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Breakdown of Bandwidth Costs?
WCityMike asks: "What is the origin of the cost of bandwidth? For instance, if I'm being charged for an apple, I know that, theoretically, the cost of that apple is going towards the purchase of apple seeds, the land on which the apple trees are grown, the fertilizer and water that helps the trees grow, and the salaries of those who pick the apples, clean them, box them, and send them to market. When an Internet provider charges someone hundreds of dollars in bandwidth costs because they were Slashdotted (or Farked) and their bandwidth use shot up, what costs have the Internet provider incurred, and why does it cost them what it does? Is there usually any sort of markup going on along the line, or are people just passing along their own expenses down the line to the end user?" It would be interesting to note the most important factor contributing to bandwidth costs. How much of the total costs are tied to infrastructure versus the human component (technicians, sysadmins, technical support and so forth)?
That's not the only source of expense of course, but it is one major one. Don't forget supply and demand of course - people charge what people are willing to pay.
All of the replies so far in this thread are banging on about general business issues and supply/demand, but what about the problems caused by the fragmented nature of the Internet itself?
I'd like to see some replies from 'people in the know' on how peering agreements, backbone interconnections and peering centers like LINX affect things.
After all, the average packet from the UK to the US doesn't just go over one provider. It goes over my ISP, a UK backbone, through LINX, to the US on a DIFFERENT ISP, then hits a NOC in NYC, goes to ANOTHER backbone.. and so on.
How do all of these different ISPs interact with each other? Do the larger ones set up networks then charge the smaller ones (like my ISP) for bandwidth which is then passed on? Or do they have 'back and forth' arrangements where the ISPs only pay for the difference between in and out traffic?
mogorific carpentry experiments
I have been reading in business week that the telco's have only utilized about 15% of all the capacity that they have. So now comes my question, what gives?
Here in Europe (Switzerland specifically) it used to be fixed bandwidth and extra costs. Now most providers for a higher price are giving unlimited. And it seems to have worked.
"You can't make a race horse of a pig"
"No," said Samuel, "but you can make very fast pig"
I guess what you want to know is why your charge increases per bandwidth consumed rather than just a list of the various expenses ISPs incur (which other people have covered pretty well), which theoretically could be dealt with by a flat charge. Here's my understanding of that. Some of it's outside my area of direct expertise - I'll mark the point where we hit that.
As the bandwidth use in an ISP increases, the overall quality of service provided to its customers goes down (i.e. contention increases), until the ISP does the following:
You're probably already familiar with the difference between server hardware for 100 users and hardware for 10,000. Switches and routers tend to be a step upgrade; they work fine for three years then BANG you need to spend forty thousand euro, and that'll do you for another three years, or whatever.
Telco bandwidth costs money, and upstream ISP service over that bandwidth costs more. The increase in that is usually sublinear - 4Mbps costs a little less than 2*2Mbps, 8Mbps costs a little less than twice that. The reasons for those costs are where I start to leave the stuff I do for a living, but my understanding is this.
For internet service (this is different and separate from just getting a leased line!), the same principles as above apply, just on a bigger scale. The larger bandwidth user takes a larger chunk of the provider's resources, therefore they'll (within certain parameters) get charged commensureately more.
For the cost of the leased line itself:
That, of course, is without all the associated costs of running a business with more than two people in it, which are (to put it politely) non-trivial.
Dave
Since it sounds like you are asking where the money goes to help understand why it costs what it does, consider this:
There are equipment costs for service delivery (i.e.: routers in the case of an ISP, or trains on the case of Amtrak), and related expenses (i.e.: electricity for routers, fuel for trains). But the more important costs that aren't obvious are intellectual expenses (engineers to design and run networks, enginners to run trains). Not to mention repayment for investors for risking their hard-earned money in the first place.
Think of other services and how difficult it would be to determine where your money goes, and why it costs what it does:
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2B1ASK1
Take OPEC for example. It's a group nations working cooperatively to maximize profits for the member nations by either creating artificial scarcity or oversupply.
One thing that prevents OEC from doing anything it wants with oil prices is that there are other sources of energy out there. If the price of oil gets to be over $45/barrel for a significant period of time, those other sources become competitive.
The Saudis understand this issue and have publically stated that they will not let the price of oil rise to the point where alternative energy sources are competitive.
Even cartels are subject to supply/demand laws if they distort a market too much.
Is the main determiner of bandwidth costs.
The fixed costs of telcos & cable networks are huge relativelly speaking.
That's why govt telco utility monopolies (including govt cable infrasture monopolies, as opposed to content) will always have the lowest sustainable costs long-term. There's no way Singapore would be able to provide broadband to everyone on th island at the costs they do without Singapore Telecom (a 100% govt own utility that subsidies tax-payers with dividends every year) having a cable infrastructure monopoly.
Look how universal cable is in the Netherlands, & at very low per customer costs to the provider. Going by what I was told, basically every house gets a cable connection with all the free-to-air channels on it as part of the Dutch equilivent of the British BBC TV license. So everyone gets the Dutch free to air channels, about 6 channels, including their BBC equilivents, plus they get about 3 free to air channels each from Germany, Belgium, France & the UK. Which means about 15 channels & a cable connection all on the standard national TV license (the Dutch equilivent of the Brits BBC license). The main side effect of this is is that its universal nature makes provider costs low & you don't have millions of TV antennas ruining the skyline (I spent 3 months there 2 years ago & I only saw 2 TV antennas in the whole country). If one wants pay TV they simply subsribe to whatever extra channels they want & it gets piped in on the 'free-to-air' cable with the govt getting a percentage from the pay TV content provider for providing the infrastructure. The whole country comes pre-wired by one single cable network, making things really simple if one wants a cable internet connection
The US wouldn't have the problem with broadband internet providers going bust all the time if it had a govt telco & cable Infrastructure utility monopoly. As the only way to get cheap prices for broadband sustainably is through the economies of scale of a monopoly.
Of course this goes for all utilities. Take electricity, the only state in Oz that has had Californian style problems is Victoria, the only Oz state with privatised electricity. Of course private monopolies are bad (legislation's then needed to protect the consumer), but govt utility monopolies are good - if they rise prices too much the politicians get voted out.
Really the only reason the US doesn't have govt utility monopolies is because of ideology. American capitalist ideology believe's it's bad for govts to provide commercial services. But putting ideology before pragmatism is a losers game. Pragmatism dictates that where economies of scale are king govt monopolies are the go.
Lets look at the example of Singapore again. Singapore Telecom provides billions to the govt coffers every year in dividends (there-by subsidising the tax-payers). Look at Singapore Airlines, its one of the most successful & profitable airlines in the world. Singapore also has govt owned stock broking firms that run multi-billion dollar stock portfolios in both Singapore & elseware. Plus govts have a legislative & competitive advantage which is the gain of Singapore's tax-payers too. The govt buys up & invests in firms where it helps ST or SA. The govt can legislature in favour of the companies it owns, there-by giving the tax-payer an advantage. Of course it's tough luck to anyone competing against the govt, but fair competition doesn't exist anyware on the planet anyway. The fact is the only purpose of a business is to make a profit, so businesses use every advantage they can, no matter how unfair it is to their competition, so why should govts be different when they are providing commercial services & protecting the tax-payers dividends. Of cours govts have to very circumspect & sef-controlled - go to far & they can drive away investment BTW the Singapore govt also has share portfolios managed through front companies meaning theire's many compaines arround the world, including the US, that are part owned or fully owned by the Singapore govt & they don't even know about.
Really this is the legacy of that ultimate pragmatist Lee Quan Yew. Singapore doesn't hesitate to use policies of the far-right, centre & far-left if they feel its the right policy for the problem. Letting oneself be constrained by ideology, like the US, is a mugs game. Can you imagine the stink in the US if the govt dared to provided commercial services at a profit & make billions in divendends? Look at the controversy that surrounded Carter lending Chrysler some short term cash. Really the massive growth rates in places like Taiwan, South Korea & Japan from 1950 to 1990, have all come from putting pragmatism 1st & not giving a shit about ideology.
While your summary is pretty decent (as far as layman terms go), the one thing I haven't seen mentioned thus far is peering and transit costs.
We all know that the Internet is a great mesh of providers of bandwidth, to whom providers of content connect (and oft-times these providers will be one and the same, but I digress). End-users then connect to this mesh and utilize the content provided via the bandwidth links.
To break it down, let's say we have five companies in a mesh. Ideally, all five companies would maintain a link with all four other companies but rarely does the world ever work out in the most idyllic sense, so we have a partial mesh instead.
Company A connects to B and E.
Company B connects to A, C, and D.
Company C connects to B, D, and E.
Company D connects to B and C.
Company E connects to A and C.
Now we have a problem. Company B wants to transmit data from company E - but they have no direct route. They must transmit portions of their data through A and/or C in order to reach the destination, and vice versa for the return trip. So now a request that involves only two companies has now involved a third party company who really has no interest in this request. To go a step further, we could introduce company F, who maintains a connection with only company D. Now companies A and E must send their transit via no less than two companies to reach their destination. Run a traceroute to some of your favourite websites, large and small, and count the companies your data path crosses along the way. For spice; try probing sites across an ocean or two.
To accomplish the harmony that is our global Internet, companies (vis; corporations, transit providers) utilize peering agreements. These agreements make statements of amounts of data and/or ratios. The relationship between A and B could involve something along the lines of a 2:1 ratio, where the smaller company is permitted to 'generate' 2 times the amount of traffic for every 1 amount that the larger company 'generates'. In the case of a slashdotting, this could throw that ratio, as well as that of many other interim providers, out of balance.
Since this extra bandwidth, although provisions have been made for it, is unexpected and can cause other customers of these providers to experience increased lag until it ends. It can also cause technicians to be called in to adjust routing metrics to mitigate the damage caused by the newly opened floodgates.
Since these top level ("tier 1") providers have to bear these additional expenses, as well as the second level ("tier 2") providers, the cost is translated onto the customer who caused the increase in traffic.
Now this might seem horrifically unfair, many might think - what about when I'm being (D)DoS'ed? Many (most?) providers have provisions in place for such contingencies, including 24x7x365 staffed NOCs with people trained to, again, mitigate the damage and attempt to trace the problem back to its origin and stop it from causing further harm to the network. Again, this service costs money and is an invaluable service to the function and utility of the Internet. If techs had to be roused at 5AM and drive into work in all sorts of weather, consume copious quantities of coffee, then appraise the situation before getting around to solving it DoS attacks would extraordinarily harmful, to the point of "taking down the Internet" for very, very large segments of its userbase.
There are other nominal costs that are incurred and have to be accounted for, such as medium (fibre, copper, microwave, satellite, etc.) to transport bandwidth, equipment to switch, route, shape, filter the data, NOCs to manage the equipment, support centres to handle customer enqueries, sales staff to sell the bandwidth, (management to talk about all of this {nyuk}), real estate in which to house these facilities and their respective staff, etc. When bandwidth usage increases, more medium is required, which comes down to more equipment to connect the medium, more staff to manage it, etc. etc.
In the simplistic sense of 'bandwidth'; once the line is installed and equipment placed at both ends (and paid for), and the recurring costs of the facilities are paid for - you could load that line to wire capacity 24 hours a day for as long as it pleased you. ICMP, NFS, HTTP, whatever traffic suited your fancy. However - as soon as you put a third entity in the middle of that traffic path, the story changes. Most source <---> destinations on the 'net involve two or more interim companies, if not substantially more.
Bandwidth has just as many tangible costs associated with it as fruit after all. :)
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