On economics of Internet service provision and content services: peering and service differentiation

We consider the relationship of Internet service providers (ISP) like network operators and content service providers in the Internet ecosystem. Currently the position of ISPs is challenged by the emergence of powerful content service providers, especially with the spreading of bandwidth demanding video services. One issue here is that the further investment in the network capacity may be hindered by prevailing business models that largely exclude the ISPs from sharing in the major cash flows resulting from content provision. We develop modeling tools for evaluation of business models of ISPs and present results of analysis of two models with the potential for generation of additional cash flows for ISP: paid peering and service differentiation. Firstly, we show that under certain conditions on the cost structure and the level of demand elasticity and uncertainty, it can be profitable for a powerful content provider to resort to paid content peering, thus transferring to the ISP a part of his content provision revenue. The resulting business model may provide substantial benefits to all major participants in this ecosystem: network providers, content and service providers and end users. After this, we consider the situation when ISP differentiates the service offer by engaging in content provision, thus entering in direct competition with content providers.