Breakdown of Bandwidth Costs? 246
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)?
Cable ships (Score:4, Interesting)
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.
Peering agreements, etc. (Score:5, Interesting)
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:Disincentive? (Score:2, Interesting)
However, the cost probably adds up when you need mission critical servers requiring connections to several backbones. Now, you need to take into account several links to several service providers as well as the extra hardware, etc. I think that's the reason why brand-name colocation/hosting bandwidth is so much more expensive as compared to, say, getting a quote for a T1 to your basement.
Ok here is my question.... (Score:4, Interesting)
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.
How much of bandwidth cost is artificial ? (Score:2, Interesting)
One thing that really sticks in my mind is that 5 years ago Pacific Bell was laying fiberoptic cable in my neighborhood (San Jose, California, USA). Right before they were about to deploy some kind of gigabit network of the future SBC bought them out and put a stop to it. Later they even had the fiber dug out, maybe to make sure that no one used it. What could the reason for this have really been ? I can't come up with anything except that they didn't want to give consumers too good a break too fast, they were hung up on 1980's penny-per-pixel pricing schemes, and that businesses paying thousands per month for T1 might want a break too.
Another thing thats bugged me for years is what the bandwidth situation would be if Al Gore hadn't privatized the internet around 1996 in exchange for a couple hundred thousand in contributions to the DNC by MCI and others. Wouldn't the current bandwidth scenario be more like the Information Highway and less like the Information Tollroad ?
Why it increases per byte... (Score:5, Interesting)
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
Re:Because they are "price searchers" (Score:3, Interesting)
ISPs are probably what can be termed "price searchers."
That may (or may not) be true of top tier providers (roughly, those who are big enough to have quid pro quo peering on the backbone). For most others, there is a cost they will incur for the bandwidth and they must pass it on.
Getting to the question, the cost of bandwidth is a combination of the upstream bandwidth charges, infrastructure such as racks, air conditioning, backup power, cardlocks, security cameras, switches and routers. More bandwidth consumed by a customer means needing more (or bigger) switches and more upstream bandwidth. More servers means more space, air conditioning, and power.
Then there are the costs for manpower to maintain that hardware and deal with customer support. If you want reliability, you'll face more costs for a border router, an ASN, a block (or blocks) of IP addresses, and multiple upstream providers. You also end up paying more to have techs manning the NOC 24/7 and others on-call should a situation arise.
All of this is all the more expensive because customers demand 5 9's even if they don't need it.
As for people who provide the long haul connections, they face costs for right of way and repair (such as when idiots see the call before digging signs and dig up and cut the fibre anyway).
Having worked for an ISP... (Score:2, Interesting)
To the seller or the buyer?
To the seller, assuming they are somewhere below the carrier grade level, their cost for the bandwidth itself is whatever they are paying the carrier(s) that they are renting their own bandwidth from. Of course, then you have to add in all the costs that come with doing something useful with that bandwidth - equipment, employees, et cetra.
To the buyer..it depends on the selling organization. In some places, Marketing gets to determine the cost, based on the current market value. This often leads to doom because hey, if they knew how to do math, they probably wouldn't have ended up in Marketing where everyone sits around and looks at shiny things. In other organizations, Engineering and Provisioning (or other Operational groups) determine the actual cost to the company, then they let either Sales or Marketing tack on a little more for overhead/profit. Depends on which departments in a company have power.
Yes, I realize that seems ludicrous, but that's generally how it works. People are people, and all that. I worked at a company where I gradually watched a shift in the balance of pricing power over a few years from Marketing/Sales to Engineering/Ops, and let me tell you, it's a fascinating thing to watch.
Sevice verses tangible goods (Score:5, Interesting)
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:
Telecosm - Recommened Reading (Score:2, Interesting)
Re:Not So Complicated (Score:3, Interesting)
I regularly see DS3 quotes for $3k/month, I remember when it was more like $30k/month, and before that it was just nuts.
But last-mile is still a problem. I recently priced out a DS3 network to 180 locations in the US. The biggest cost was last-mile connectivity.
Does "law" of supply and demand really apply? (Score:3, Interesting)
Oil is a little different than bandwidth in that it is a very tangible good. You get mechanical devices to pump the stuff out of the ground, pipe it down to a ship, get it to an oil refinery, and distribute the stuff. OPEC may be able to influence the market somewhat, but when capital is tied very closely to physical product, the laws of supply and demand become harder to control and manipulate.
But look at what happens when you try to apply the law of supply and demand to a much more intangible good like electricity. Electrons can very easily be "hidden" and then magically reappear practically at the flip of a few powerline circuits. It instantaneously can be shuttled over great distances from one place to another at little or no cost. And this makes it a market ripe for manipulation and scamming a la Enron. They took OPEC one step further by creating an entire artificial markets to sell electricity.
Enron was also about to create an artificial market for Internet bandwidth. Just like electricity, you can play a lot of games with the "supply" of bandwidth and play a lot of bullshit games with the actual cost of the good. I definitely don't trust corporations to set the price of bandwidth.
It's extrememly difficult to place a cost on bandwidth especially when the corporations that control bandwidth have their fingers in many different other communication services. Basically, companies will charge whatever they can get away with, the "true" cost of bandwidth be damned.
And that's precisely the problem. When utility company's first started out, they were entirely unregulated and they were the only game in town. They charged whatever they could get away with until government stepped in and allowed them to charge just enough but still make a handsome profit.
The Internet is not much different. Though we have more than one ISP to choose from, there are only a small group of players who control access to the Internet's backbone. It wouldn't be much of a trick for them to fix bandwidth prices and make a killing.
So to answer the question "what are the true costs of bandwidth", I'd say, "However much gouging the average consumer can accept. The public be damned."
Re:Does "law" of supply and demand really apply? (Score:5, Interesting)
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 (Score:3, Interesting)
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?"
The original poster refered to a "rate increase" scenario, such as being slashdotted (though this is almost never the condition seen; more often, it's things like abusive P2P, sustained large-pipe VPN connections to another network, or nonstop downloads of DVDs, MP3s, videos, etc.)
Contrary to common net paranoia, most ISPs don't go chasing after bandwidth abusers unless they really are a problem. Network "policemen" are an expensive distraction from the primary focus of our business, so they don't usually send the heat out unless someone's really out of control.
So per "passing along expense" vs. "marking things up," I wish!!! By the time a customer has been notified of bandwidth or AUP abuse, they've not only consumed much more resource than they've paid for (which typically won't be paid back, even if a rate increase is applied to the subscriber), but they've incurred a hefty administrative expense.
Take your typical
How much of the total costs are tied to infrastructure versus the human component (technicians, sysadmins, technical support and so forth)?
Very good question to raise. In our network, bandwidth costs are only #3 - they follow payroll (people cost) and network infrastructure capital costs (e.g. routers, buildings, towers, switches, servers).
When you're down to a per Mbps/month cost of less than $350 (for both upstream egress to tier one networks and ingress from your customer), bandwidth abusers still can cost you a bit of money (chewing up a sustained 1 Mbps/month while paying $30-$40 for residential service), but the people cost associated with dealing with the abuse is more significant.
So what's the best way to deal with this? Information retrieval charging [www.thur.de]
Actually, I'd expect more and more providers to pursue a tighter bandwidth model (down from the ~3 Mbps unlimited of early cable modem years) with bandwidth caps being more common. Understand that by making 95% of the customers overjoyed, and either making the 5% bandwidth hogs pay for their use or go to the competition, it makes service better and lower cost for everyone else.
And a final thought: We've seen threads on
*scoove*
Re:Does "law" of supply and demand really apply? (Score:3, Interesting)
But when you are buying and selling intangible goods like electricity and bandwidth on the open market, it becomes extremely easy to manipulate the laws of supply and demand. Do you think it's really possible for UUNet, Sprint, and AT&T to precisely calculate the cost of transmitting a MB from point A to point B through their vast communication networks? It's an impossible task and subject to a lot of bullshit accounting procedures. There's no law of supply and demand being followed by these bandwidth cartels. And they certainly don't have to worry about setting the price to high. What are you going to do, start laying wire for your own personal Internet?
A Little More Complicated (Score:3, Interesting)
Perhaps this is how it works for a colocated customer. But for most end users (buisiness and residential), the majority of the monthly cost goes to the line charges from the phone company and other infrastructure costs. There isn't really that high of a markup, at least for us, on the cost of, say, a T1. Not once you add in the cost of our DS-3's/OC-3. Then we have to pay for OUR upstream connection.
They couldn't charge users a fixed-flat-monthly fee because then one (or a few) users could take up all the bandwith (terabytes of data) for a flat fee, thus bringing the ISPs servers to a halt. The pay-per-bandwidth model secures the ISP a fixed amount of revenue as long as it has demand, and it does.
Again, maybe in a colocated situation, but ISPs could NEVER charge a one time fee unless that fee covered the estimated line charges for the length of the contract. Really, "bandwidth" doesn't cost anything. The only real cost is the infraastructure. And then there is a markup (like with any product or service) so that the ISP can make some money. Actual bandwidth used is only factored in to make the people who use the infrastructure more pay more to offset cost of maintaining things. Usually its not factored in at all, at least for us, since the majority of our cost is in delivering the physical connection.
To answer the original question, for us, as a T1 reseller, the majority of the cost is line charges from the phone company. Thats the cost of the loop and a fraction of the cost of our OC-3. Then we markup maybe 30% to pay for our upstream connection (which may be broken down differently) and to pay for administrative costs. We don't make a whole lot of money in the end. Really just enough to stay in business.
-matthew
Traffic aggregation Vs. Quality of Service (Qos) (Score:2, Interesting)
Since many users are dynamically using bandwidth the ISP benefits from the fact that their peak usage is uncorrelated in time (lets stay from fractality for simplicities sake). Thus burstiness leads to what is called "statistical multiplexing" which actually offers powerful economic advantage.
Thus traffic aggregation is a key design feature of todays internet.
Every user has a peak-bandwidth usage (P) during ON phase. This is interleaved by long periods of silence, or OFF phase. Understandably the average-bandwidth (A) of each user is much less than peak usage, or A is less than P.
When ISP provisions his network what should he consider? A or P?
If he commits to P then he will always be in a position to fullfil the user demand whenever it may happen. User gets QoS but ISP gets shafted as the network will be most of the time underutilized.
If he commits to A then each transfer would be spread out in time, and each user would feel the that service is unsatifactory. But the ISP benefits from the fact that he can have "more" customers as compared to the earlier case.
Example (units ignored)
P = 20
A = 10
Bandwidth = 100
ISP committing P will have 100/20 = 5 customers
ISP committing A will have 100/10 = 10 customers
Now i did mention that users would feel that "service is unsatisfactory". It is due to the fact that more that 85% of internet traffic is TCP and is elastic in nature which roughly means that each additional user of the bandwidth will result in decreased available bandwidth to every other user using it.
Theoratically there is an optimal point, or a certain number of users, upto which aggregation is desirable. Under this point, aggregation is small but QoS is high. Beyond this point the aggregation is high but the users begin to feel the impact in shape of degraded QoS.
Congestion pricing is one of the ways of moving the number-of-users to that optimal operating point.
Re:Peering agreements, etc. (Score:4, Interesting)
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*
Economies of scale (Score:5, Interesting)
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.
Re:When it comes to a Slashdotting... (Score:5, Interesting)
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. :)
Re:How much of bandwidth cost is artificial ? (Score:2, Interesting)
This is key: unexpected load increase (Score:3, Interesting)
When they run out of gas, everything goes into panic mode. People work overtime. Unexpected capital expenditures are made (new routers, new servers, new DASD, etc.). Surcharges are tacked on from upstream vendors.
All those costs add up, and because they're unexpected, they're painful. So to an extent, the surcharge that WE receive is to discourage us from whacking the pipes too often; or, if we need it, to arrange for the capacity in advance. So if the higher costs seem disproportionate, it's because they're supposed to be. Enough of these events can drive a smaller provider out of business.
JMO
You pay for taking up the redundant bandwidth... (Score:3, Interesting)
So. The ISP has 3 DS3s, but it's customer base only uses about 30 mbit of all that bandwidth on average. It probably wouldn't be fair to charge all the customers the same for their usage, because #1, there are quite a few customers that are never going to pass much traffic, and #2, if you did that, your prices would not be competitive, and you wouldn't get many customers..
Solution: the customers that DO take up more than average bandwidth get to bear the burden of helping to pay for that extra bandwidth. While Joe and Jim have colocated servers that stay right around 500kbits per second average, but Bob has a colocated server that jumps up to 10 megabit for a few days, it makes sense to get Bob to pay a higher charge for the bandwidth the ISP makes available for instances such as that. Also, as more and more customers start to take up more and more bandwidth, they're also going to be paying for the costs of adding bandwidth as it's needed. New routers, new cabling and the manpower needed for such an event, not to mention the costs of the new DS3 or OC3 or whatever are probably quite a hit at startup, financially.
If the ISP didn't have the extra bandwidth available, when something did happen, customers would get very upset about the bog down that would inevitably happen. Upset customers = losing money..
You're all to analytical (Score:3, Interesting)
It all comes down to the cost of a pizza. In 1982, Judge Green Ruled on the Modified Final Judgment (MFJ), also known as the ruling that broke up the Bell Telephone Company into RBOCs. Anyway, part of the judgment was that residential users shouldn't pay more a month than the cost of a medium, one topping pizza. Its a true story. In order to do that, the commercial customer have to pick up part of the tab. That's done through connection charges. AT&T charges your RBOC for every minute that they use their lines, your RBOC turns around and charges ISP's.
With a mess of calculations, statistics, and QOS numbers it can be calculated that if you use 3 MB a month instead of 1 MB then the RBOC will incurred an increased fee from AT&T. They pass that along to the ISP. However, this will all change when Qwest gets authorization to do inter-LATA calls. They can go around AT&T and connect directly and not incurred the connection charge.
Expect big changes in the near future.
Peering vs. Transit, Tier1s and 7x24 techs (Score:3, Interesting)
On Peering and Transit - There are several different sets of definitions depending on technical subtleties, but the fundamental difference is that transit costs money, while peering is "free", but has restrictions on what you can do. In the transit model, Carrier A provides services that Customer B wants, so B pays A for them, and A transports B's packets anywhere that B wants; any restrictions are of the form "your pipe is this big" or "if you send more than X GB/month, it costs extra".
Peering is a connection between two carriers that both think that they get roughly equal value from connecting to each other, so they do some allocation of the costs of connecting their networks, don't charge each other for carrying the packets, and do some monitoring and limitation to make sure they really are getting roughly equal value. A traditional peering arrangement would be that Carrier A and Carrier B are North-America-wide carriers, and they put big "peering point" connections on the East and West Coasts, and A hands any traffic for B's customers to B at the nearest peering point and vice versa. Sometimes the peering points were "private peering", where they build a direct connection, but for smaller peering, they might just both buy pipes into MAE-West and MAE-East. The subtleties are typically about traffic to destinations other than A and B's direct customers. If A has a peering connection to Carrier C, and B doesn't, typical peering policies don't let B use its peering connections with A to reach C; it either has to peer with C, or buy transit from A or C or D to get there. (This is more common for US Tier 1 ISPs than for smaller ISPs or non-US peering points.) Also, there's typically a traffic ratio like 2:1 that defines whether the players are getting equal value from each other or not.
It's not always that simple technically, and there's often politics involved. Consider a dial ISP and a hosting center. The traffic may be very asymmetric, say 10:1 from the hosting center to the dial ISP, but it may be worthwhile for both of them to peer with each other rather than buying transit from somebody else. The dial ISP gets to offer its customers more content value, and the hosting center gets to offer its customers more eyeballs. Assuming they're near enough to each other for the peering infrastructure to be cheap, it's a win for everybody, right? But if the dial ISP is AOL and the hosting center is Joe's Garage, Joe will probably have to pay AOL for the privilege, while if the dial ISP is Joe's Garage and the hosting center is Exodus or Abovenet, Joe will probably also have to pay. During the boom, of course, the problem was often resolved by one side buying the other for stock, causing the market to overvalue the combined stock even more :-) Other examples of politics - for many private interconnection arrangements, especially in the past, the terms were often secret, because one side didn't want to admit that it had to pay somebody else to carry some of their traffic instead of using their own backbone, or one of the big carriers didn't want to admit that it *wasn't* charging money to a medium-sized ISP because being a "peer" with somebody small makes it look like you're not the 800-pound gorilla, plus it makes other medium-sized carriers think that maybe they can peer with you for free instead of paying you.
One other common definition of "peering" is "using BGP to connect to each other", which is a description of the technology rather than the cash flow. The Border Gateway Protocol is a routing protocol that's used to exchange information about who connects to what networks, and it's the main way that big ISPs talk to each other. However, it's also used for customer-to-ISP connections even if you're just buying transit, usually for customers who are buying service from two ISPs for reliability reasons. BGP is an amazingly complex protocol with a dozen or so different knobs to tweak to give you very fine-grained control over complex routing situations and different kinds of load-balancing, but if you're not a Tier 1 ISP, the amount you actually need to do to use it effectively is pretty minimal. In the past, BGP only worked on really big routers, but these days you can use even a Cisco 2600 unless you need to get full Internet routes (which burn too much memory), and you can also get Linux Zebra routers to do BGP.
You're totally wrong on Monopolies. (Score:3, Interesting)
Economies of scale are important, but that doesn't mean that governments have any real advantages. They buy hardware from the same commercial vendors. They can try to hire employees from the same pools of very smart technical people and the same pools of not-so-smart grunt-workers that the free market hires from, but they've typically got much more restrictive internal rules on wages and benefits. They do have some artificial advantages - they don't have to pay taxes, unlike businesses in most countries, and they don't have to put up with clueless business regulators, but they've got the artificial disadvantage that clueless government policymakers have an easier time pushing them around.
The one real advantage they have is ability to get right-of-way, because any place that has government-run telcos has government-run highways, so negotiations for burying cable along or across highways are much much easier for them than for commercial businesses. (That's a real sore point in the San Francisco Bay Area :-) Similarly, restrictions on above-ground cables are something that commercial telcos often have to put up with that government telcos don't. Also, if the railroads are government-run, it's easier for government telcos to negotiate with them than for free-market telcos, but if the railroads are privately owned, they're on a more equal footing. Similarly for running telco along power-line routes, but that's a relatively new issue because high-speed copper-based telecom and high-voltage power don't always get along, unlike low-speed telecom and low-voltage copper.
Well-regulated private monopolies aren't much better than government-run telcos - at least in the US, they typically got to make a fixed percentage profit, so they did have incentives to grow their markets by providing better and somewhat cheaper services, and to use internal cost accounting mechanisms that let the pricing be somewhat related to the costs, and when there were social agendas like making business customers pay more to subsidize residential customers, at least they knew the actual costs that they were subsidizing. But they were still big and stupid. And they got to hire some of the best engineers and scientists in the world (shameless plug here :-) because they had more incentive to develop and deploy technology than most of the PTT-dominated telcos (with a few possible exceptions, but not most of them.)
The big advantage that competitive telecom companies over monopolies (government or not) is that having a market with competitors forces them to innovate, and to understand what their customers want, and to evaluate whether their value-for-money tradeoffs make sense compared to what the competition is offering. Most monopolies simply don't have real feedback, and many of them depend on technological innovation from other countries rather than doing their own.
The other big advantage that government telcos have over non-government telcos of all types, which they totally failed to take advantage of until cellphones gave them the technology, is the ability to use radio spectrum to build rural communications. They could have done it decades earlier, because fixed-wireless is a much simpler problem than moving-wireless, but they didn't. In the US, the radio spectrum was effectively the oligopoly of broadcasters, with exceptions like amateur radio (which had anti-free-speech provisions to prevent business use of radio) and eventually CB, and the phone companies didn't have enough incentive to develop it to make it worth getting the FCC to let them have the spectrum space. But in lots of other countries, it's different - radio-based telephony would have made sense, and with the government running the phone companies, they should have been able to get permission to use the spectrum without a problem.
Disclaimer: I work for a company that used to be a regulated monopoly, and is now partially regulated, though mostly unregulated. But these opinions are mine, not theirs.