An Attempt at Economically Rational Pricing: Time Warner Trial

Mailman List Mirror (Read Only)
1

Such caps, if they are high enough, may be a reasonable compromise.
As Mark Newton wrote a few days ago, about Australia,

   The more sensible end of town pays about $80 per month for about
   40 Gbytes of quota, give or take, depending on the ISP. After that
   they get shaped to 64 kbps unless they want to pay more for more
   quota. Bytecounts are retrieved via SNMP (for business customers)
   or Radius (for DSL, dial, ISDN, etc).
    
   When transit is costing $250 per megabit per month, there aren't
   many other options.

Given Australia's level of Internet traffic (see http://www.dtc.umn.edu/mints/),
it seems that only a tiny fraction of the users will hit the 40 Gbytes of quota.

But if your transit costs $10 per megabit per month, other factors may dominate.

I have a discussion of these issues in the paper "Internet pricing
and the history of communications," published in Computer Networks
36 (2001), pp. 493-517, available at

  http://www.dtc.umn.edu/~odlyzko/doc/history.communications1b.pdf

Some of these issues are also dealt in the more recent paper with David
Levinson, "Too expensive to meter: The influence of transaction costs in
transportation and communication," Phil. Trans. Royal Soc. A, to appear,

  http://www.dtc.umn.edu/~odlyzko/doc/metering-expensive.pdf

Overall, telecom policy makers, both inside service providers and in
regulatory bodies, have been fixated on a particular economic model
that denigrates flat rate plans. Now I am not a flat rate bigot,
and understand their limitations. But it seems imperative to appreciate
that there are several other factors that matter, discussed
in the papers mentioned above. One is that people are willing to pay
more for flat rates. Second is that flat rates stimulate usage,
something that I claim telcos should be striging to do, as transmission
capacity is growing. But few people appear willing to learn that lesson.

Andrew

  Simon Leinen wrote:
  > While I think this is basically a sound approach, I'm skeptical that
  > *slightly* lowering prices will be sufficient to convert 80% of the
  > user base from flat to unmetered pricing. Don't underestimate the
  > value that people put on not having to think about their consumption.
  >
  As long as the companies convince people that the "cap" is large enough
  to be essentially the same as unmetered then most people won't care and
  will take the savings. The other angle is to convince the 95% of
  customers that caps will actually deliver them a faster speed as the
  "evil 5%ers" won't be slowing them down by hogging the bandwidth.

  Having a cap and slowing down afterward (64kbps or 128kbps are typical)
  is what worked here in Oz. It also removes a whole lot of credit
  related issues. Consumers get a product where they know what they're
  getting - it's fast upto a point and then it slows down.

2

Hi Andrew,

I don’t think it is obvious that it is too expensive to justify metering in today’s environment. Such a claim was definitely true a few years ago when end users were mostly sending email, instant messages, and downloading web pages, but innovation has probably changed the outcome of the cost/benefit analysis so that metering can be justified for the heavy users.

Regarding stimulating demand, the only obvious way to increase revenues and profits in a flat rate pricing scheme is to add more users or bundle more products (voice, voicemail, television, etc.). I would argue that the US has reached the point where further increases in broadband penetration probably require either subsidies or government fiat or pressure (Korea, Japan, etc.). And the large American underclass doesn’t that help the broadband penetration cause either.

Indeed, the virtue of metering is that it gives the provider an incentive to stimulate demand. Flat rate pricing is the worst model in terms of stimulating supply and investment.

My humble two cents. PS: I’ll take a look at your papers.

Roderick S. Beck
Director of European Sales
Hibernia Atlantic
1, Passage du Chantier, 75012 Paris
http://www.hiberniaatlantic.com
Wireless: 1-212-444-8829.
Landline: 33-1-4346-3209.
French Wireless: 33-6-14-33-48-97.
AOL Messenger: GlobalBandwidth
rod.beck@hiberniaatlantic.com
rodbeck@erols.com
``Unthinking respect for authority is the greatest enemy of truth.’’ Albert Einstein.

3

Hi,

The more sensible end of town pays about $80 per month for about 40 Gbytes of quota, give or take, depending on the ISP. After that they get shaped to 64 kbps unless they want to pay more for more quota.

I replied offlist to Andrew with some ideas, but I have been thinking more about the econometric model of Australian connectivity, and how interesting it is.

When transit is costing $250 per megabit per month, there aren't many other options.

[...]

Having a cap and slowing down afterward (64kbps or 128kbps are typical) is what worked here in Oz.

The grass is always greener of course, but when I think about why ISPs in the UK have to cap fairly aggressively (bear in mind I pay the figure Andrew cited is typical for internet access in AU, and have a smaller quota !), there are aspects of the Australian problem that I am envious of.

Australia has a relatively small population (c. 20m) which would act as a small ceiling for demand, but the vast majority of the population live in relatively close proximity. Density is highest in coastal regions which makes it ideal for fiber landing ! I will trust Andrew's numbers of $80 for a 40GB cap.

The UK has a population of c. 60m, and population density is high (12k people per square mile in London). I'm more likely to pay less than $10/Mbit for global transit. The small country and concentration of POPs in key metropolitan areas makes interconnection cheap. Exchange membership and participation is hugely popular (>600 networks peer in London, 415 peer exclusively in the UK). And yet I pay US$70 to my ISP for residential connectivity and my cap is 30GB. Why is this ? Thanks to the pricing model imposed on last-mile connectivity imposed by the incumbent, it costs an ISP US$471/Mbit to send data to my customer[1]. Maybe the same data that's just come all the way from Oz through my transit for US$10.

It used to be the case that global transit was very expensive wherever deployed in the world. As pricing fell, this fueled innovation and created demand for connectivity at every level - domestic, data centre, enterprise, carrier ... The price of connectivity to Australia is likely to fall, because as the opportunity to sell connectivity increases, so should the number of fibers running to Australia (if we were all in the same room, this is the point that Rod would wave his arms, leap out of his seat, and announce that he's already half the way there and would get there first, so noone else needs to try :slight_smile: ). And as economies way off to the west of the country grow and stabilise, then the options for sea routes to the country will grow.

In the mean time, that $250 figure is a market price. Attempt to modify the market conditions will change the price. But perhaps there are commercial activities that could stimulate demand for consumer IP services - here's some ideas for thought

  - What's my traffic to south Asia and the other apnic regions ? Can I save some money buying *partial* routes from a large player in this region. Or is the problem that actually it's the transport to *anywhere* out of Australia ?
  - Am I peering widely enough ? Should I actually be stuffing a switch under the floor in my employer's suite and letting my buddies plug in ? Peeringdb knows about eight exchanges in a developed economy of 20 million people. We have more than eight in single cities of Europe.
  - So transit pricing sucks. But that's one of my costs as an operator. What's the pricing of a footprint in carrier hotels ? Are there enough carrier hotels ? How much am I paying for power ? If real estate and power is cheap in AU, then shouldn't content network operators in places where power and space is expensive already be planning how to pop up in Australia ?
  - What about local content ? Why is so much traffic leaving the country ? Does someone need to be extremely plucky and offer bargain basement content hosting in the continent ? If AU entrepreneurs are ignoring the online channel for retail and entertainment, then who wants to jump on a plane and turn this situation around with me ? :slight_smile:
  - OK, how about we proxy certain types of content unless our users opt out. Any cache hits don't contribute to their 40GB monthly download. If transit is the problem, then offer financial incentives to your users to help you not pay for it. If you're peering IP, why not start "peering" your top cache hits between providers too ?
  - P2P is probably a problem for AU networks. Contrary to most policy makers, there are services which use p2p as a transport, that don't involve the distribution of copyright material without consent. The next generation services that use p2p as a transport, e.g. Joost, have said to be trying to build proximity awareness into their p2p implementation. Peering widely will help here. As for the file sharers, then (I really, really hate to say it) but can you just make sure you're picking up the seedier parts of usenet binaries over peering instead, and hope people use that ? Sad to think in these terms, but if we're being pragmatic ...

I'd love to hear the opinions of AU operators on these issues, and think that there's lessons for everyone - if AU operators can show us how they deploy more cost effective connectivity products, then there are some regional ISPs in the rest of the world who would also benefit.

Andy

[1] £1,758,693 ($3.5m) PA for a 622Mbit BT Central, (so in bandwidth terms, equates to $471/Mbit per month - if the central is maxxed out) - I posted this to Nanog in October.

4

- What's my traffic to south Asia and the other apnic regions ? Can I save some money buying *partial* routes from a large player in this region. Or is the problem that actually it's the transport to *anywhere* out of Australia ?

The cost is getting out of Oz. Once you get to Japan (Australia Japan Cable) then it's not that expensive (heck cable station to Tokyo is more than cable station to USA).

Currently there are 3 cable systems out of Australia:

Southern Cross Cable (SXC) - 2 legs to the US, one via Fiji, one via NZ.
Australia Japan Cable (AJC) - one leg from Sydney to Guam and onto Tokyo.
SEAMEWE3 (SMW3) - Perth to Singapore (old, and expensive).
PIPE Network is building Sydney to Guam (PPC-1) which will link up with a VSNL Cable to Japan and onto the USA.

There's rumour another cable will be build Perth to Singapore, but it's been that way for years so let's see.

All of these cable systems are charging high rates compared to what you guys are used to across the Atlantic for instance (order of magnitude or more).

- Am I peering widely enough ? Should I actually be stuffing a switch under the floor in my employer's suite and letting my buddies plug in ? Peeringdb knows about eight exchanges in a developed economy of 20 million people. We have more than eight in single cities of Europe.

Peering in Oz is MPLA. This leads to no one worrying about having to be found to form peering relationships, so peeringdb is incomplete at best. I've tried to encourage people to add their data in.

However, domestic peering here is alive and well. We get 2/3 of our domestic capacity from peering. 1/3 from (expensive) transit to the "Gang of Four) who won't peer (Telstra/Optus Singtel/AAPT Telecom NZ/MCI 703). (AS703 will peer sometimes).

Unfortunately the 1/3 transit for domestic is outrageously expensive too. (Well over US$120/mbps in large quantity).

5

and pricing in australia had nothing to do with a monopilist telco with a rapacious plan highly well articulated and sold to the govt by an arch-capitalist with a silver tongue?

randy

6

It used to, but not so much now.

The access tail price is still dominated by Telstra's macinations, but
national SDH capacity is relatively competitive these days, and Telstra
are almost completely uninvolved in transpacific pricing.

Transpacific pricing is more driven by the duopoly effects of AJC and
Southern Cross. Will be interesting to see how PPC-1 shakes the market
up next year. We're looking forward to it.

   - mark

7

Andy Davidson wrote:

- Am I peering widely enough ? Should I actually be stuffing a switch under the floor in my employer's suite and letting my buddies plug in ? Peeringdb knows about eight exchanges in a developed economy of 20 million people. We have more than eight in single cities of Europe.

Peering in Oz is MPLA. This leads to no one worrying about having to be found to form peering relationships, so peeringdb is incomplete at best. I've tried to encourage people to add their data in.

Is it always compulsory ? (I just did some legwork and read the WAIX policies, and it seems to be mandatory here) This surprises me, Multi-lateral peering is great for lots of networks, but really bad for others, and (if forced) probably acts as a barrier to the bigger networks from taking part in any public peering ....

1/3 from (expensive) transit to the "Gang of Four) who won't peer

.... and acts as an incentive to pull out of the agreement as networks grow .. think about what happens when your customers' routes start appearing through your MLP session as well.

I can think of some MLP-only exchanges in Europe, but I can't think of any that do significant traffic.

Andy

8

Andy Davidson wrote:

Andy Davidson wrote:

- Am I peering widely enough ? Should I actually be stuffing a switch under the floor in my employer's suite and letting my buddies plug in ? Peeringdb knows about eight exchanges in a developed economy of 20 million people. We have more than eight in single cities of Europe.

Peering in Oz is MPLA. This leads to no one worrying about having to be found to form peering relationships, so peeringdb is incomplete at best. I've tried to encourage people to add their data in.

Is it always compulsory ?

Yes.

(I just did some legwork and read the WAIX policies, and it seems to be mandatory here) This surprises me, Multi-lateral peering is great for lots of networks, but really bad for others, and (if forced) probably acts as a barrier to the bigger networks from taking part in any public peering ....

Well, there's basically only 5 networks of any size that don't participate (Telstra, Optus Singtel, AAPT TNZ, MCI and SPT (AS9942) who aren't that big).

So, clearly it's not a big issue. What's interesting is the kinds of people that DO participate (Asia Netcom, VSNL (Oz only) etc).

1/3 from (expensive) transit to the "Gang of Four) who won't peer

.... and acts as an incentive to pull out of the agreement as networks grow .. think about what happens when your customers' routes start appearing through your MLP session as well.

It's an issue. But overall it's not big enough of one. We all gain a lot more by peering together than not.

I can think of some MLP-only exchanges in Europe, but I can't think of any that do significant traffic.

Yeah - I can understand why MLP is not big elsewhere (we peer in the US so I do the peering there - it's very different, but also the traffic levels are very different.

We all share a lot of content here and so the savings amongst 7 of the 10 top broadband companies in Oz make it all worth while.

MLP is what works here - the GoF believe that their transit is special and won't peer with anyone else in Oz. It's partially a government mistake from the late 90s.

MMC

9

$quoted_author = "Andy Davidson" ;

.. think about what happens when your customers' routes start appearing
through your MLP session as well.

Standard practice would be to localpref customer routes over peering routes.

Likely to result in assymetric routing as the customer prefers peering
routes over transit.

The customer's inbound (standard billing metric) won't be affected but their
ratio might.

BTDTGTTS

cheers
marty

10

Standard practice would be to localpref customer routes over peering routes.

unless unusual agreements exist with peers, this is pretty much normal config everywhere ever since vaf whacked asp and me in '96. otherwise, if you peer multiple places, the peer sees inconsistent routes, which usually gets you a nastygram from rigorous peers.

Likely to result in assymetric routing as the customer prefers peering
routes over transit.

omg! asymmetric routing on the internet! world at eleven, end of news predicted! :slight_smile:

meeting at multiple points and hot potato gets you asymmetry right off the bat.

randy

11

>Peering in Oz is MLPA. This leads to no one worrying about having
>to be found to form peering relationships, so peeringdb is
>incomplete at best. I've tried to encourage people to add their
>data in.

Is it always compulsory ? (I just did some legwork and read the WAIX
policies, and it seems to be mandatory here) This surprises me,
Multi-lateral peering is great for lots of networks, but really bad
for others, and (if forced) probably acts as a barrier to the bigger
networks from taking part in any public peering ....

Early on, the large providers still wouldn't peer. These MLPA IX'es
were formed primarily for small providers to dodge >$2000 a megabit
a month transit costs.

These days, the small-now-large providers MLPA'ing at the local IX
are starting to discover why MLPA is great for little players but
financially silly for larger ones. That said, peering at a state
IX doesn't preclude you from peering with one of the telco's (as
far as I gather - I've been out of this industry for quite a while!)
and for the sake of the growth of IP in Australia I'd like to see
the bulk of peering still be MLPA. Cracking a bilateral peering
nut in Australia would be .. funny to watch.

>1/3 from (expensive) transit to the "Gang of Four) who won't peer

.... and acts as an incentive to pull out of the agreement as networks
grow .. think about what happens when your customers' routes start
appearing through your MLP session as well.

Then you make absolutely sure you only announce your local routes
to each local MLP IX. If you announce your entire network to it then
you should know what you're doing. :slight_smile: A few WAIX participants do that
as the cost of hauling it over their WAN links between capital cities
is smaller than farming it off via transit (I'm guessing.)

I can think of some MLP-only exchanges in Europe, but I can't think of
any that do significant traffic.

Completely different scale of things :slight_smile: And you'll find people who run
(mostly) open peering policies there too.

Adrian

12

$quoted_author = "Randy Bush" ;

Likely to result in assymetric routing as the customer prefers peering
routes over transit.

omg! asymmetric routing on the internet! world at eleven, end of news
predicted! :slight_smile:

:slight_smile:

This was basically setting up the next comment which was in relation to how
this situation ("my customer is now at a multi-lateral peering point I'm on")
is not really an issue as far as the bean-counters are concerned. Unless any
ratio limit you have was applicable to that customer.

cheers
marty

13

Randy Bush wrote:

and pricing in australia had nothing to do with a monopilist telco with a rapacious plan highly well articulated and sold to the govt by an arch-capitalist with a silver tongue?

I don't know about that. However, I do know that relatively small
isolated communities in the bottom end of the South Pacific Ocean have
to make somewhat tough calls in the provisioning of international
connectivity. Satellite is too slow, so it has to be submarine cable. If
you head west on cable then the costs escalate because of the
transcontinental costs just to get the the west cost and the trans-
Indian Ocean runs are either long or run very close to geologically
active areas, and even when you get to Singapore you still have to do a
full trans-Pacific to off load the majority of your traffic, so the end-
to-end delays start to rise. If you head north from the East Coast of
Australia then in theory you can tap into the larger equatorial and
north Pacific east west capacity market, but at the same time the end to
end delays are high and the cost of heading north is almost the same as
the costs of heading north east. And the east west market is highly
uncertain - during business slumps capacity could be had very cheaply,
but when asian demand is strong hen the price escalates very quickly, so
there are some risks with this option. Or you can head directly north
east, as Southern Cross has done some years back. The transmission delay
is as close to optimal as you can get, but it doesn't negate the fact
that at one of the cable is a community of 24M people, which is not
exactly a big market by anyone's metric, and these 24M individuals have
to fuel the entire business case for the infrastructure investment.

Southern Cross cost some US $1B to construct about a decade ago - I
suspect that a comparable project today would cost somewhere between
$300M and $700M depending on the amount of redundancy you are after, lit
capacity, and the precise landing points of the cable system. But these
days its an investment not without risk, as the existing deployed
systems have a significant capacity overhang in the AU/NZ end of the
market and therefor have the ability to undercut the price of any new
venture if they wished. So new ventures in cable systems in this part of
the world normally requires the buy-in from larger cashed up players.
The consequence is that aspirations of a fiercely competitive market
with follow-on in pricing drops to end consumers tends to be difficult
to realize. I suspect that in these markets it more of a battle between
bankers and investment models than it has any bearing on the technology
or the end user costs in the long run.

14

Geoff Huston wrote:

Randy Bush wrote:

and pricing in australia had nothing to do with a monopilist telco with a rapacious plan highly well articulated and sold to the govt by an arch-capitalist with a silver tongue?

I don't know about that. However, I do know that relatively small
isolated communities in the bottom end of the South Pacific Ocean have
to make somewhat tough calls in the provisioning of international
connectivity. Satellite is too slow, so it has to be submarine cable. If
you head west on cable then the costs escalate because of the
transcontinental costs just to get the the west cost and the trans-
Indian Ocean runs are either long or run very close to geologically
active areas, and even when you get to Singapore you still have to do a
full trans-Pacific to off load the majority of your traffic, so the end-
to-end delays start to rise. If you head north from the East Coast of
Australia then in theory you can tap into the larger equatorial and
north Pacific east west capacity market, but at the same time the end to
end delays are high and the cost of heading north is almost the same as
the costs of heading north east. And the east west market is highly
uncertain - during business slumps capacity could be had very cheaply,
but when asian demand is strong hen the price escalates very quickly, so
there are some risks with this option. Or you can head directly north
east, as Southern Cross has done some years back. The transmission delay
is as close to optimal as you can get, but it doesn't negate the fact
that at one of the cable is a community of 24M people, which is not
exactly a big market by anyone's metric, and these 24M individuals have
to fuel the entire business case for the infrastructure investment.

Southern Cross cost some US $1B to construct about a decade ago - I
suspect that a comparable project today would cost somewhere between
$300M and $700M depending on the amount of redundancy you are after, lit
capacity, and the precise landing points of the cable system. But these
days its an investment not without risk, as the existing deployed
systems have a significant capacity overhang in the AU/NZ end of the
market and therefor have the ability to undercut the price of any new
venture if they wished. So new ventures in cable systems in this part of
the world normally requires the buy-in from larger cashed up players.
The consequence is that aspirations of a fiercely competitive market
with follow-on in pricing drops to end consumers tends to be difficult
to realize. I suspect that in these markets it more of a battle between
bankers and investment models than it has any bearing on the technology
or the end user costs in the long run.

QED! <grin>

15

And Japan had the arch-capitalist with a silver tongue, Masayoshi Son,
to whack the NTT monopilist telco(s) broadband policy into action.

Let's hear it for the arch-capitalists with silver tongues.

16

We don't really have a lot of ratio-limit issues over here. Nobody
is going to say, "Our traffic is way imbalanced so I'm not peering
with you anymore," when transit costs hundreds of bucks per megabit.

The industry in .au is very firmly stratified into one group
containing Telstra, Singtel/Optus, AAPT/TNZ and MCI-703, and another
group containing everyone else. The everyone-else crowd (which
makes up well over half of the domestic marketplace) is perfectly
happy to exchange traffic with each other on almost any terms
whatsoever if it means they can reduce or elminiate their financial
commitments to the other four.

   - mark

17

Southern Cross cost some US $1B to construct about a decade ago

RFS was Nov 2001. They full paid the debt from a US$1.3B cost of construction in Oct 2005.
(see http://www.southerncrosscables.com/public/News/newsdetail.cfm?StoryID=14)

So, they're making some VERY decent money out of the duopoly with AJC.

Hence why Telstra's building their OWN cable to Hawaii. It's cheaper to build than buy!

MMC

18

.. its starting.

Adrian

19

But the equivalence you seem to be suggesting in fact demonstrates the exact opposite.

Which of the A-Cs leveraged (gov-driven) facilities bottleneck relief, and which one has tried to prevent/resist such relief?
Anyone care to compare relative price/service differences between AU and JP -- or if that seems too iffy, to compare the magnitude of within-country change in service price/quality over the last 5-6 years?

Let's "hear it" for some of them. Let's "give it" to some of the others.

TV

20

Matthew Moyle-Croft wrote:

Southern Cross cost some US $1B to construct about a decade ago

RFS was Nov 2001. They full paid the debt from a US$1.3B cost of construction in Oct 2005.
(see http://www.southerncrosscables.com/public/News/newsdetail.cfm?StoryID=14)

So, they're making some VERY decent money out of the duopoly with AJC.

Yes, that exercise managed to weather the slump in prices a couple of years back when supply far exceeded demand, and then exploit their excellent technical position when demand picked up and translate that position into good revenue streams that appear to be well above initial construction and ongoing operational costs.

I don't believe AJC has had a similar story, but others may know more here.

Hence why Telstra's building their OWN cable to Hawaii. It's cheaper to build than buy!

My comment is that its generally more complicated than that, and from a sufficiently distanced view overspending on infrastructure forces up prices as much as underspending. The only real revenue stream to fund this infrastructure comes from this pool of 24M folk living at the bum end of the Pacific Ocean. Paying for a large number of underutilized cable projects does have a higher total recurrent cost than would be the case of there were efficient sharing of a smaller number of cable projects, and ultimately its consumers who fund this inefficiency in supply. So sometimes competition provides natural incentives for cost efficient investments, that ultimately benefit consumers, and sometimes competition gets it wrong and over-invests because the actors cannot resolve their individual requirements in ways that result in efficient sharing of common venture infrastructure investments, and in such cases the consumer ends up paying for the inefficiency in infrastructure investment. So sometimes it is cheaper to lease than construct, and sometimes its not.

Here endth the Nanog lesson in economics from me ( :slight_smile: )

My only point in entering this thread was to make the observations that the lessons from the AU model may not be very generic - small isolated communities often have a unique set of constraints for investments in communications systems and that often results in different industry structures, different relationships between the actors and often results in different pricing structures in the consumer market. I'm not sure that I'd be confident in generalizing this particular history into anything more generic that would apply to other communities in other parts of the world.