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Internet Governance 27 January 2015

The hidden economics of local content hosting

Michael Kende
By Michael KendeSenior Fellow and Visiting Lecturer, Graduate Institute, Geneva

We recently released a paper entitled “Promoting Local Content Hosting to Develop the Internet Ecosystem” that shows the impact on developing Internet ecosystems of hosting content abroad. We found that local content providers, including newspapers and radio stations, host their content abroad largely for one reason – it is cheaper. This is important when you consider that these providers often operate in small markets with limited opportunities to monetize their online investments.

However, in hosting their content abroad they are imposing a negative externality on the rest of the market. A negative externality occurs when a party suffers from an economic transaction in which they had no involvement. A classic example is pollution – factories are not required to account for the impact of pollution on the rest of society when making production decisions.  

In our case, local content hosted abroad must be delivered back to the country over international Internet transit links that, in spite of significant infrastructure investments in recent years, are still expensive. The resulting high costs for accessing content hosted abroad are generally borne by ISPs. The result is a negative externality, where the rational decisions of content providers to host abroad have a negative impact on ISPs’ costs, which in turn disproportionately increases the cost of Internet usage and limits demand.

In partnership with the Rwandan Ministry of Youth and ICT, we gathered data to help quantify this negative externality. For one of the larger Rwandan websites we examined, we found that the content developer achieved a saving of USD 111 per year by hosting overseas, but that this imposed USD 13,500 in transit costs for the Rwandan ISPs to deliver the content to local users. Based on the data that we had, there were multiple websites generating this level of negative externality.

The fact that the direct economic impact on ISPs is somewhat limited by the modest traffic generated by the websites serves as evidence of another significant negative impact of hosting abroad: the significant latency effects and relative high costs of access can smother demand for Internet services among end-users. We will detail the evidence that we found in a follow-up post.

Read more about “Promoting Local Content Hosting to Develop the Internet Ecosystem“.

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Disclaimer: Viewpoints expressed in this post are those of the author and may or may not reflect official Internet Society positions.

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