Vertical Integration Between Providers With Possible Cloud Migration

Background

In order to provide content to the customers, vertical integration between providers is necessary. Term vertical integration refers to interconnection, i.e. physical and logical connecting, among providers operating at different network's levels. For instance, long-distance operator and local operator can be vertically integrated. Intrinsically, interconnection enables customers connected to one network to communicate with customers of the same or different network. It is a set of legal rules, technical and operational arrangements which providers use to connect their equipment, networks and services. Vertical integration is economical, efficient and it enables achievement of economies of scale (Dai & Tang, 2009). Often applied contracts are Revenue Sharing, Cost Sharing and Wholesale Price. Instead of explicitly defined interconnection tariffs, operators often apply Revenue Sharing, which establishes fixed revenue share among providers. This type of contract is characterized with operational simplicity, and it can rebalance providers' returns when retail prices are distorted for any reason. Some of the greatest challenges that providers are dealing with are increasing profitability of the offered services, assuring higher charges for improved services and obtaining a fair share of the increased revenues. A fair Revenue Sharing contract based on the weighed proportional fairness criterion is proposed by He & Warland, (2006). They also show that non-cooperative strategies between providers may lead to unfair distribution of profit and may even discourage future upgrades to the network. Modelling of non-cooperative interaction between service providers and content provider as a Stackelberg game is performed by Wu, Kim, Hande, Chiang & Tsang (2011). These authors propose Revenue Sharing contract between service providers that jointly provide network connectivity between content provider and customers. They introduce profit division factor into the contract with the aim of social profit's maximization. Revenue Sharing contract between content provider and two service providers under network neutrality debate is observed by Coucheney, Maille, & Tuffin (2014). In this model, service providers enable direct connectivity to a fixed proportion of the content and compete in terms of price for customers. Relations between service providers are established using Revenue Sharing contract in order to maximize customers' welfare.