North American Network Operators Group

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Re: Why do some ISP's have bandwidth quotas?

  • From: Steve Gibbard
  • Date: Tue Oct 09 15:13:33 2007

On Mon, 8 Oct 2007, Joe Greco wrote:

It's arrogant to fix brokenness?  Because I'm certainly there.  In my
experience, if you don't bother to address problems, they're very likely
to remain, especially when money is involved on the opposite side.

There's a big difference between fixing brokenness and demanding that somebody else do something that might make sense in your situation but not in theirs.

People in different places deal with different economic factors, whether in terms of telecommunications, or the movement of goods, or labor.

In the US, we automate a lot of household tasks (dish washing, clothes washing, etc.) because the machines to do those tasks are cheap, and peoples' time is expensive. Many people have cars, because they can afford them, but hiring a chauffeur would be extremely extravagant. In some other parts of the world, importing machines to wash dishes or wash clothing would be considered extremely expensive. Anybody who could afford such things would instead spend $10 per month on a servant who would do what those machines do, and clean the house and cook meals. Cars, made with expensive foreign materials by expensive foreign labor, would mostly be unaffordable, but anybody who could afford one would also spend the extra $10 per month on somebody to drive it for them.

The same goes for telecommunications connectivity. In the US, we've been conditioned over the last ten years to think of long haul telecom capacity between major cities as a seemingly infinite resource with a price approaching zero, so expending extra effort to limit its use wouldn't make much sense. In parts of the world where the same long distance capacity that we take for granted sells for $5,000 per megabit per second per month, and where $5,000 represents 10 or 20 years of income for the average person, people look at it differently.

So, what drives the telecom cost differences? Distance and difficulty of terrain are certainly partial answers, as are economies of scale. But, if we look at what happened in the US, the story is a bit different. In the late 1990s, we had a telecom construction boom. Demand for capacity was surging and lots of investors wanted to invest in new capacity. There was a set of cities that were seen both as where the money was, and where a network had to be to be a peer of all the other networks. Once somebody was laying a little bit of fiber, it didn't cost much more to lay a lot of it, so lots of companies ended up burying lots more fiber than they had a use for between the same set of points. Doing that was really expensive, and the construction had to be paid for up front before the fiber could be used. Presumably, the investors assumed that once the fiber was in, it would sell for what fiber was selling for before the construction boom, and they'd all make their money back.

Unfortunately if you're an investor, but fortunately if you're an American consumer, the market didn't work that way. It became a competitive market with high capital costs, a near infinite supply of the product, and lots of competition. The fiber companies couldn't price their services to recover their construction costs, because if they had charged more than any of their competitors they wouldn't have made a cent. Instead, they priced their services to be cheaper than the competition, trying to salvage whatever money they could. The competitors responded by pricing things even cheaper, trying to make sales of their own, and the cycle repeated itself again and again as the price of capacity along those routes fell towards zero. Eventually, the construction debt went away in bankruptcy, the fiber got bought up cheaply by companies that hadn't lost everything in building it, and what it had cost to build ceased to be relevant at all.

In other words, capacity in the US is cheap because a bunch of investors screwed up. That's nothing new; it's how the American railroads got built in the mid to late 1800s, and it's how the original American phone networks got built in the early 1900s. Investors will presumably keep making similar mistakes, and society will be better off because of it. But counting on them to make the same mistake while investing in the same thing within the same decade may be pushing it.

Unfortunately for consumers, and fortunately for investors, this pattern didn't repeat itself everywhere. Those who built fiber on paths that were not seen as where the money was ended up with monopolies. They can charge far more than their construction costs, as long as they can find customers willing to pay. They're vulnerable, of course, to somebody else coming along and building a parallel cable that forces their prices towards zero, but such a cable would force its own price towards zero as well, and generally wouldn't be a good investment. Second cables do occasionally get built, but often their either on sufficiently different paths that they still provide a monopoly on connectivity to somewhere, or they're built by somebody who needs the capacity themselves.

If you're an ISP in an area served by an expensive long haul capacity monopoly rather than a cheap competitive free for all, the economic decisions you're likely to make are quite different than the decisions made in major American cities. If you can always go get more cheap capacity, encouraging your customers to use a lot of it and thereby become dependent on it may be a wise move, or at least may not hurt you much. It's probably cheaper than keeping track of who's using what and having to deal with variable bills. But if the capacity you buy is expensive, you probably don't want your customers using a lot of it unless they're willing to pay you at least what you're paying for it. Charging per bit, or imposing bandwidth caps, is a way to align your customers' economic interests with your own, and to encourage them to behave in the way that you want them to.

I should also note that those advocating "carrier neutral" fiber to the home probably won't get high speeds at low prices, as long as that "carrier neutral" fiber is a monopoly. Even regulated monopolies are generally allowed to charge enough to make back their construction costs, and if the ISPs are paying for the fiber monthly rather than up front, that's going to put a pretty firm floor on what ISPs can charge. What would theoretically push consumer prices down would be to have several competing companies build fiber to the same set of homes, that they or their post-bankruptcy successors would continue to control. We've sort of got that in much of the US, with the DSL/cable duopolies, and speeds do seem to be creeping up slowly, although not nearly as much as in some other parts of the world. The question, of course, is how to convince investors to go for such a thing.