1. Two Modest Proposals for Improving the Economic Efficiency of Colocation Facilities Version 0.2 December, 2000 Bill Woodcock Packet Clearing House

2. The Market Today  Many new colocation and exchange facilities currently under construction.  Primarily only large markets are served, and they’re already over-served.  Little to no analysis or understanding of the market by its major participants.  High demand is temporarily masking gross inefficiencies.

3. The good news?  Most of the current problems are problems of success, like scaling, sizing, pricing, and apportionment of resources. Not problems of failure, like crises of quality or lack of demand.  In short, the industry shows great promise, but needs to perform a little introspection to get past its adolescence and into economic maturity.

4. The meta-environment  Traffic-exchange facilities operate in a balance governed by the geographic density of potential participants.  If the facilities are too distant, backhaul to reach them is too expensive for most potential participants.  If facilities are too crowded, they cannibalize the market, reduce their own function, lower overall value, and overload regional infrastructure.

5. Successful facilities  Provide high value in the form of a large number of potential peers for any participant.  Aren’t too crowded by their neighbors, so potential participants don’t have to forego alternatives to afford to participate in any particular facility.  Can accommodate new participants.

6. Problems with current model  Doesn’t take overhead costs into account.  Discourages interconnection.  Doesn’t discourage waste of constrained resources.  Doesn’t generate additional value once a facility has reached capacity.

7. Modest Proposal #1: Optimizing the price of space  Charging for things tends to discourage their use, while providing them for free tends to encourage their use.  Therefore, exchange facilities should charge for space, since it is a constrained resource, and customers using space preclude the entry of new participants who would provide additional value to current participants.

8.  A corollary is that exchange facilities should not charge for switch-fabric connections, since that discourages participants from connecting to each other, removing them from the value equation even though they’re still using space.

9. fpercentage of the facility which is already full, including this customer’s allocation nnumber of rack-units of space allocated to this customer oper-customer overhead costs pprice seed qscaling factor yprice paid by this customer

11. fpercent full nnumber of rack units oper-customer overhead pprice seed qscaling factor yprice paid by this customer

12. f = 1 o = 250 p = 20 q = 1

13. f = 10 o = 250 p = 20 q = 1

14. f = 20 o = 250 p = 20 q = 1

15. f = 30 o = 250 p = 20 q = 1

16. f = 40 o = 250 p = 20 q = 1

17. f = 50 o = 250 p = 20 q = 1

18. f = 60 o = 250 p = 20 q = 1

19. f = 70 o = 250 p = 20 q = 1

20. f = 80 o = 250 p = 20 q = 1

21. f = 90 o = 250 p = 20 q = 1

22. f = 99 o = 250 p = 20 q = 1

23. 0+45n=yq(1+f/100)=1.15q (1+f/100)=1.6q (1+f/100)=1.75 NCostNCostNCostNCost 2$2942$3102$317 3$3213$3663$387 4$3484$4344$476 6$4076$6026$710 11$49511$56511$117711$1579 22$99022$95022$326922$4720 44$198044$180244$877244$15284 88$396088$369588$2608488$50818 132$5940132$5741132$49675132$103060 176$7920176$7895176$78566176$170339

24. Goals  Fill space with paying customers rapidly  As additional participants arrive, squeeze existing participants who are using space inefficiently  Keep space utilization near 100%, while increasing number of participants, and amount of revenue

25. Modest Proposal #2: Optimizing facilities at capacity  There exists an optimum balance or mix of carrier, ISP, and content-provider participants at an exchange, such that each group is sufficiently populous that it must compete internally, while still having enough customers to be profitable, and be able to select from a large enough group of providers to expect market pricing.

26.  Until a facility is full, it should accept all comers, so no decisions between types of participants need be made until all but one space are full.  Whenever a single remaining space exists, or a full facility loses one customer, an opportunity exists to improve the value of the facility by optimizing the participant mix by a vote among the current participants.

27. Anonymous self-categorization  At least two voting methods are possible.  Candidate customers for the last available space may self-categorize as carrier, ISP, or content-provider, and the current customers may conduct an approval vote among those categories, without respect to who the actual (potentially anonymous) candidates might be.  This permits standing votes.

28. Named candidate voting  Alternatively, participants may conduct approval voting among explicitly-named candidates.  Although it sacrifices anonymity, this circumvents gamesmanship among candidates, problems of categorization into coarsely-granular buckets, and allows the filling of multiple positions in one vote.

29. The anti-incentive to gamesmanship  Rational candidates have little incentive to engage in gamesmanship under the anonymous method, since they would be de- optimizing the facility they would be entering, whereas entering another facility where they were welcomed by more fellow-participants would be more profitable.  If that possibility does not exist, potential exists for abuse of self-categorization.

30. Matrix of likely voting outcome CarriersISPsContent CarriersNeverAlwaysSometimes ISPsSometimesNeverAlways ContentSometimesAlwaysNever 20%?50%?30%?

31. Bill Woodcock woody@pch.net Thanks to Geoff Huston for critical contributions. www.pch.net/documents/papers/colo-efficiency