Business Case

IXPs offer a place for members to exchange local Internet traffic within a country. The IXP provides a competitive alternative to routing domestically destined traffic abroad (Figure 1). An IXP will be attractive if the cost of exchanging traffic locally is cheaper than purchasing international bandwidth (IP transit) from an upstream provider for routing the traffic overseas.  International bandwidth can comprise a significant portion of operating expenses for ISPs in developing nations, an IXP can help reduce costs, resulting in lower Internet access subscription charges for users.

Whether an IXP makes financial sense for ISPs can be calculated by comparing the cost of IP transit to the cost of domestic peering. A hypothetical example based on actual 2010 values for the German Internet Exchange (DE-CIX) illustrates this calculation.The cost of peering is calculated based on three distances to DE-CIX: local, nearby and far. The cost of IP transit has been estimated at US$3.50 per Mbps based on interviews with several ISPs. Peering costs include the variable transport charges to the IXP depending on location as well as the common costs for a 10G port in the IXP, collocation fees and router amortization  

The Economics of Interconnection

The two key factors in connecting to, or setting up an IXP are:

  1. The amount of traffic that is likely to flow between the local networks,
  2. The cost of the physical connection between the network and the IXP, versus the cost of the connection to the upstream Internet cloud.

To take a simple example:

Assuming that three networks each have 100Mbps international connections to the upstream Internet cloud, which, in a developing country, could cost them each about USD 30 000 per month, i.e., a total annual cost for all three networks of 3 X 30 000 USD per month X 12 months = USD 1 080 000. Assuming about 10% of the traffic is local would mean that roughly USD 108 000 per year is being spent on routing local traffic via the upstream Internet link. If the three networks can self-provide their links to the IXP at no cost (such as by using a wireless circuit or when they have facilities located in the same building), then aside from providing faster service to local users, an IXP would pay for itself in a few months.

In practice, networks may need to lease connections from a licensed telecom provider to reach the IXP, in which case the cost for local bandwidth might be as much as USD 1000 / Mbps/ month in a developing country. This gives an annual cost for local links of 10% X 30 Mbps X 1000 USD/month X 12 months = USD 36 000. Even taking this additional cost into account, the hypothetical IXP still provides an annual saving of almost USD 72 000 per year, although a portion of this would need to be applied to maintaining the IXP. Naturally if there are more local networks, greater capacities involved or higher costs for upstream links, or in the proportion of local traffic, much greater savings can be provided by an IXP. And even if the direct cost savings on capacity purchases are taken out of the equation, an IXP still offers the other tangible benefits detailed above, such as improving the performance of local internetwork traffic, promoting the development of local content and providing a location for shared services, such as domain name servers (DNS), caching and time-servers.

Once an IXP is in place, market related forces based on competitive pricing for the underlying infrastructure tends to drive the direction of traffic toward the most cost-effective traffic exchange mechanisms, without the need for special intervention by government or groups of operators.

An IXP can also have some indirect beneficial impact on the pricing of capacity. For example, in some countries such as Ghana, the IXP has assisted in negotiating lower rates for international connectivity for its members. Such negotiations could occur independently of the IXP, but the creation of the IXP can have a catalytic effect, and by having a group of networks at the same location, the IXP can negotiate a better deal with the upstream providers on behalf of customers located at the IXP.

The Practical Reality of Starting-up - Always remember that the IXP is a Business (advice from France-IX)

Start-up for IXPs may involve a unique situation where equipment, rack-space, rent, staff-time, and other fees are donated.  In order for the IXP to remain sustainable, the IXP must begin to think about its 3-5 year business plan in order to shift into a position where the IXP can operate and pay rent, buy new equipment, and begin to shift into a different mode of operation. 

We will be providing more information about "the business case" and checklists.  Watch this space!

Additional Business Case Data

  • France-IX gave an excellent presentation at MENOG-13 on their business case and how they changed.
  • A new study from the Development Bank for Latin America studies the business case for IXPs in Latin America.
  • Many IXPs have hired marketing, public-policy, and communications teams.  These staff help interface with government officials, increase membership size for IXP viability and scope, and assist in explaining what an IXP is or is not.
  • Visit the Resources page for further reports and documents