Lay Techs: Tech for Laypeople

Before you read on you would want to know how will this article benefit you. Well if you're the kind of person who just buy fish from the market without the slightest curiosity as to where they come from and how they are traded, you should not waste your time with this article. If you somehow start by asking "What's fish got to do with the Internet?" or "Well I don't mind learning something new today," then read on. This is my best attempt at making sense of the Internet as I am after all a lay person like most consumers out there, and my interpretation may contain a couple of errors at best.



Everybody use the Internet as how everybody consume fuel. I take the general average because in some parts of the world fuel is used instead of the Internet and vice-versa. So we can safely surmise that the Internet is a commodity just as fuel is. Economics dictate that all basic commodities are subject to perfectly elastic Supply and Demand, all else being equal. 

The Commodity

Elasticity of a product depends on how different one is to another. For example, water is water is water. So therefore water should be the same everywhere in the world and command price based on demand and supply, and nothing more. But it isn't, because different companies that supply water will provide either actual or perceived value to their products so they can sell this value for a special price by creating demand for it. Typical examples would be Reverse Osmosis, Oxygenated, Purified, Filtered and Mineral Waters. This is what we call Product Differentiation. However every unit (bit) of Internet is the same anywhere in the world, and does not carry differentiation. This holds true as long as Net Neutrality prevails. 

Perfect Elasticity

Net Neutrality is when no Internet Service Provider (ISP) can charge it's corporate users special fee for smoother traffic to their customers. This guarantees that no corporation in the world can differentiate their products from another, thereby keeping elasticity of the Internet perfect. An example of the Internet otherwise would be an ISP clogging up traffic from consumers to the website of some companies because they pay less to the ISP than other corporate users. 

We have at the ends, users. This includes consumers and companies like me, you and Maybank. Then we have Downstream ISPs servicing users - blue and red circles represent different companies like TM, Maxis and Jaring. The huge yellow hexagon in the middle is the Upstream ISP, kind of like AT&T and Tata Communications who link all the downstream ISPs around the world with each other. The big picture would be a few upstream ISPs linking with each other and to downstream ISPs and then finally to end users. This is the intricate World Wide Web, which allows you to access a website located in the USA or anywhere else in the world. 

Transit Fare

If a bank customer from Blue ISP tries to login to his bank which is in Red ISP, traditionally Blue ISP would pay to transit this request to Yellow ISP for the service of connecting its user to his bank in Red ISP. And then Red ISP will pay Yellow ISP a transit fee for feeding it's customer the requested information. This will work vice-versa if a shopper in Red ISP surfs an online shop in Blue ISP. So both downstream ISPs will end up paying the upstream ISP for every bit that goes across, either way. 

Peering: A Freer Flow

To reduce cost, both Blue and Red ISPs establish a faster and more direct connection called Peering (green arrow). By peering, downstream ISPs get to reduce costs otherwise incurred for the data transaction between each other through upstream ISPs. Sounds like the perfect plan. But it has its limitation. 

If TM peers with Maxis and Maxis with Jaring, TM does not automatically peer with Jaring. Each provider would need to establish their own peering bridge with every other company out there they think is worth their effort. So if there are enough users from Maxis currently connecting to users from Jaring, then it makes sense to build a peer bridge. If not, they'd rather rely on upstream ISPs to do the occasional and sporadic chores for them as the effort of building this peer bridge will not make economic sense. And the webbing intensifies. Local Internet Exchanges have been set up in many countries to manage these irregularities in trade, but that shall be discussed at another time. 

Peering and the Currency

The Peering data flowing between Blue and Red ISPs would also need to achieve a balance of trade, which is the situation when data outflow equals data inflow. If an imbalance is somehow achieved through Peering between these two ISPs, then the receiver of this extra traffic would need to pay in cash the difference. Like countries with currencies, every downstream ISP has it's own Peering Policy. If Blue ISP owes Red ISP excess traffic, then Blue ISP will need to pay Red ISP according to Red ISP's Peering Policy.

Setting the Scene to an Economy
Only by understanding the jargon and being able to wrap our heads around the concept of the Internet can we start theorizing the economics of it.