The implications of overlay routing for ISPs' peering strategies

The Internet is composed of many distinct networks, operated by independent Internet Service Providers (ISPs). The traffic and economic relationships of ISPs are mainly decided by their routing policies. However, in today's Internet, overlay routing, which changes traffic routing at the application layer, is rapidly increasing and this challenges the validity of ISPs' existing agreements. We study here the economic implications of overlay routing for ISPs, using an ISP interconnection business model based on a simple network. We then study the overlay traffic patterns in the network under various conditions. Combining the business model and traffic patterns, we study the ISPs' cost reductions with Bill-and-Keep peering and paid peering. We also discuss the ISPs' incentive to upgrade the network under each peering strategy.