The Great Exchange

Michael Shields shields at
Thu May 28 03:19:26 UTC 1998

> Michael Shields writes:
> > Why are you assuming that the Internet will continue to have
> > non-distance-sensitive pricing, when it clearly has distance-
> > sensitive costs (ultimately)?
> I'm assuming it for several reasons.
> 1) The price of metering packets by destination exceeds the cost of
> providing the underlying service as it stands. This does not make me
> think that distance sensitive pricing has a bright future.

I don't think I can agree that the cost of metering is unreasonable,
assuming you have the ability to monitor the traffic on your lines to
know what sites are using the bandwidth.  This data is available today
on routers capable of flow-export; I think it will need to be a
standard feature on all major routers in the future, because it is
very valuable data even if not used for implementing a distance-
sensitive pricing model.

What you would need to determine is your cost per GB to each
destination prefix (or from each source prefix) outside your network.
You can do that by determining the cost of each of your backbone and
border links, and the makeup of traffic on them.  This computation
scales with the number of links in your network times the number of
prefixes in the Internet.

I don't think the cost of calculating this would exceed the cost of
providing the underlying service.  It may or may not be "cheap enough".

Please let me know if I'm misunderstanding something.

> 2) Long distance carriers have essentially eliminated distance
> sensitive pricing for domestic U.S. calls, and at the moment the price 
> on such calls is only a hair above the local carrier settlement costs
> of 7 cents per minute (3.5 cents per side.) Cellular carriers are
> getting into the act, eliminating long distance charges for a small
> flat fee. International pricing is also plummeting. None of this leads 
> me to believe that the future for metered PHONE SERVICE is very
> bright, and you're trying to argue that metered internet service has a 
> bright future?

It's one thing to have semi-unmetered service, of which there are
plenty of examples in phone networks -- unlimited local calling, or
unlimited domestic calling.  It's very much another to have fully
unmetered service: free calls of any length to anywhere in the world.
Until I can make a one-hour call from DC to Moscow for the same price,
or even a similar price, as a one-hour call to New York, it's not
equitable that I can ftp for the same price.

> 3) It does not appear that moves towards metered pricing have been
> well recieved by consumers. ISPs are sticking to their current pricing 
> model, although they are often limiting the flat rate zone to
> "reasonable" personal usage levels of a couple hundred hours per
> month.
> In short, I see no economic basis for such metering, and no moves
> towards such metering. Maybe I'm wrong, but I doubt that we're going
> to see any change in this any time soon.

Could be.  I think the economic basis is there; I just don't know if
it's strong enough to overcome customers' love of flat-rate.

As long as usage is mostly homogenous within a price class, there
won't be any incentive for non-flat-rate pricing.  If a substantial
number of users start doing daily large international data exchange,
that may start to hurt.  The question is whether a relatively small
percentage of users account for a significant fraction of the traffic
on the expensive lines.  I don't know the answer but I would not be
surprised to find many customers have much more long-haul traffic than

Probably it will never make market sense to have distance-sensitive
traffic pricing for "low-speed" users, where the cost of providing the
service is mostly the cost of tech support, billing, dialin or xDSL
aggregation, &c., and bandwidth is a small proportion of the cost.
Shields, CrossLink.

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