Verizon Cuts Peering Costs To CDNs: The Real Story Is More Than Price

Yesterday, Verizon announced a new program dubbed the "Verizon Partner Port Program" which gives content owners and CDNs the benefit of a direct connection from their content storage devices to the Verizon Internet backbone network. While Verizon is saying that they are offering "a significantly lower price to connect directly to the Verizon Internet backbone network," this is about more than just lower pricing.

Some would argue that Verizon is simply offering lower IP transit prices, which really is not that big of a deal. Agreed, from a high-level, that's all this could look like. But after speaking with two major CDNs yesterday, they are very interested in this Verizon offering and say that it may enable them to offer a lower price to any content owner who wants to reach Verizon customers.

While many of the major CDNs already connect to Verizon via peering connections and NAPs, this new service offers CDNs a lot cheaper transport costs than just a traditional IP transit link they would negotiate with Verizon. Since these new connections would be all outbound traffic and not inbound, Verizon can manage their network differently and offer a lower price. CDNs have the ability to connect to Verizon from ten data centers in the U.S., most of which are Equinix facilities.

While Verizon would not disclose pricing to me, CDNs that had already spoken to Verizon talked pricing with me that was much lower than what they would pay for traditional transit services. And one of the CDNs I spoke to said that if Verizon could offer pricing that much lower, the CDN could in turn offer content owners a cheaper price to deliver their content to Verizon subscribers. If that in fact happens, this Verizon offering becomes more than just about lower IP costs. It means it has the ability to reduce the content owners distribution costs, the CDNs operating costs and provides a better experience for users like me who are on the FiOS network.

Comments

[Aaron]

There seems to be an assumption that the CDNs excited by this currently pay VZ for transit. Any effect on networks having settlement-free peering with VZ, maybe L3 or AKAM?

[Dan Rayburn]

Hi Aaron, no one truly knows what the peering deals look like except those at the CDNs. Many times we hear people in the industry say that one network does or does not pay for peering, yet how do we know that? Do we have any proof that Akamai or Level 3 have settlement free peering? They may, but none of those companies will go on record and discuss peering relationships, so it's really a guess at this point.

Would love to hear from the CDNs directly on this in the comments section.

[Blank Stare]

Um wow. Lets start with the facts - something which this post and subsequent comments contain very few of:

- Level3 is a Tier1 ISP. They are settlement free with Verizon. We absolutely know that ... period.
- Akamai doesn't have SFI with 701. They're heavy outbound with no backbone. They peer with lots, but not Verizon.
- Transport is completely different than transit, which makes the title of the article mis-leading.
- Its a paid peering product from Verizon, not full transit
- Content owners don't "want" to reach Verizon customers, they _need_ to reach Verizon customers, and frankly have no choice in the matter if they want to have a business. But no content provider pays a different rate for this unless they're doing their own peering/PP and routing intelligence before sending the DNS request to the CDN (which very few have the ability to do). So I'm not sure what you mean at the end of your 2nd paragraph.

I agree that Verizon knows they can offer lower prices to "content" as its mainly consuming available outbound capacity, and that FIOS and VZ DSL customers would get slightly better performance to the CDN's content if it was on-net. However, the PP has to be extremely low considering the rock bottom prices of transit right now. IE, if VZ isn't playing in the $2 - 3$ range its probably not worth it. CDN's are already beating the hell out of each other anyway on price, so I'm not sure who would think that this would be a game changer in terms of rates which are offered to clients. With transit hovering in the $4 range for the big boys, plus their ~50% SFI, and knowing that Verizon AS access only represents a fraction of total paid transit percentage, this doesn't alter economics for the offer management side.

[Dan Rayburn]

Thanks, your right, it should say "peering" or "direct connects" in the title instead of transport. I've made that fix.

As for the price comment, I had two of the largest CDNs tell me that they thought this might affect pricing, not that it would, but that it might. If they are the ones telling me that, I would tend to believe them since they know what their costs are. I don't think anyone can say it will/won't affect pricing unless it is the CDNs, since they are the only ones buying these services.

[Raj Dutt]

Dan,

I can't imagine VZ paid peering in-of-itself will have a material impact on pricing, for any CDN. Not to say that it isn't an interesting offer.

Assume that a well peered CDN (like a LLNW) already reaches 75%+ of their end users over SFI (ie. peering) as opposed to transit. I know this isn't an unreasonably high number, since Voxel isn't that much lower.

So, that leaves you with 25% of the bits going over a transit (paid) connection.

If you assume that-
(a) VZ represents a fifth of this paid traffic (which I think is on the high side)
(b) their paid peering product is priced at half of what big CDNs pay for transit;

then it's only going to move the needle by a couple of percentage points on the usage based component of opex (don't estimate the other components!).

IE. Not a material impact.

If every Tier1 network started offering paid peering at significantly less than transit, things could get interesting. That would have an impact (although probably not as big as one might think) on pricing.

Our VP of Network Architecture posted on our blog today about paid peering in general. You might find it interesting: http://www.voxel.net/blog/2009/01/paid-peering/

You mention "the CDN could in turn offer content owners a cheaper price to deliver their content to Verizon subscribers". I think this is an interesting point that deserves further discussion. Currently, IP transit and CDN service is sold as 'flat rate' regardless of the destination of the end user. Many moons ago, Level(3) experimented with charging based on destination (similar to the way the PSTN works). Obviously, that was a relatively short lived and the market has moved to flat rate.

The cost to deliver a bit can vary dramatically, not only from region to region, but from network to network. There are eyeball networks with fairly open peering policies, and there are eyeball networks with very restrictive peering policies. With increased pricing pressure amongst CDNs, maybe we'll see a return to a tiered model, especially if the price for CDN starts to fall below the cost of transit (we're not nearly at that point yet, and I'm sure most operators, us included, hope we don't ever get there ;-)

I'll admit it's a fairly unlikely scenario, but I don't think it's ridiculous. If you would have told me 2 years ago that eyeball providers would start billing their residential customers based on usage, I would have thought you were crazy. But they've obviously succumbed to the reality of their underlying cost structure.

My $0.02,

Raj Dutt
Founder/CEO
Voxel dot Net Inc

[Tessema]

Hi Dan, I am a great fan of your work. I was wondering if you know where I can get IP transit pricing over the past 5 years. I am working on a research project for grad school. Thanks.

[Dan Rayburn]

Sorry, I don't know of anywhere to get that info.