The Economics of Sharing

I. The benefits of sharing.

On the Internet, sharing is a solved problem. The Tier-1 backbone providers all save time and money for their international bandwidth via “peering agreements” — contracts that say network traffic will be freely exchanged between them without any money traded. The cost of maintaining such an agreement is only the maintenance of each side’s own equipment, and one or more “cross connections” that are shared equally between the contractual parties. Whole buildings have been set up, usually called “carrier neutral hotels,” just to provide space for the equipment and wires required for these connections. They wouldn’t be sharing traffic in this way, nor would they pay the costs of these cross connections and hotel stays, if there were not some huge cost benefits being gained. Free Internet traffic must be very valuable.

So why don’t neighbors and home owners just participate in Internet traffic sharing agreements as well? Is it a technical issue? Not really! Home network scale Internet routing features like Multihoming, Routing Information Protocol, and Border Gateway Protocol routing have been available in low-cost network equipment, sitting on store shelves for years.  Computer scientists at the University of Illinois at Urbana-Champaign have even developed routing software called PERM (Practical End-host collaborative Residential Multihoming) that makes it easy to safely share a home wireless network connection with nearby neighbors, on low-cost wireless network equipment. They are giving that software away for free! The biggest thing holding back people from actually using that software isn’t knowledge — it’s incumbent ISP contract limitations and related legal fears. Your Internet provider doesn’t want you to get the same economic advantages that they do from sharing connections. They want you to buy any bandwidth upgrades from them, rather than doubling your burst bandwidth by just sharing connections with a neighbor. The problem isn’t that sharing with neighbors is hard — it’s so easy that incumbents can’t easily charge you extra for it.

II. The opportunity of the Commons.

Four basic types of shared resource management. Adapted from V. Ostrom and E. Ostrom 1977, 12.
Amount that sharing diminishes value
Low High
Cost of excluding participants in sharing
Low Maintenance Tolls Private Goods
High Public Goods Common-pool Resources

The table above was derived from one that was created way back in 1977, in part by Dr. Elinor Ostrom, who was a recipient of a 2009 Nobel Prize in Economics. It is a brilliantly simple way to figure out how a resource should be managed, between people with access to any given resource. When looking at this table, it’s fairly obvious that the Internet as a whole should be treated as a Public Good. Due to a phenomenon called the network effect, sharing a network with more people actually increases its value. Technologies like wireless network routers, network cables installed via fence line conduits, and Network Address Translation (NAT) all combine to make it almost impossible to stop close neighbors from sharing network connections. Even if a property is physically inspected for such neighbor-to-neighbor connections, properly encrypted connections make it nearly impossible to prove that such connections are sharing anything other than local data traffic. Restrictions on sharing Internet traffic are unenforceable in such a situation. The cost of inspection would be much higher than any income that could be gained by detecting such sharing.

There is one situation when sharing Internet traffic could diminish connection value — when the traffic in an Internet router is congested. This only happens when the sum of router connections sending traffic exceeds the hardware’s ability to route traffic. This could happen either because the processor isn’t fast enough to handle the traffic, or the destination line’s bandwidth is too small to handle all the traffic. In well managed networks, this congestion happens very rarely, and only in short bursts. In these cases, the cost of excluding sharing participants near the router is actually higher, because each additional router that can handle the same traffic will help ease the congestion. According to the table above, this temporary scenario presents an opportunity to deal with the Internet as a Common-pool Resource (or “Commons” for short).

Older and less powerful routers tend to deal with network data congestion by dropping data packets randomly, which just forces the sender to resend the same data a little later (hopefully when that network route is less congested). Newer and more powerful routers can selectively drop data based on packet type, like dropping a video packet while keeping a Voice over Internet Protocol (VoIP) phone packet. This kind of selective dropping is usually called a Quality of Service (QoS) feature, because selecting one service over others allows it to have better quality, like less static on a VoIP call. How incumbent Internet Service Providers (ISP) use this service is the primary subject of Network Neutrality. QoS technology can be used to give you better service of your own choosing, but it can also be used by your ISP to make services that they choose seem better, regardless of your own wishes. The biggest fight at the center of the Network Neutrality is over who owns your Internet connection, and with it the right to control QoS settings.

III. Remaining Questions.

Should these kinds of management decisions be left in the hands of incumbent Internet access duopolies of telephone and cable? Should these decisions be left to consumers instead, via elected representatives, and perhaps via democratic organizations like Cooperative Utilities? What do you think?

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