posted on December 21, 2011 11:19
The Internet continues to grow very fast causing network operators to complain that flat rate; all-you-can-eat charging models are no longer appropriate. Many commentators assume it is inevitable that volume of data will have to be used as a basis for charging consumers extra. The theory is that broadband is the same as other utilities. Just as utilities all base their charges on consumption of the units delivered (water, electricity and gas) then so should broadband.
But there is a big problem with this comparison.
Those other utilities have two costs. They have the cost of building out the distribution network that delivers the gas, water or electricity. In this regard they are like a network operator.
They also, however, have the cost of producing the water, gas or electricity – completely unlike a network operator. It’s not that there isn’t a cost of production of network bytes. It’s that the cost of the production of those bytes is borne by someone else – the content originator. Google, Microsoft, Yahoo, Netflix and everyone else that produces the content have massive server farms that “create” the bytes.
There is also a more direct correlation between the number of bytes consumed and the cost to the content originators. As more bytes need to be produced more servers need to be purchased. The servers take up more space and need more power to run.
So, traditional utilities bear both the fixed cost of delivery and the variable cost of production for the units that are delivered. A network operator and a content originator share those costs. The network operator bears the somewhat fixed cost of delivery. The content originator bears the more variable cost of production.
There is another big difference between a traditional utility and a network operator – the rate of change in their costs. The delivery portion of a traditional utility actually increases over time because the equipment (pipes, cables etc.) costs increase as raw materials get more expensive. Manpower costs associated with construction are also increasing. The same is true for the cost of producing the units. The long-term trend for production of gas, electricity and water (mostly driven by increasing environmental regulations) is increasing.
But for both the network operator and the content originator the costs are falling – and falling fast. Moore’s, Kryder’s and Butter’s laws apply to all of the equipment cost elements. They all show a massive and continuing unit cost improvement. While this is partially offset by the increasing unit cost of manpower the overall cost is still trending down.
So where does all this leave us?
In part 1 I suggested that network operator’s costs are not driven by data volume. The number of customers that are trying to use the service during the busy hour drives their costs.
In part 2 I have suggested that the total cost of delivering consumers the data they request is shared between the network operator and the content originator. And both the network operator’s and the content originator’s unit costs are falling very fast, and very predictably.
I believe that this sharing of cost is appropriate and should continue as both parties have revenue streams arising from what they do. It is also logical that content originators should have more of a unit based revenue stream (pay per view, per click, per ad). And that network operators should have more of a fixed fee per-consumer business model (pay per access pipe, differentiated by speed).
But, while the network use is growing extremely fast, as measured by bandwidth consumption during the busy hour(s), maybe the appropriate additional charge for a network operator to levy on its customer is use during the busy hour. If a higher percentage of their customer’s use occurs during the busy hour(s) then they should expect to pay more than people who only use the network when there is lots of unused bandwidth. Or if you want high speed during the busy hour(s) you pay a premium. If you don’t need high speed during the busy hour(s) you pay less.
 Note; I am only discussing the cost of delivering bytes here. I am not considering the cost of producing any content.