Article

Reduced latency and optimized connectivity: Why direct data exchange boosts economic growth

Ivo Ivanov, CEO of DE-CIX
3 April 2024

For cities to gain an advantage in the stiff global competition for company settlements and talent, one key ingredient is to offer seamless Internet access and world-class connectivity. Enterprises depend on the good performance of business applications and optimal connectivity to clouds and partner companies at an affordable price, while their employees demand excellent connectivity after hours for digital entertainment, e-commerce, and communication. Local interconnection of networks via an Internet Exchange (IX) is key to the optimization of connectivity. Every millisecond counts in the speed of data transfer. This is where latency, the time it takes for data to travel to its destination for processing and back again, plays a major role. By exchanging data traffic directly with other networks at an IX, network operators and their enterprise customers can optimize connectivity and ensure secure and short data pathways. IXs also encourage the development of healthy competition and a local digital ecosystem, while bringing down the cost of connectivity. For cities that aspire to becoming an Internet hub, attractive for the settlement of companies and high performers, the pathway revolves around direct interconnection, explains Ivo Ivanov, CEO of DE-CIX.

There can be no doubt that ensuring excellent connectivity in a city is an important step towards allowing it to get ahead in the race for enterprises and talent. The OECD Talent Attractiveness Index considers Internet access as a measure a city’s relative attractiveness, while for Digital Nomads, the two most important determinants for the choice of a new location are the cost of living and fast, accessible Internet. For companies, many other factors also come into play, such as the regulatory environment, supply chains, and transport infrastructure, alongside the increasingly important access to talent. A basic requirement for almost all of that is high-performance, reliable, resilient, and secure connectivity – which is, and will remain, essential for all business processes in the modern world.

Internet infrastructure is key to a city’s potential

The performance and competitiveness of connectivity infrastructure is key to a city’s potential to develop into a technological leader and Internet hub within its region. Internet Exchanges, which bring networks together to exchange data traffic, provide excellent support in this evolution. IXs improve the speed and performance of connections to content, clouds, and digital services by ensuring optimized data pathways. They thus dispense with the need for data to travel to distant hubs – across national borders and even oceans – to be exchanged. Local interconnection within a diverse ecosystem also creates new redundant pathways for data to take, thus leading to a more stable network and increasing the resilience of connectivity. The encouragement of competition within the connectivity market has the added advantage of reducing costs for the network providers themselves and for their end customers.

Data gravity magnetizes a city

Over the last 30 years of the commercial Internet, we have seen the emergence of strong Internet hubs around the world, with Internet Exchanges at their epicenter. This initially European model of cost-neutral data exchange between networks via an IX began with historical world cities like Frankfurt, Amsterdam, and London – cities where the existing concentration of telecommunications networks led to massive investments in data centers and attracted ever more networks and tech companies to their environs. New York, Dallas, and Seattle were among the early US locations to demonstrate the power of “data gravity” to promote economic growth, and in Asia, Singapore and Tokyo stand as further examples of today’s highly mature international Internet hubs.

After the initial hubs developed, we then saw the emergence of new Internet hubs in places that did not have a historical head start. Metropolitan markets in rapidly developing nations, like Sao Paolo and Mumbai, and in strategic locations for global traffic flows, such as Dubai, are leading a second wave of development in Internet hubs. Some of these and their associated IXs have now firmly established themselves as gravity sinks, with the magnetic power to attract international and national networks and tech companies. More cities in this category are to come, like Mexico City, which until now has lacked an IX with sufficient potential.

Now, a new development is also beginning, with the establishment of regional Internet Exchanges to serve local populations – often in more rural areas – with low-latency connectivity to support modern applications and use-cases. As these IXs grow over the next decade, they will become a focal point for regional data exchange, encouraging greater investment in data centers and network expansion, as well as increased company settlements, drawing, in their wake, greater pools of talent to these regions.

How cities can evolve for a prosperous future

We can see the impact of an IX on the evolution of a city using the example of Dubai. Now in its second decade of operation, the UAE-IX powered by DE-CIX in Dubai has contributed to a profound transformation of the city. Given that Dubai was a greenfield market when the IX was established in 2012, Internet users in the UAE needed to retrieve digital content and services from Asia, Europe, or the US, meaning that the latency was unacceptably high, and Internet access was extremely expensive. The transformation began with the local and regional interconnection of Middle Eastern networks over the IX and the encouragement of transcontinental networks to the city’s shores. This was followed by the expansion of data center space in the city (more than tripling in a decade), and the gradual localization of content, meaning that content networks began to cache popular content in Dubai to ensure better performance for local users. This was followed by the localization of cloud providers to support the growing number of enterprise networks. Meanwhile, the shorter distances that data needed to travel brought down the costs for local networks, and in turn the cost of connectivity for local users.

To put this in perspective: In 2012, 90% of local data traffic needed to be transported outside of the GCC (Gulf Cooperation Council) to Europe, Asia, or North America to be exchanged, resulting in huge delays, poor Internet performance, and regular outages. Today, 90% of locally bound data remains local, meaning that latency to content has reduced from 200 milliseconds (ms) to 3 ms. The international IP transit price has fallen by 98% and broadband Internet prices by around 85%, and the UAE enjoys almost 100% Internet penetration. Certainly, the meteoric growth of Dubai over the last decade is not solely down to the establishment of an IX: The regulatory authorities undertook strong action to modernize regulations and make Dubai more attractive in many ways to company settlements.

But it doesn’t end there…

After a decade of evolution, the result for Dubai was that, by 2022, the UAE’s Non-Oil Gross Domestic Product has grown by 35%, the number of international organizations to set up their global headquarters in the UAE has grown by over 700%, the number of international universities had doubled (from 5 to 10), and the number of students in higher education had increased by 714% to close to a million.

With increasing migration of both companies and high-performance individuals to a city, the need for local digital services grow, leading to the establishment of new companies to meet these needs. These range from data centers and additional connectivity services to systems integrators, digital marketing and recruitment agencies, and on to modern transportation and smart city scenarios. With greater digital engagement comes greater demand for digital business and entertainment solutions, encouraging the localization and further strengthening the ecosystem. In this way, local interconnection enables the development of data gravity: the more data is exchanged locally, the more is attracted to come to the emerging hub.

Conclusion

The digital economy has become the backbone of economic growth for the future, and no sector can afford not to be on the path to digitalization. Growing data traffic on the Internet, increasingly latency-sensitive applications, and rising security requirements call for local interconnection via high-performance Internet Exchanges. Internet Exchanges can also facilitate the growth of a local digital economy, access to clouds and content, and better connectivity, supporting the city in the stiff global competition for companies and talent.