, while others like Level 3 (NASDAQ:LVLT) sell transit, but also VPN, CDN, WAN optimization and a host of other managed services. Many transit providers also only sell access in specific regions of the world, while others sell in multiple continents. Combined, there are lots of transit providers all over the world, of all sizes. While not a complete list, some of the more well known transit providers are:

  • AT&T (NYSE:T)
  • CenturyLink (NYSE:CTL)
  • Cogent
  • GTT
  • Hurricane Electric
  • KPN
  • Level 3
  • NTT Communications
  • Sprint (NYSE:S)
  • Tata Communications (NYSE:TCL)
  • Telefonica (NYSE:TEF)
  • TeliaSonera (OTCPK:TLSNY)
  • Verizon (NYSE:VZ)
  • XO Communications

A lot of mainstream outlets talk about transit, but never seem to mention what it costs. While transit prices are all over the map based on location and quality of what is being bought, today, most transit in the U.S. costs less than $1 per Mbps, for large volume deals. In Australia, I've seen it as high as $150 per Mbps. Japan can easily be $25 per Mbps, but it all depends on the volume being bought. Most companies who buy transit, including Netflix (NASDAQ:NFLX), buy from multiple providers, at different price points and most important, with different SLAs. So many of those who buy transit from multiple providers distribute traffic, across multiple transit providers, in real-time, based on performance metrics. I've compiled some of the most common prices I have seen in the market, from those I speak to who buy transit. Again, there are many variables that determine the price, but here are the most common monthly rates I see in the U.S., with commits:

  • 10Mbps $7.00
  • 50Mbps $4.00
  • 150Mbps $2.00
  • 300Mbps $1.00
  • 600Mbps $0.80
  • 1500Mbps - 1.5Gbps $0.65
  • 3000Mbps - 3Gbps $0.50

While there has been a lot of talk about Netflix delivering content inside the last mile, via Open Connect or commercial interconnect relationships, it's important to remember that 18 months ago, CDNs were still accounting for 40% of the overall traffic volume flowing into ISP networks. I'd have to check what that number is today, but it's still going to be high as most content owners today use third-party CDN service providers, and they don't try to build out their own CDN as Netflix and a few others have done. This is where transit comes in and allows all of these CDNs to connect to all the different ISPs, so that video gets to end-users.

Transit is so important because without it, the Internet would not work. We'd have a bunch of closed networks that don't connect with one another and traffic would not make it to end users. From a business standpoint, there are many backbone and transit providers to choose from in a highly competitive market, which all CDNs and some larger content owners work with and gain price reductions every year. Transit pricing has and continues to get cheaper every quarter, and it is expected it will decline in price once again this year.

Disclosure: None.

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