The Economics of Virtualization

The difficulty of making changes to the internet architecture has spawned widespread interest in large-scale, "virtualized" testbeds as a place to deploy new services. Despite the excitement, uncertainty surrounds the question of how technologies can bridge the gap from testbed to global availability. It is recognized that no amount of validation will spur today's ISPs to make architectural changes, so if new services are to reach a widespread audience, the testbed itself must provide that reach. This suggests two questions: First, would today's network providers (or a new set of providers) ever support a virtualized architecture on a global scale? Second, even if they did, would such a network, spanning a great many domains, support the adoption of new services or upgrades to the infrastructure?

In this talk, I will argue that the answers to these questions depend critically on how money flows to network and service providers. A novel economic theory, rooted in the classic model of Cournot competition, allows us to compare market types with regard to service innovation and network upgrade. According to this analysis, there is a danger that a virtualized testbed inherits the market structure prevalent in the internet architecture, causing investment levels to remain poor. On the other hand, alternate market designs can dramatically improve incentives to invest in services, and even in network upgrades, but may encounter resistance from network providers who are likely to see reduced profits. I will discuss how these alternate market types may be implemented.