1. Differentiating Transit Exchanges from Peering Exchanges
Version 1.2
June, 2002
Bill Woodcock
Packet Clearing House

2. Past Assumptions
All exchanges are functionally similar, differing principally qualitatively.
People go to exchanges to peer, but buy transit at their own location or within a colocation facility.

3. Observed Reality
Some exchanges are vastly more expensive than others, providing services which are economically unsupportable within a peering economy.
A lot of market participants are buying and selling transit within exchange facilities, either over crossconnects or through the switch fabric.

4. Hypothesis
There are actually two poles toward which exchanges can be optimized: peering or transit, and they pose very different economic and provisioning requirements.
It is difficult to make a single exchange maximally successful at both, so an understanding of the operative market forces is critical to avoiding unintended compromises.

5. Aggregation Benefits
An aggregation benefit is an efficiency derived from grouping traffic from many sources or destinations together into one shared connection, rather than putting each divisible unit of traffic through its own connection.
Aggregation benefits typically result in increased apparent performance or cost savings or both.

6. Aggregation Benefits (2)
The down-side of aggregation is that it aggregates not only the traffic, but it simultaneously aggregates risk.
There is thus a tradeoff between the irreplaceability of a circuit and the degree of aggregation benefit which can be recouped from it.
In other words, a path which carries critical routes must have redundancy.

7. Exchange Points and Aggregated Risk
Peering is an economic optimization. That is, peering provides a lower-cost route to a destination otherwise reachable through transit.
A route learned through peering is always accompanied by a redundant transit path, whereas a route learned through transit may not also be reachable through a peering path.

8. Exchange Points and Aggregated Risk (2)
Further redundancy is never necessary on a peering path. Full aggregation benefit may be extracted from it without danger, since the redundant transit path provides a “safety net.”
Transit contains full routes, including those not learned through peering, and constitutes a sole means of reaching most destinations. It thus requires redundancy and reliability. Aggregation benefits cannot be fully realized on a transit link.

9. Peering Exchange Transit Exchange
Maximization of aggregation benefits suggest that
exactly one peering exchange exist in a region, and
that it include all available peers.
Reliability by dint of redundancy suggests that
two or more transit exchanges exist in a region, and
that each can operate competitively with no more than three buyers and three sellers.

10. Peering Exchange Transit Exchange
Making all peers available at one exchange dictates that the exchange switch fabric within a region never be fragmented, regardless of how many exchange point operators exist.
Since at least two transit exchanges should exist in a region, different operators’ switch fabrics need not be interconnected.
This allows transit exchange operators to more closely govern the quality of their service.

11. Peering Exchange Transit Exchange
Aggregation suggests that peers should be reached through the switch fabric, up to the limit of the capacity of the fastest available switch port.
Reliability suggests that if only a couple of transit relationships are needed within an exchange, direct interconnections are the best means of facilitating them.

12. Peering Exchange Transit Exchange
Maximum benefit is reached at the lowest price.
The price is bounded by the additional cost of accommodating otherwise-peered traffic through transit during peering exchange downtime.
Maximum benefit is reached at the highest reliability.
The price is bounded by the difference between the sum of the market sale price plus backhaul, and the cost of transit delivered at the customer premises.

13. This Begs the Question:
If a provider is already at two exchanges, to purchase transit in a redundant fashion…
and the marginal cost of pushing additional traffic through those two exchanges is less than that of going to a third exchange, even a very cheap one, then…
do we need to differentiate transit and peering exchanges, after all?

14. I believe that the answer is that this is where peering exchanges must prove their mettle, by truly presenting a cost lower than the marginal cost of pushing additional traffic through transit exchanges.
This suggests that greater success can be reached through differentiation than through inclusivity.

15. Bill Woodcock