Wednesday, 8 December 2010

Economics of Bandwidth

It is getting interesting out there on the intertubes.

When you see disputes like this arise, you have to remind yourself, what's the first rule of business? Make money. How do you do this? By selling as little as possible for as much as possible. We call that "what the market will bear". Every business has to find that magic point of what the market will bear in terms of price markup. Which is one reason Canadians pay more for cell service. Yes more competition will likely drive down costs, but as long as people keep snapping up $80, $100 a month plans, the carriers will keep selling them. If that example doesn't satisfy, look at the markup on luxury items. The more luxurious the item, the greater the markup.

The problem with the Internet is that multiple companies are selling bandwidth to different buyers which includes content providers and consumers. But the consumers are accessing content from everywhere on the Internet, and traversing multiple carrier networks to get there. What has resulted is an unequal distribution of resources required to maintain a consistent level of service across all of the Internet.

Whichever carrier Google or Apple uplink with to provide content gets regular (substantial) payments from Google or Apple. That carrier does not share those profits, and allocates part of that revenue stream to maintain their own section of the Internet. Carrier B in Europe gets most of its revenue from home users, and the profit margin is not as large. Due to this, they do not have as much capital to invest in upgrades, and their network starts to struggle under the load of content provided by providers in North America.

Same principle with the Netflix/Level 3/Comcast dispute. Unfortunately, all of the companies involved have a profit motive because, in the end, they are businesses. They are there to make money. Not to provide service.

To be honest, as long as the free market is responsible for maintaining the Internet, this problem is only going to get worse. Any solutions proposed impose restrictions on the carriers' right to make money. Regulations make for thorny solutions as it is counter-intuitive to dictate exactly how much money a carrier can charge, how much it has to invest in improving its infrastructure and how much it has to share to improve global service and still require it to compete.

But I will admit, just because I can see the rationale behind the problems, doesn't mean I see an easy solution.

PS If you don't believe me that companies pay way more for Internet access, our companies 20 Mb connection is $3,000 a month.  To go 100 Mb is $4,2000.  The install cost of the original circuit was $25,000.  Compare that to the $99 mo 50 Mb plan from Rogers.  But we ain't filtered, shaped or otherwise restricted by our carrier's shaping policies.  Our access is 20 Mb for upload and download, but even so we pay 30x the average home user for Internet access.  (Even the small business plans are more than residential.)

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