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

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 (CCOI) core products is selling transit, while others like Level 3 (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 (T)
• CenturyLink (CTL)
• Cogent
• GTT
• Hurricane Electric
• KPN
• Level 3
• NTT Communications
• Sprint (S)
• Tata Communications (TCL)
• Telefonica (TEF)
• TeliaSonera (OTCPK:TLSNY)
• Verizon (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 (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.

Comments

[pole65]

Mostly true but also confusing when you mix and match products (IP related Peering and Transit with VPN, CDN, etc--which are completely different types of products only common in that they use IP, but most services do today--and like discussing Greyhound bus service with UPS/Fedex). Not sure why you wrote this, but for the common non-industry reader, the only important thing to know is Transit as a "product" is low quality, low cost way to get internet connectivity (and noteworthy, some Transit providers have better quality than others, partly due to their peering relationships). Peering as you say is network to network, but doesn't mean that there isn't "transit" connectivity on the ends of the network to get the bit to where it ultimately goes. This is just part of constructing a network similar to a pipeline system having multiple paths and hubs (Peering being the hubs).

All the press about Cogent, Level3, Comcast, etc. and their peering negotiations is about asymmetric traffic patterns. If you don't exchange approx. same amount of traffic both ways, then the logic is that the party sending more than receiving should pay, otherwise they shut off service (this has caused some disruptions in customer experience).

Transit is an important part of major carrier revenues. Level3 used to report separately but not sure they do any longer. Price compression has been extreme in this segment of the telecom market, ultimately making high-speed internet access more available at lower prices to non-Tier I ISP's and enterprise customers (and ultimately consumers).

Again, why did you write this??? Is this supposed to move into the network neutrality set of issues??

[jarco]

Your comments were more interesting than the article itself although the author dug into a subject seldom discussed in investment forums and should be commended for that.

We see pictures and video of comm centers with neat rows of ceiling high cabinets, flashing lights at cable connections, and it all looks very orderly and efficient. Many years ago I invested in a company called Ascend Communications which ultimately bought another holding, Cascade Communications. The latter was in my back yard, the former California. Seeing Ascend racks as the prime connection point for networks at the time compelled a worthwhile investment decision. Seemed pretty simple then; several orders of magnitude than the comparable analysis today. Moral of the story, unless one understands the technology application, best to avoid the space.

Some time ago, I switched from DSL internet connection to our local cable provider. Aside from the obvious, a prime initial motivation came from observing repeated Embarq (now Century Tel) trucks parked along side of the common termination box of the typical telco phone network. Lots of head scratching, open doors overnight on occasion, a real rats nest of wires, etc. including my on-again off-again internet connection. One wonders what's behind those neat and seemingly orderly Transit cabinets of today. And, yes the Century Tel trucks still routinely visit the road side box - rain or shine.

[pole65]

Interesting. those were the days. Cascade made equipment for what is now two outmoded protocols (ATM, Frame relay--both supplanted by Ethernet and IP) and Ascend made modem banks so home computers could "dial-in" and be converted to IP for internet connectivity. Thank goodness we don't have to do that any longer. There were still routers sitting behind the Ascend gear to move the traffic.

I actually have DSL based service in my home provided at ATT U-verse. It is amazing the a copper pair can provide up to 50 meg of bandwidth with the right distances. I have been fairly happy with u-verse, outside of its cost going up every year. You are right that the old twisted pair network is a rat's nest, but it serves it purpose and it pretty well documented, etc. by the old bell system. If you ever went inside a cable company operation center, you might be even more concerned about the quality of the physical plant! coax does have the advantage though of being able to pass thru more bandwidth for longer distances than twisted pair copper plant.

fyi, "Transit" connection isn't at the pedestal and maybe not even at the central office or cable company head-end. It is back further in the network where the local service provider interconnects with another provider. this job is performed by a router of some type (think Cisco or Juniper or Lucent or a number of other smaller providers). The embarq router would be connected to another service provider's router (say Level3) and they were exchange traffic with the packets going their merry way on to their ultimate destination (IP address). Cable plant functions the same way in the the coax cable ultimately runs back into the cable MSO's network to a final router that hands off the traffic.

So pick your poison for local service provider (local phone company, cable company, wireless provider, etc.) but in terms of this article and "transit", that takes place where the traffic is handed to another internet service provider.