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)?

Comments

buying an apple?

[spacedx]

I had always thought that if you were being charged for an apple, that cost was actually going towards Steve Jobs' personal Gulfstream V jet?

Cable ships

[IamTheRealMike]

Cable ships are a large part of the cost of bandwidth, most of the major western top level bandwidth providers maintain fleets of undersea cable maintenance ships. These things are fantastically expensive to build and run, and part of the cost of them filters down to all of us. For instance, part of my £20/month connection costs are helping to pay for the undersea link that connects me to slashdot. Ditto for satellite/microwave links, they all cost a lot to maintain and run.

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.

the real costs of bandwidth

[kraksmoka]

well, kind of like an apple, it all starts with the seed money from unwitting investors who realize not that their hard earned money is about to be thrown in a hole in the ground. then companies hire construction folks like Mas Tec (Miami, Fl) to quickly and quietly plant the seed money along with some fiber optic cables, or repeater boxes with really expensive chips, or whatever the potential bandwidth provider needs to throw into the hole to make some /.'ing possible. then, once the investor and the company throw all their money into said hole, a wonderful economy based on advertising emerges and the bandwith is carried to market by all the mom and pop bandwith growers and sold everywhere from local farmers markets to big grocery stores. UH OH, advertising didn't work! now we have to pay the saps, er investors, who gave us their money to pour into our special hole, something called a return on investment in a hole. ok, we'll either declare bankruptcy, or now, we'll charge alot of money for bandwidth for a while since our humble little hole grew into a mountain of debt.

and everyone lived happily ever after (except for northpoint, directv dsl, worldcom and anyone else who didn't own a regional telephone monopoly to cover idiotic spending levels and tremendous waste). the end

When it comes to a Slashdotting...

[Anonymous Coward]

...the problem is burst. Period.

When you buy an apple, you can eat the whole apple at once (tossing the core into the compost pile when you're through), or you can cut the apple up into slices and eat those slices over a few hours' time. If you eat the entire apple in one sitting, it doesn't cost any more than if you'd cut the apple into 16 slices and eaten one per hour.

Bandwidth isn't like an apple.

Bandwidth is purchased in one of three ways (or sometimes several or all three ways at once):

1. A connection with a maximum of X amount of throughput at any given time, "unmetered" (ha ha)

2. A connection with a maximum of X amount of throughput at any given time, plus a restriction on how much throughput can take place in a given month

3. A connection with a maximum of X amount of throughput most of the time, which can increase on the fly to some multiple of X for short periods of time, with a restriction on how much throughput can take place in a given month

The third type of connection is usually known as "burstable." What it means is that the ISP sells you a line which is physically capable of, say, 3Mbps transfer; but they sell you this line with the understanding that 99% of the time you're only going to be using a maximum of, say, 1Mbps of that capacity. You're allowed to "burst" over your 1Mbps average up to 3Mbps.

Some ISPs restrict these "bursts" to certain lengths of time, some restrict the "bursts" to certain amounts of data (e.g. you can burst to 3Mbps for 1GB at a time). Either way, you're typically given a certain allotment of "bursts" per month. Any more "bursts" and you pay extra.

When your site is Slashdotted, you generate hella "burst," hella quick, and hella strong. As a result, your hosting company may wind up exceeding the allowable "burst" (either in time or in bytes) according to their contract.

Unlike the apple - where you can "burst" it all into your stomach at once with no penalty - bandwidth is sold on the contingency that it's going to be used over time. Use it all at once and you get fucked. That's pretty much it.

Re:When it comes to a Slashdotting...

[Myxx]

I work for a Tier 1 company that does Enterprise Hosting. We use the burstable method and the 95th percentile. You commit to say 1 mbps. As long as you stay under that you know your costs. You can burst 5% of the time the link is up for a month and not pay anything extra. That equates to something like 20+ hours you could burst, which is good for those who take a /. hit.

I also know that we mark it up so much that I think it is ludicrous, but we can because we can.

Re:When it comes to a Slashdotting...

[Blkdeath]

...the problem is burst. Period.

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. :)

How we do it.

[standards]

For my organization, about 45% of the customer's cost goes to pay for bandwidth. The rest is mostly people costs.

- We provide very limited end-user technical support.
- We provide a very specific service. We don't try to do "anything that could bring in a buck". I think a lot of ISPs get into the trap of "anything for money"... which results in a LOT of hidden costs. This should be MBA 101 stuff, but it's amazing how trapped people get doing things for zero benefit.
- Before we implement anything, we look at the potential costs and benefits.
- Everything has to have a complete process in place before we move it into production. Otherwise, on-going support costs skyrocket.
- We have a very clear contract with our customers. We trust them; they tryust us; they don't misuse us, we don't misuse them.

This is simply basic IT business stuff. But most small bandwidth resellers (and many large providers) fail at it.

Peering agreements, etc.

[wackybrit]

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?

Re:Peering agreements, etc.

[aufait]

Do the larger ones set up networks then charge the smaller ones (like my ISP) for bandwidth which is then passed on?

Yes. Only the big boys have free peering between themselves. And, even they have costs associated with peering: cost of colocation at a peering point, bandwidth between the two service providers, etc.

Or do they have 'back and forth' arrangements where the ISPs only pay for the difference between in and out traffic?

Some do this. However, it has always been a hot button issue with ISPs. Some ISPs, e.g. UUNET, have a higher percentage of web servers. While others, e.g. Earthlink, have a higher percentage of users. Who exactly is providing more value to the other. Is Earthlink supplying the viewers to the web sites? Or, is UUNET supplying the web sites to the viewers?

Re:Peering agreements, etc.

[scoove]

How do all of these different ISPs interact with each other?

There's been a bit of battling that got us to the current model of interchange between networks. A bit of history helps explain why we have the model we have now:

At first, we had the NSFNET system - which was a government contract administered network consisting of a national network (NSFNET, run under contract by ANS, which I believe was a venture between IBM and MCI), and then distributed to regionals, e.g. NEARNET, SURANET, MIDNET, etc. The regionals were initially nonprofits, occasionally directly administered and sometimes done via contract (I believe PSINet was formed by operating the regional contract in the central east cost).

NSFNET didn't permit true commercial traffic, due to its AUP and the fact that taxpayers paid for the network and it'd be an abuse. Still, many regionals blatently ignored this rule. (They also charged obscene rates like $60,000/year for a 56 Kbps leased line, which I was quoted for a community connection in 1993 by our regional - guess someone had to pay for the retired college professors doing research on their payroll).

NSFNET, its pols and associated lobbyists from the Baby Bells, decided to push for a commercial network monopoly that would create a commercial national network, regional NAPs which would be Bell-operated (granting Internet monopoly to them), and then service providers could buy access to the NAP and compete (yea right) with the Bells. We actually saw this model take place with DSL unbundling and the massive failure of DSL and CLEC providers when the Bells played paperwork games (such as SWBell, which allegedly had a single phone line for all the fax requests for DSL orders from competitive carriers - and gosh, guess what kept running out of paper!) Incidentally, Al "Father of the Internet" Gore was a big proponent of this Bell monopoly grant. I guess it is kind of true that he was the father of the aborted Internet Bell Monopoly.

Fortunately for all of us, UUNET, PSINet, Sprint and a few others started up the Commercial Internet Exchange and created a multilateral exchange - where all could tie together by joining the organization and peer for free.

Naturally, as each one joined, they wanted to stop multilateral connections, as they wanted all newcomers to buy through them instead. Then came the MAEs (metropolitan area ethernets, administered then by MFS) which had peering that was bilateral instead of multilateral - meaning you could show up at a MAE but have no connections. You had to arrange for peering with each party one-by-one. Sometimes they'd play, sometimes not.

As things grew, we ended up with what former SprintLink head Bob Collet called "NSPs and ISPs" - network service providers being the backbone providers that were interconnected and bilaterally peered at numerous peerpoints and bilateral interconnects, and ISPs being those that buy from the NSPs and perhaps occasionally partially bilaterally peer.

Do the larger ones set up networks then charge the smaller ones (like my ISP) for bandwidth which is then passed on?

Yes. NSPs charge for transit.

Or do they have 'back and forth' arrangements where the ISPs only pay for the difference between in and out traffic?

This is an excellent question, given that it is very much the rule in international voice telecom. Between international voice carriers, there usually is a "settlement" arrangement - where each tracks traffic sent to each other, and then if there is any significant difference, it is either carried over to the next month or it is paid for to bring the balance back to zero.

Whether the Internet will mature in this manner is anyone's guess, though I have a hunch it might. Understanding that we still have a big battle over which is more important: consumer eyeballs or content, and we can't build settlement models until we resolve this.

Are Earthlink and AOL's masses worth money to a content-heavy network? Or do content providers (like cable TV) have material that Earthlink should pay for? If that's ever meshed out, I think we might see settlement models become a real possibility.

*scoove*

Peering arrangements

[GLX]

Not all ISP's peer for free with other ISP's. In a lot of cases, they have to "settle up" for their peering costs at the end of the month, per megabyte, with their peers. UUNet is big on doing this with their peers and it's where they make 50% of their income...

Cogent and AOL just had a fallout about this - Cogent felt that they should have free peering with AOL but AOL felt Cogent should pay for usage because most of the traffic going to AOL was for Cogent customers and not vice versa.

(see 'Peering' Dispute With AOL Slows Cogent Customer Access and Paid Peering )

So yes, the short answer is that upstream ISP's do pay per Mb in a good amount of instances if they aren't a huge transit hub. Obviously some ISP's aren't subject to this and just charge by the MB figuring the more traffic you're getting, the more money you're making from their connection.

Ok here is my question....

[SerpentMage]

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.

Re:Ok here is my question....

[warpSpeed]

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?

That is probably 15% of thier fiber capacity, not total capacity. The other cost of hooking up the fiber is the routers and integrating it into the "net". The reason is that the price of getting bandwidth is so low now that is not cost effective for them to hook the fiber up.

Counter-intuitive? The fiber is only one part of the cost and it is fixed since it is in the ground alredy. There is the capital required, and the human cost to support hooking up and maintaining the fiber. If they hooked up all the fiber they would drive down the costs of bandwidth even more, and thus lose more money. So they leave the fiber dark until it make economic sence for them to light it up.

Re:Disincentive?

[gremlin_591002]

Perhaps, but when (a long time ago, in a galaxy far, far away) I ran an end user ISP. I got hammered once by a customer. His box was rooted and used in a denial of service attack.

Anyway, my bandwidth was paid for. I had a full T1, Sprint didn't care how much traffic I sent across it, they were set to cover it.

He was very sorry about it. It cost me about 2 hours of downtime for the rest of my customers. It took me about an hour to respond once I found out there was a problem and pulled the plug on his box. I issued refunds to customers that were affected.

I charged him the cost of those refunds, plus $35 for an hour of my time.

Note that this probably didn't cover all of my costs. I wasted most of a day adjusting bills of those affected, which I didn't charge for. The agreement I had with this customer was special. He was allowed to use all extra bandwidth for his peering box, but was not allowed to infringe upon the rest of the customer's requests. This was before QOS packet stuff so it was kind of a manual 'keep on eye on the MRTG graphs and make sure were aren't maxed out' kind of arrangement.

As a small ISP..

[warpSpeed]

My cost for Bandwidth is about 50% of my revenue. I am a one man show, and my ISP is not the bulk of my income. I make my money consulting.

I do not know how the big boys do it, they have to have teams of skilled techs, phone support people, support infrasturture, people to manage said infrastructure, oh yeah, and the actual network to provide the bandwidth.

I do not begrudge that fact that I have to pay a lot for bandwidth. I am actualy happy that I pay so little for what I get. However the barrier to entry into the market will make many people thing twice about doing it. If I knew then what I know now... well I probably would not have gone into this business.

As for the costs to the ISP when a site gets slashdoted, the cost is slow connectivity and frustrated clients. It is a delecate balance, making sure you have enough capacity, and staying in the black. There is a huge lead time to getting additional bandwith avaiable, unless you are a large organization and can afford standby bandwidth.

I have to keep a close eye on operations to make sure that bandwidth is not being over taxed by a single client, and that that client knows about thier usage. I have had several clients get hacked (open ftp Windows servers are a favorite). Suddenly they are pushing a full T1 of data out and they are scrathing thier head wondering why the Internet is so slow today...

Why it increases per byte...

[davew]

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:

• Upgrade their external (upstream) links (more on this in a minute)
• Upgrade their internal infrastructure (which might also be telco links between cities or countries, or might be 10M hubs going to 100M or Gigabit Ethernet switches)
• Upgrade their supporting infrastructure (proxy caches, mail servers, billing systems, people on the tech support line, abuse department - this last one is a problem that seems to increase exponentially with size)

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:

• It costs money to put fibre in the ground, or under the sea, or whatever, and that needs to be recouped. This is a once-off, and it takes ages to pay back (hence the massive debts that the Worldcoms of this world are operating under).
• The equipment that goes at each end of the wire costs a fuckload. At really high speeds (10 gig and thereabouts) it could cost more than the fibre itself. This isn't quite a once-off, but is a step upgrade a bit like your own switch infrastructure.
• People and systems need to monitor the network, work out what bits have broken and need fixes, what's just had a digger put through it, etc. etc.

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

bandwidth cost

[Anonymous Coward]

First off, an increase in load does not mean you need to increase the number of people who work for you (sysadmins, techs, etc.)

Second, costs are obviously passed to end users with a mark up (however little).

Third, cost of bandwidth DECREASES AS BANDWIDTH ITSELF INCREASES. At least with ISPs. ISPs who buy bandwidth in bulk actually reduce their cost per Kbps (that is, we get charged a lower per Kbps rate if we buy 45Mbps outright than 64Kbps). For example, we used to pay $1600 for a 64Kbps link but now we pay only $6000 for a 2 Mbps link (we're outside the U.S. so this includes physical connections) instead of $51200 ([2048Kbps / 64Kbps] x 1600).

HOWEVER, buying in excess usually result in part of the bandwidth being unused but the ISP still pays for it. That's where the numbers game starts, where the ISP divide the cost of the bandwidth plus a mark up, to get what they charge customers.

Obviously they can't charge customers on a per Kbps rate to recoup costs otherwise the customers would be up in arms. Now here's a secret (ssshhh!), most Internet traffic is bursty, that is, customers don't always utilize the entire bandwidth (at least, not at the same time) that the ISP guaranteed(?) - you access a webpage, read it (while you read, you don't utilize bandwidth) and access another page. ISPs rely on that fact when coming up with prices. That is the reason most do not like it when you upload stuff in P2P nets. Most probably they just use the RIAA, DRM, whatever, as an excuse to block access to P2P. Why? Because the minute you offer upload access over P2P nets, chances are high that you'll be utilizing whatever bandwidth they promised you. They don't like that because if a significant number do that it'll throw off their numbers (remember, they didn't expect you to actually consume the entire bandwidth so they didn't charge you based on a per Kbps rate). Noticed this trend lately with so-called broadband providers who "guarantee" you so-and-so amount of bandwidth/speed?

You asked for the breakdown of bandwidth cost. Yes, most of it is caused by having to get additional bandwidth (larger pipe to handle larger traffic) but it is actually holding on to that large bandwidth (with very few users paying for it) which is the cause of you getting slapped with a huge bill if you go over the allotted amount. Their cost would be lower if they didn't have to keep excess bandwidth to give to you when the time comes that you actually need to burst over when you're slashdotted.

We solved this problem of having to offer competitive prices while still being able to pay for bandwidth by charging on a per-MB basis (with a minimum of course). We give enough free MB to cover a month's worth of surfing/browsing (done thru extensive study of usage patterns) but the minute customers go to P2P nets, we hit them with an excess usage fee. This limits them from keeping their connections 24 hours doing nothing but downloading mp3's and mpegs.

And we don't even have to hide behind RIAA or DRM.

ALL our customers btw, are satisfied with this arrangement. Only those who go to P2P nets and download recklessly are the ones complaining (until now, all those who exceeded our allotment by a large margin have ALL been caught using Kazaa, iMesh or Morpheus).

Sevice verses tangible goods

[eyeball]

I'm not an economist or financial expert, but it would seem that it would be more difficult to put a price on a service than on a tangible good. It's like comparing (sorry) apples and oranges. Seriously, it's easy to see where the money goes: raw materials, processing equipment, employees, insurance, etc.

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:

• Lawn mowing / Landscaping
  
• Medical Care
  
• Cable TV
  
• Hotel Service
  
• Auto Repair
  

Some Factors

[aufait]

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?

That is not a simple question to answer since there are several factors that have to be taken into consideration in determining price. Different type services, e.g. dialin lines, colocation, dedicated bandwidth, etc, have different factors.

The primary thing to remember is that the ISP business model is based on setting prices for the "average user". They do not directly pass on the cost of each user to that user. For example, a dialin phone line costs $25. That is the cost of just the line. It doesn't include equipment, employess, or bandwidth. The reason ISPs charge $20 or less is that the average user doesn't tie up the line 24/7 so that they can 7 to 10 users per dialin line.

The same is true with bandwidth. An average customer who gets a dedicated T1 usually averages 50% or less of the lines capacity. So the ISP can sell T1 service to two or three customers for each outgoing T1.

Another factor is peak vs average load. The ISP has to provide facilities to handle the peak load. Yet, most prices are set according to average load. Check this site if you want a graphic example of the slashdot effect.

All this presents a problem for ISPs in pricing for users want fast speeds but have low averages, e.g. colocated web sites or DSL lines. They can't charge for the maximum possible load. If they did, DSL lines would run closer to $1000 per month instead of $50. If they stictly base it on average load, the low users are subsidizing the bandwidth of the high users.

To resolve it, they have come up with a price tier that gives an incentive to users to, accurately as possible, estimate their usage. They make it cheaper for the user to pay for the next tier above their average monthly usage rather then paying for the tier below their monthly usage.

Re:Does "law" of supply and demand really apply?

[the eric conspiracy]

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.

Bandwidth costs

[scoove]

Thought there have been several responses relating to burstable pricing, it's important to understand that burstable models are more of a marketing concept than a network costing one.

Considering that IP service is in the class of packet sharing telecom - meaning you do not have a fully reserved, "100% yours and only yours" pipe from location A to location Z (end to end), your costing models have to be a bit more complex than adding the sum of the parts. But it should probably start there. Packet share != Overbooking, although packet share networks /can/ permit overbooking to occur.

To explain costing on a more common tier two or smaller level (tier one costing has much more to do with transport costs and a bunch more variables not interesting here), take your typical tier two or smaller ISP who we'll say is connected only to a single upstream, and that upstream provider is a tier one (multihomed at x+ bilateral and/or multilateral facilities; e.g. Sprint or AT&T Worldnet).

That ISP will have:
- an egress transport cost: e.g. a T1 to Sprint and perhaps a local loop cost to get to the tier one carrier; sometimes this is bundled by the tier one provider
- a facility cost: router, colocation, switching and all the associated things to figure out what to do with customer traffic and send it where
- an ingress transport cost: this is the transport cost from the customer to the ISP (e.g. T1 to a local frame relay cloud from the customer, then another portion from the cloud to the ISP, or a similar model in DSL, or a fixed point-to-point line)

Plus applicable switching/routing/data center/network core/backoffice/customer support/billing costs.

Then the fun comes in calculating an aggregate the ISP wishes to use in predicting how many seats it can sell on its T1 until the plane can get full - understanding that if it oversubscribes the T1, it may have the possibility of bumping passengers (such as slow performance; people getting less than what they paid for).

(Note: You'd be surprised how many smaller ISPs don't even understand the concept of aggregation - many rural ISPs in our parts think Internet comes in T1 and put 500 DSL home connections on the T1 without thinking twice. "Order another T1? Why? We already have Internet!" Plus there are other reasons they never go past a single T1 - their Cisco 2600 only has two ports (T1 in, T1 out), they don't know how to load balance more than one T1, and fundamentally it's too expensive for them)

Aggregation becomes the process of determining how to share that cost, since it's a shared network. It includes variables like time of day (business customers will usually demand more bandwidth during business hours; residential after hours, etc.), whether the customer has a bandwidth guarantee in their service level agreement, etc.

After all of this calculation and checking of assumptions, the ISP may calculate it into a cost per Mbps as we do.

so they have to overbook. It's all about getting the most out of what resources you have.

Not always true. Overbooking can be perceived as ineffective loading - an error, in otherwords, to be avoided. Your power utility doesn't run a constantly overbooked network - that'd have serious regulatory and technical consequences. But when you've got very little backoffice expertise in a smaller ISP, they won't know how to develop traffic models and purchase effectively.

Overbooking can be avoided both by developing good subscriber models and by enforcing them (ugly reality: if you're using 1 Mbps up/down sustained and are paying $35/month, you're not paying for what you're consuming and you'll cause a problem somewhere along the line). Additionally, you're going to see better aggregation and closer matches to "what you pay is what you get" as the last mile part of the business matures. Much of the success of an ISP is in how it buys and how closely it matches what was bought with what was sold - you can't run a $2 all-you-can-eat prime rib buffet, nor can you charge $10 for one that has nothing but dinner roles.

Really, overbooking and the opposite end of the spectrum (giving excessive bandwidth without charging for it) are mistakes made early in the development of the business. Successful providers will tighten up both ends, providing the service people ordered and paid for, and smart customers will understand that in order to get what they paid for, they shouldn't also expect a free lunch.

*scoove*

Service provider pricing 101

[RebornData]

Pricing and cost analysis is a rather complex topic that there's a lot of academic theory for, but in my experience many / most companies rely on a combination of very basic analysis, "gut feel" and "look what the other guy is doing" to figure out. I worked for 6 years as a product manager for various kinds of service providers, so I've had direct experience with it. BTW: service providers often use the terms "product" and "service" interchangeably for what the outside world would call a service, so my apologies if I switch back and forth. It goes something like this.

Let's look at cost first. Typically, service providers think of costs as some percentage of the dollars coming in for a given service. They break these down into several categories. Although each company is different, here's a simple example:

• Cost of goods sold: These are dollars that the companies spends to provide the specific service. More on this later.
• "SG&A": Sales, General and Administrative. Otherwise known as "overhead" -- cost associated with running the company that aren't tied specifically to a service (management salaries, office space, etc...). Sometimes sales salaries and marketing are broken out from this on a per-service basis, other times they are lumped into the general company overhead costs.
• Margin: This is the money left over after the company's costs are taken care of. If the company sells everything directly at retail price, this is equal to profit. However, if a company has resellers or other types of "sales channels", they will be paid a certain percentage of the margin for selling the product. Discounts also come out of this chunk.

Very rough rule of thumb: cost of goods sold should *never* exceed 50% of "retail" (undiscounted) revenue in the telecom / service provider space. Of course, if a company is desperate for business they may give away very large portions of the margin percentage in the form of discounts, etc...

The "cost of goods sold" for a typical hosted dedicated server generally break down into several major categories, that may or may not be broken out as different "services":

• Hardware cost & software licensing: This is the fixed purchase cost of the dedicated server itself, and any associated software licenses. This is typically paid directly by the customer up-front, or broken down into lease-like payments and buried in a flat monthly fee.
• Data center: These are costs of having the server sitting in the data center, including lease cost of the space, supporting rack and LAN infrastructure, electricity, cooling, security, etc... Typically these costs are figured based on averages per square ft. of server room space or by rack space.
• Operations / management: These are the costs of management services provided for the server: NOC staffing, management / monitoring system cost, tape backup costs, etc... In the case of colocation, this may be minimal or non-existant, while it's very significant for dedicated / managed services, since you're paying for system administrators to upgrade your OS, apply patches, etc...
• Customer service / support: Costs for the right to call someone on the phone and get help with your service. This primarily includes call center infrastructure & support staff salaries. Again, may vary widely depending on the level of service selected.
• Bandwidth: At a minimum, this is the cost of the routing infrastructure, the cost of the WAN part of the NOC staff and systems, and the monthly costs paid to the upstream providers for big dedicated pipes. Your average hosting company is not running their own fiber or even buying dedicated circuits: they are buying IP transport from a large ISP, and pay for a certain amount of bandwidth. Usually, they'll lay in a very large fiber pipe to the ISP's local POP, and then activate additional bandwidth as needed. I can't break down the long-haul ISP's costs for providing that bandwidth, but presumably it breaks down similarly.

Now, a few words about pricing, and specifically bandwidth pricing, since the poster was interested in that. Aside from bandwidth, the costs above are reasonably predictable from customer to customer and month to month. The more predictable a cost is, the more likely a service provider is to lump it in with a bunch of other costs and charge a flat fee. The less predictable a cost is, the more likely it's going to be metered and broken out.

In general, customers demand / want flat, fixed, predictable prices. This is why ISPs charge $19.95/month for dialup rather than $.05 / hr. Of course, at some level the ISPs price for dialup is proportional to actual use, but they've figured out that, on average, they can make money at a $19.95 flat fee, and customers are willing to pay it. Of course, customers who use less are subsidizing the service of customers who use more. But as long as the *average* cost remains low enough that the low-usage customers feel they are paying a fair price, it works out.

Server bandwidth is a case where it doesn't work out. The amount of bandwidth that a single static web server is capable of consuming is quite stunning, and goes up along with Moore's law. Many hosting customers choose a dedicated server not because they need gallons of bandwidth, but because they have some sort of custom app or want full administrative control of their system. These folks aren't willing to pay a price that would cover the "average" cost of bandwidth across all an ISPs customers, which may include large streaming media systems or pr0n hosters. So the ISP meters / measures the bandwidth and charges each customer appropriately.

However, it's a bit more complicated than that. You'll notice that, if a customer buys a lot of bandwidth, they pay a lot less per GB than a small customer. The smallest customers may pay ridiculous prices for bandwidth if they exceed their plan (case in point the Farked "boobies" page that racked up $400 in bandwidth charges in two days). It's obvious that SPs are charging much more than their "costs" for the bandwidth in these cases, and you'll notice that the same thing is true for cell phone plans, etc... What's going on?

The answer is that it's all about predictability. A service provider must maintain adequate capacity for providing service. If they don't have enough upstream bandwidth, service quality for their entire user population goes down the toilet. It takes a long time to add additional capacity- new fiber needs to be run, new equipment purchased, etc... As a result, service providers are always buying new capacity in advance of demand, and to do this accurately they must be able to forecast demand. This boils down to getting accurate forecasts from their customers, which is impossible to do directly. Instead, as capitalists, they put economic incentives in place to motivate customers to predict their maximum demand accurately by pricing in tiers, or packages. Buy buying a particular bandwidth package (say, 20GB/month) you are effectively telling the provider that's how much you are planning to use, and they plan their capacity accordingly. Deviating from their master capacity plan is very, very costly for the service provider, and accordingly, the "right" to deviate from your plan as a customer is proportionally more expensive.

Another way to look at it. Customers who buy the smallest bandwidth package are the least "valuable" to the company because they are making no revenue commitments. They are also the most easily able to double, triple, or quadruple their demand from month to month because their servers are capable of consuming so much more bandwidth than they are buying. On the other hand, a large, multi-server customer is a more valuable customer, and is likely to be using a larger portion of the available capacity of their servers, and thus less likely to have wild changes in the amount of bandwidth they consume. The small customer thus pays much more per GB of bandwidth than the large customer, especially if they exceed their plan. In a lot of ways it's like the airline industry or any other industry where buying additional capacity is expensive and/or time consuming: you pay a premium for being able to use that capacity on short-notice.

Well, that's more than you probably ever wanted to know. Hope it's been educational.

-R

Economies of scale

[DABANSHEE]

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.

ISP rates demystified

[puzzled]

I run a small wireless ISP that covers a five county area, three of them in a 700k population urban area, two rural counties that border the city.

A single T1 from a reputeable provider (Sprint, UUNet, AT&T on good days) still costs around $1,000 in this part of the country. You can get slightly cheaper T1s from [IC]LECs ($800 or so) but if you later multihome with a tier 1 provider you'll end up lopsided. If you grow enough to need a significant fraction of a DS3 your cost per T1 equivalent can drop from the $1,000 mark to about $500.

I've posted this little equation a number of times before and I don't think its worn out yet.

one 256k full time music/movie trader == 4 channels on a T1 == (4 channels/24 total channels) * $1,000 ~= $160/mo cost to an ISP, dropping to $80/mo if they're a big ISP.

In addition to circuit costs I pay antenna site leases for building roofs, towers, and the like. I've got a small office and the debt on the equipment used in the network.

Unlike various venture capital created wireless beasts flopping around in my market, my company is 'organic' - it has financing (money used to buy equipment) but no funding (money used for operations). My partners and I all have other sources of income (consulting, equipment sales, very tolerant spouses, etc) and we won't draw paychecks until we've got the recurring revenue to support that.

We face one other wireless player in our space with a first generation bridged only network and a not so good reputation (I love you guys! Don't change a thing!). We also face a large, agressive cable company turned CLEC, DSL is widely available from the ILEC and another CLEC, and the ILEC has a fairly useable, cheap ISDN offering.

At the entry level for business we get between $75 and $130 for a connection up to 768k. We charge $250 per megabit with the assumption that anyone using that sort of speed is going to have VPN apps on the connection and they'll require additional hand holding.

In addition to the business customers we have one of the rural counties that is actively producing residential customers @ $29.95 monthly. I wouldn't miss them if they all dropped dead tomorrow, since they're mostly those that wore out their welcome at their local DSL provider and now they're Kazaaing up my network.

T1s are full duplex. Did you know this? DSL/cable users are amazed when they learn this fact. I like to explain it to them on a phone call rather than in person, so I can interrupt them while they're telling me a T1 can't be 1.5 mbit symetric. Think about it :-)

So, I've got N T1s x 1.5 mbits of inflow and the same amount of outflow. The business customers use bandwidth from about 0700 - 1700, the residential customers from about 1500 when kids get home from school till about 2400 - basically two completely separate markets I can serve with the same inflow bandwidth. The ratio of inflow to outflow is about 5:1 with 'normal' customers.

The Kazaa thieves upset this 5:1 rule of thumb greatly and should really be counted as a wholesale symetric customer and charged accordingly. The CEO won't approve this charge plan, so I'm approaching it BOFH style, and anyone running Kazaa or similar services has just volunteered to be a victim^h^h^h^h^h^h subject in my various QoS experiments.

How did we decide how much to charge?

You need to understand that while I have an in depth understanding of what people are doing with the IP network I manage I *don't care* what they're doing, so long as they're not annoying the others trying to use it, or doing stuff that will get various three letter government agencies serving subpoenas to my office.

I happen to like playing with IP networks which makes being CTO a pretty fun job, but we could just as well have a warehouse full of various widgets that we buy for $2 and sell for $3 - its just an investment.

All networks built with more equipment than you can carry in one large RubberMaid(tm) storage container are investments. They depreciate a certain amount monthly, they have various expenses involved in operation including the next tier ISP cost, and hopefully, if you're doing things right, you're ending up with more $$$ on the 31st of December than you had January 1 of the same year.

So, there you have it. Its a *business*. Take a business class if this is all fuzzy to you, or better yet just start an ISP on your own and we'll see how long you think sharing MP3s and movies via the internet is a 'right'.

No, it's Terribly Complicated, in Total Free-Fall

[billstewart]

For big ISPs, it's *terribly* complicated, because supply and demand are related to marginal costs, and to fixed costs, and to prices charged by the competition, and to equipment amortization, and all of these things are getting yanked around rapidly by technology change; the only people who have a clue are the small ISPs who have to buy most of their services from other people, but even they can keep haggling down their prices a bit. There are people out there charging ~$50/Mbps for bandwidth, and doing peering for free, and charging $500/Mbps for bandwidth, and that's just in the US - once you start crossing oceans, or national boundaries, it gets far weirder, except in places that haven't liberalized their telecom and have oppressive stupid PTTs who can tell their customers what they have to pay.

Colocation centers and Dense Wavelength Division Multiplexing are to blame for most of this, along with Moore's Law making computers (and therefore routers) cheaper. A decade ago, it cost a lot of money to put fiber in the ground, and the fiber had a fixed capacity (typically 1.7gbps), and you could get some economies of scale by putting a bundle of fibers in the same trench, since the cost of the fiber was much less than the right-of-way or installation cost. DWDM lets you run many wavelengths on the same fiber. In ~1996, this meant 8 wavelengths of 2.4Gbps; today it's 80-160 wavelengths of 10 Gbps. Adding more capacity still costs you money, because you need to add repeaters in the middle and expensive electronics at the edges, but the costs of those keep dropping and repeater distances keep growing, so it makes sense to buy the edge equipment you need now and upgrade later when you need it, since the prices of the hardware are diving fast. The marginal costs on a backbone fiber aren't zero, but they're pretty close.

Colocation centers also change the economics radically, because they can buy a small number of fat pipes, which have much lower price per bit than skinny pipes, avoid paying the telcos much for access lines, because they can be located near big ISPs, can support thousands of machines in the same location, and to the extent that their customers are sending bits to each other instead of the outside world, can provide lots of bandwidth on very cheap LANs inside their buildings instead of to an ISP who charges them money. Before Exodus fell apart, there was a huge ecosystem of providers who sold services to each other inside their colo spaces, and some of the other hosting providers did that also.

A related business is carrier-neutral colo centers like Equinix or the Seattle Westin Building or LA's 1 Wilshire, which convince a bunch of telecom and ISP carriers to build connections into their buildings, rather than selling to hosting users, which lets the carriers connect to each other using cheap interconnects. So a big ISP would buy an OC48 pipe into the building from an access provider, buy a rack to put their routers on, and then use Gigabit Ether to connect to the other ISPs. Also, they can put a telco fiber into the center, so if a small customer wants a T1 to one of the carriers, they can just add the circuit onto the fiber. But how do you price bandwidth in this environment? For the colo company, it's easy; they're selling real estate and charging a flat fee for fiber patch panel connections (how they make money doing that is a different question, but at least they know their costs, so they can do prices that aren't artificial.) But for the carriers, is there any reason to run a peering connection at 100 Mbps vs. 1Gbps? Not really; their router hardware costs a bit more, but it's still a drop in the bucket.

Then there's Dark Fiber access and Dim Fiber access. It's not as common as George Gilder predicted, but there are places where it's available. The basic model is that the access provider isn't messing with routers or switches; they're acting more like a construction company, installing fiber and renting right-of-way (or conduit space) and letting the customer light it up themselves at whatever bandwidth they feel like. Sometimes this is a hybrid business - a provider might have a big lit ring around San Francisco Bay and sell wavelengths on the ring connecting to dark fiber on the last mile, or alternatively they'd have a big bundle of hundreds of fibers around the Bay and do patch panels. Some of that is technology dependent, because of distance limitations for different speeds, and therefore it's also influenced by geography - anything inside Manhattan doesn't need a a repeater, or from Manhattan to nearby parts of New Jersey where the real estate's a bit cheaper and there's less backhoe risk, but some distances in the San Francisco Bay Area are a bit too far for repeaterless operation at some speeds, and Los Angeles is really huge. Also, while fiber technology used to be just for long-haul telecom or lower-cost LANs, the Storage Area Network people have recently developed technologies like Fibre Channel for connecting disk drives to CPUs at 20km distances - there are starting to be a lot of banks and brokerages in Manhattan that have disk farms in New Jersey colo centers, and instead of their mainframes being all in the same building as the traders, they may be spread out geographically, often with primary capacity in one location and backup in another.