More Sidgemore on per-bit pricing (fwd)

Mon Dec 7 21:27:04 UTC 1998

pushp at CERF.NET said:
>
(rather elegant piece of text removed)
>
> Why does then paying for many "information appliances" that  tap into
> an "IP service pipe" in a similar fashion seem so outlandish ? 

I don't disagree with much of what you have written, but playing
devil's advocate I think it *seems* outlandish to some because:

1. Ostrich-with-head-in-sand change-resistance is rife.

2. From a superficial point of view, it seems that the costs are not
   usage sensitive. Tier 1 (whatever that mean) backbone's are building
   network as fast as they can get OC-12s deployed / hire engineering staff
   etc.; The planning process itself for (say) taking an OC-3 network to
   an OC-12 network is not a short one, let alone the deployment. If you
   have a small number of high bandwidth customers connected to one POP,
   your costs of connecting a few customers who are guaranteed (by SLA) to
   be able to get an DS-3 if they want it, but are billed at a rate of
   (say) a few Mb/s, is the same(*) cost as connecting customers billed
   for a flat rate DS-3. (*)=OK it may not be the same as usage based charging
   may well give you a higher port speed contention ratio, but the point
   here is with port speeds which are significant compared to backhaul speed,
   there is a significant risk cost in not deploying sufficient backhaul to
   cope with customer usage growth you can't predict due to not having a
   large enough statistical sample to work with. If you sell at flat rate,
   you can refuse or delay upgrades which would otherwise impare QoS to other
   customers.

   If you think about this in the context of any other good, so called
   usage tariffing is actually a relatively simple derivative product. If
   you are buying coal for a power station, you won't get a contract (or
   not at a decent price), where you can have however much coal you can
   physically get in trucks down the road at guaranteed price X, but you
   can instead order none at all. Instead, you might commit to buying
   Y amount of coal a month at price P per ton, have an option on amount Z
   more per month at price Q per ton (where P<Q). In a traditional market
   if you didn't misplanned, and didn't want X amount after all, you'd
   either have to store it (and incur costs), return it (and incur costs)
   or return it to the market at a possibly lower price (hence arbitrage).

   The situation is *not* entirely similar to electricity. If electricity
   was charged the way some providers charge per bit, I could order a power
   line and normally be charged for 300W of continuous consumption with
   no fixed charge. Then suddenly one day I could plug in a steelworks
   with no prior warning, eat many megawatts, and expect the same supply to
   work. If electricity was installed like this, you would have a huge
   fixed cost per month. If there were only a few homes per smaller
   substation, the fixed cost would be even greater (risk).

   However, neither ISPs nor consumers have sufficiently (yet) analysed
   the market to find out how this works. As you point out, every bit sent
   is likely to have a different cost, depending not only on destination,
   but on time of day too (think about the electricity example). If ISPs
   can't work out how to charge eachother per bit for peering arrangements
   (where, how, and to whom one offloads traffic in a peering context has
   substantial cost based implications) how can we expect them to not only
   develop realistic charging schemes for their customers, but also explain
   them to a relatively immature market?

3. Fixed cost charging is popular with customers. Many customers do not
   understand what they are buying. They do not understand the bandwidth (and
   thus cost) implications of (say) changing their web sites. They are
   frightened their bills might be astronomically increased by some
   activity on the line which isn't benefiting them proportionately (i.e.
   DoS attack, rogue employees etc. as opposed to extra web site hits,
   more employees finding useful information from the net, whatever). And
   the customer facing tools to analyse *why* bandwidth usage is what it
   is are, at best, primative. We don't yet have a ready market in programs
   to automatically recompress the .GIFs on your web site as JPEGs
   prior to transmission (or whatever) to save bandwidth costs. When the
   IT people (or whoever) attempt to get budget for their line internally,
   a fixed cost is more easily justified to the relevant bean-counter.
   An open-ended liability (which is what I've heard usage based charging
   referred to as) is unpopular. The people posting to NANOG 'disagreeing'
   with usage based charging are presumably merely voicing their 
dissatisfaction
   with it as a product offering.

4. The market will decide. Trite this may seem, but it's true. There are a
   lot of products which are half way between pure per bit charging and
   pure flat rate (you know this, CERFnet has at least one; I know this,
   I buy them from you :-) ), and these are essentially first hacks at
   a derivative market in bits (the way I see it). But just like derivatives,
   they aren't yet especially comprehensible.

Awaiting cross-US bits to be listed with pork bellies...

-- 
Alex Bligh
GX Networks (formerly Xara Networks)