Thursday, January 27, 2011

Arguments for a cost of 5 cents per GB for usage based billing

In my post yesterday, I argued that I think that usage-based billing (UBB) does make sense, but only if the rate is on the order of 5 cents per GB, and dropping over time. ISPs in Canada are charging 10 to 100 times this, which makes downloading video outrageously expensive.

My argument yesterday was that 5 cents per GB would be sustainable from a consumer's perspective since the cost of downloading a high-definition movie would be limited to be around a dollar (above and beyond the rental/purchase price of course).

Today I will add some additional arguments, both in favor of very cheap per-GB rates, and also in favor of usage based billing at those low rates. I will try to be conservative in my estimates so by arguments will be hard to challenge.

What is the marginal cost of providing an extra GB of download to a consumer? We don't know exactly, and it will vary from neighbourhood to neighbourhood, but we can do some 'back of the envelope' calculations to show that it must be extremely small.

In the worst case, the ISP's lines to the network might be near capacity. In this scenario, the ISP would need to provide an extra line along its existing conduits, with the attendant switching hardware and head-end equipment. These days, 1Gbps lines are typical. What return on investment could an ISP get from such a line at 3 cents per GB (which is less than the 5 cents I talked about earlier to allow for wholesaling and profit)? The total number of GB the line could serve in a month would be 328725. If that entire number of GB were sold, then the revenue would be $9861 per month. In reality, the line will only be used to capacity at peak periods, and it may take years before it reaches capacity even then. So lets imagine it is used on average at 25% capacity over a 10 year lifespan, that gives revenue of $2465 per month. If this was used to pay interest at 5%, then the ISP could afford to pay $232,000 to install the new line. I am certain that in the vast majority of cases, the line would cost less than this.

Today there is a report from Netflix, which suggests that the actual marginal costs would be 1 cent or less for each GB. Of course they have a conflict of interest, so they are likely to argue for a smaller cost. However, it should be clear beyond any doubt that the 50 cents to $5 currently being charged by Canadian ISPs is vastly out of line.

Netflix argues that at one cent per GB, usage-based billing becomes nonsensical. However let's take the ISP's perspective for a minute. If you allow unlimited downloads, some people will decide to download all the free video they can find on the Internet. We can play devil's advocate and imagine an obsessive-compulsive character that finds a way to download video 24 hours per day; at 10GB/h they could consume 7300GB per month; I think it fair that such a download-fiend might be expected to pay the $365 he would be charged at 5 cents per GB. Clearly he would be consuming capacity at a level greater than the ISP's marginal of providing the service.

Let's look at two other cases: The first is the person who entirely replaces their 7h of cable-TV-watching per day, by watching 7h of Internet video per day. They would consume 2120GB per month, and at my rate it would cost them $105. This would be a lot more than the equivalent cost of buying cable TV. However I think the extra cost is justifiable: Cable TV channels broadcast to multiple customers at once so makes much more economical use of the infrastructure. Put that $105 in perspective though, at the current ISP rates our Internet-TV watcher would be paying $1050 to $10500. Obviously excessive. Yet Internet TV served by multiple vendors is clearly the way of the future. Cable/Phone/Internet companies are only protecting their existing duopoly by charging per-GB rates that make this impossible.

The final case is the person who rents three two-hour movies per week, or watches 6 hours of ordinary TV per week. That would take 260GB per month at the good-quality 10GB/h rate I have been using, and would cost them $13. At current ISP rates it would be between $130 and $1300.

There is a lot of backlash in Canada against UBB and the recent CRTC decision forcing independent ISPs, which buy capacity wholesale from the the major operators. to be subjected to the same excessive UBB rates, with only 15% discount. I suggest that the independents should be either able to buy a fixed percentage of total capacity on each line, or else be charged a wholesale UBB rate of something like 3.5 cents per GB.

It is  clear to me that the CRTC made a terrible decision by failing to consider the actual cost of capacity.

3 comments:

  1. Usage based billing is absolutely not the way to go. Currently, ISPs make enough profits to not just sustain their current networks, they are constantly expanding already. Why should consumers pay MORE when ISPs already make enough profit to expand their networks, plus provide hefty sums in terms of bonuses to executives? We're paying for our internet connections and our connection speed. What we do with that connection, and how much we use should not be metered or controlled.

    There is no way that it would cost an ISP anywhere near $30, let alone $100 for someone who downloads 7300 GB of content a month. Your current internet connection fees already pay for more than anything you could consume in a month.

    We are so used to overpaying for what we get, that there are actually people who SUPPORT this kind of crap, and that's what I find sad. Anyone who supports usage based internet billing is someone who I stand against. Whether it be computer based, or cellphone based.

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  2. High Thomson backs up my suggested proce in an article today http://www.theglobeandmail.com/news/technology/gadgets-and-gear/hugh-thompson/what-is-a-fair-price-for-internet-service/article1890596/

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  3. I agree with this proposed price model.
    I think the biggest problem consumers have with UBB is strictly the proposed implementation by major ISPs. I'd be all for UBB at a reasonable markup but 10 to 100 times markup is excessive.

    It's funny that consumers are opposed to UBB for bandwidth but with virtually every other consumer good it's the norm.

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