CoreSite/ CENX deal highlights similarities between Internet and Carrier Ethernet interconnection markets

CEN Feature (Jan 25 2011)

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   An agreement announced last week between Carrier Ethernet exchange operator CENX and data center operator CoreSite got me to thinking about the similarities—and also the differences—between the Carrier Ethernet exchange market and the Internet transport and peering business.

    

   The Internet backbone market

   When the Internet was commercialized in the mid-1990s, a handful of companies began to operate their own backbones, initially exchanging traffic for free at peering points. As Internet traffic grew, this approach became increasingly unwieldy as the infrastructure supporting the exchange frequently needed upgrading but there wasn’t always a clear business case to support those upgrades. As a result, public peering points often became congested. 

   This soon lead backbone operators to establish private peering relationships and traffic exchange points with one another if the level of traffic exchanged was sufficient to merit that investment. If one network operator’s traffic level was substantially lower than that of the largest operators, those operators might decline to enter peering arrangements with the smaller operator. Instead, the smaller network operator would purchase something called “transit” from one of the larger operators. In this arrangement, the smaller carrier delivers its traffic to the large carrier’s backbone for a fee and the larger operator carries that traffic with its own, exchanging it with the other larger network operators through their usual peering arrangements.

   Before long, another factor came into the equation. The largest content providers, who typically didn’t operate their own networks, wanted to make sure end users could have excellent connectivity to their content—and they began to locate their content at key private peering points, enabling content to easily reach multiple major backbones.

    

   Carrier Ethernet exchanges

   In the Carrier Ethernet market, private interconnection agreements came before public exchange options. But because interconnection agreements are complicated, operators of Ethernet exchanges saw a market for an alternative that would streamline the interconnection process by bringing multiple Ethernet operators together in a single place. The Carrier Ethernet exchanges are likely to prove more viable than the public Internet peering points because congestion is less likely to be a problem at the Carrier Ethernet exchanges. This is due, in part, to the service parameters inherent in the way Ethernet services are established and, in part, to a different economic equation. Interconnections are not free but are paid for. 

   The larger Ethernet operators, like the largest Internet backbone operators, are likely to prefer to interconnect directly with one another at private interconnection points. And if two carriers build up a sufficient volume of business with one another through the exchange, they may end up moving out of the public exchange to establish less costly connectivity directly with one another. But Carrier Ethernet exchanges offer a simpler alternative that is particularly well-suited for smaller carriers and should have greater long-term viability than the public Internet peering points.

   There is something akin to transit in the Carrier Ethernet exchange market, although it works somewhat differently. When an Ethernet service provider operates in a metro area that has no Carrier Ethernet exchange, the service provider may opt to purchase a connection from another carrier to a neighboring metro that has an exchange. From a network topology perspective, this looks somewhat like a transit connection. But unlike with Internet transit, any interconnection agreements established through the Carrier Ethernet exchange are made between the carriers at each endpoint of the connection.

    

   CENX and CoreSite 

   The Carrier Ethernet exchange market has now reached the same evolutionary point that the Internet exchange market did when content providers began to co-locate at Internet peering points—which leads us back to the new agreement between CENX and CoreSite. A core business for CoreSite is hosting cloud service providers. And like Internet content providers before them, cloud providers are now realizing that they should be able to better serve their end user customers if they have direct access to multiple network operators—only in this case they’re looking for Ethernet operators.

   I’m told CoreSite considered essentially creating its own Ethernet exchanges in its 11 data centers but opted, instead, to invite CENX to establish exchanges within those data centers. The 600 or so cloud service providers hosted by CoreSite now can establish a single connection to CENX that positions them to connect to Ethernet providers using any of the CENX exchanges. Collectively, those providers now serve about 15 million Ethernet-connected buildings. And for CENX the deal brings buyers to its exchange—helping to correct an initial imbalance toward the seller side.

   I’m sure it won’t be long before other cloud providers—and data center operators serving cloud providers—come to the same realization that CoreSite did and start looking to co-locate where they can reach a lot of different Ethernet providers. In the CoreSite/CENX example, the exchange operator moved in with the data center operator. But potentially the same result could be achieved the other way around—assuming the exchange operator has sufficient co-location space. CENX competitor Equinix is already in the data center business and is putting its Ethernet exchanges into those data centers, which could put it in a good position to attract cloud providers seeking excellent Ethernet connectivity.

   The phrase “Internet time” is sometimes used to describe something that happens very quickly. But surprisingly, evolutionary phases that took several years in the Internet exchange business have taken less than 18 months to occur in the Carrier Ethernet exchange market. 

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