Maier-Rigaud, Frank P. and Milde, Christopher and Selke, André, Economics of the Interconnection Data Centre (IDC) Industry (October 1, 2015). Available for download at SSRN: http://ssrn.com/abstract=2680186

“The modern digital economy is characterized by high data volumes and the necessity for reliable high speed data exchange. Businesses such as Netflix, providing video on-demand, social and messaging networks that enable text, photo and video communications such as WhatsApp, Snapchat and YouTube, location based mobile applications such as Foursquare, cloud computing providers such as Amazon Web Services and Microsoft Azure, or search providers such as Google and Microsoft Bing all rely on high performance data transmission and data exchange between their own networks and the networks used to reach their customers or partners in order to provide services. The same is true for other industries e.g. high frequency trading that relies on an extremely fast exchange of trading data from stock exchanges to traders or brokers and online advertising which relies on high speed exchange of data from content and service providers such as search engines and publishers to advertising platforms. High speed and high quality data exchange between the networks of different companies can be technically achieved by direct physical connections via fibre optic or copper cables over short distances between the servers of two networks. Such physical connections are referred to as Direct Circuit Interconnections or Cross-Connects and take place in Interconnection Data Centers (IDCs). Enabling high-performance interconnection through Cross-Connects is the core value adding service offered by the IDC industry.  Cross-Connect services are related to but distinct from the services of Internet Exchanges (“IXs”). IXs offer interconnection not via dedicated physical cables between two networks, but via a Network Switch that operates as an open exchange platform where many networks can simultaneously interconnect to many others. While interconnection via such a Network Switch has cost advantages when an organisation seeks interconnection with many networks, each of which generates only limited traffic, it cannot provide the same performance in data exchange in terms of quality of service (“QoS”) and security as Cross-Connects.  The IDC industry provides essential infrastructure and services to organisations seeking to interconnect their networks and computing resources. The availability of high quality IDC services in sufficient quantities and on competitive terms is critical to the present and future increasingly interconnected digital economy. Interconnection is required to deliver digital content and applications and a large number of other services to users across Europe and the world. Given the importance of the IDC industry, this paper takes a closer look at the economic features of the industry that affect the dynamics and functioning of IDC markets. The paper discusses (horizontal) competition between IDC providers within the same IDC market and analyzes the (vertical) relationship between the IDC market and the IX market.”