I’ve covered the internet for over nine years, but I still don’t completely understand why and how the internet is priced and traded.
To the extent that the internet can be broken down into pieces that are local, regional, national, and international, the parts that serve more people are cheaper than the parts that serve fewer people. There is less competition on local routes, and far less demand on a per bit basis.
In this area, the internet is like air travel, with main routes offering more frequent service at a lower price, and service to remote areas being more expensive or even unavailable.
The internet can also be described as a series of vertical services, from the actual hardware connection all the way up to the protocols that sustain your connection to this website. The most used model describes 7 layers but for the purposes of this discussion, three layers suffice: hardware, routing, and services.
Hardware only (dark fiber) is cheaper than hardware plus routing (lit fiber) which, in turn, is cheaper than services.
Those who have built the fiber are unable to obtain revenue from the expensive services, a conundrum that led Gordon Cook, for example, to write that those who build the pipes have no incentive to over-provision them — no incentive to avoid congestion in the internet.
Those who build the pipes also are tempted to use their control over layers one and two to derive revenue from layer three. In theory, the provider of the most open and friendly service should win, but in practice, most areas of the internet are an oligopoly, causing pricing problems that the market cannot solve alone.
Peering
Some ISPs barter traffic instead of buying and selling it. In a particular exclusive club, ISPs with the right agreement simply exchange traffic without paying each other for it. This works as long as the barter involves a roughly equal exchange.
The club was formed a long time ago, and since then, some ISPs have done better than others.
One of those with less traffic to trade is PSINet, now owned by Cogent. PSINet gets tossed out of the club at great cost to the internet regularly — see, for example, the peering disputes of 2001, 2008.
I believe that what I wrote in 2005 is still true: “As long as the Internet is stitched together by agreements that are as personal as they are professional, the web itself can be damaged at any time as strands get disconnected without warning.”