Telecommunications provider economics

Quite different models have applied to telephony versus Internet telecommunications provider economics. The models differ both at the individual user and the carrier levels. Traditional telephone calls, as well as conventional postal mail, operate on a "sender pays" model. Internet exchange, however, has been more mutual-benefit at the end user level, which can create an incorrect assumption that "the Internet is free".

Telephony sender pays & separations model
In the usual case, the caller will pay the retail charges for a telephone call. At the service provider level, however, very different models apply. Using a model called separations, telephone companies in a non-monopoly environment compensate both the callee's local telephone company, as well as intermediary long-distance and other providers, for carrying the call.

ISP peering vs. transit model
ISPs related to one another in two basic ways, depending on whether they see the other as roughly equal in coverage, number of customers, etc., or if one connects to many more destinations than the other. While this was reasonably accurate in the early days of the Internet and its predecessors, things have become far more complicated.

Consider, for example, ISP 1, a small and home office provider, often of "triple play" Internet, television, and telephone service. If ISP 1 has a national presence, it can have very large numbers of customers who want to access content. ISP2, however, may specialize in serving content providers, such that it has a relatively small number of direct customers, whom ISP 1's customers want to reach. Are the two economic equals?

Peering assuming equality
which the AS consider one another as equals, in which each believes that their customer base is approximately the same size, and it is of mutual benefits that their customers be able to reach one another. In such cases of peering,. When the parties agree that they are peers, they advertise, to each peer, the address space (i.e., of their internals and of their customers) to which they offer connectivity. No money changes hands because this is considered a balanced exchange.

In contrast, a transit relationship involves the transfer of money from the customer AS to the provider AS; the transit provider accepts money for providing connectivity to all reachable Internet destinations. See telecommunications provider economics for a more detailed discussion of some of the models used both in traditional telephony and in the Internet.