Analysis of the Requirements of Settlement-Free Interconnection Policies

Peering between two networks may be either settlement-free or paid. In order to qualify for settlement-free peering, large Internet Service Providers (ISPs) require that peers meet certain requirements. However, the academic literature has not yet shown the relationship between these settlement-free peering requirements and the value to each interconnecting network. We develop two models to analyze the value to each network from the most common and important requirements in the United States. Large ISPs in the U.S. often require potential settlement-free peers to interconnect at a minimum of 6–8 locations. We find that there is a substantial benefit from this requirement to the ISP, but little incremental benefit from a larger number of interconnection points. Large ISPs often require that the ratio of incoming traffic to outgoing traffic remain below approximately 2:1. In the case of two interconnecting ISPs, we find that this requirement ensures a roughly equal exchange of value. We also show that it is rational for an ISP to agree to settlement-free peering if the content provider agrees to interconnect at a specified minimum number of interconnection points and to deliver a specified minimum proportion of traffic locally, but a limit on the traffic ratio is irrational.