It was a very interesting reaction to a comment I made on the Telco 2.0 blog. I had reacted to an article and online video in which Andrew Bud of Mblox presented "sending party pays", as a new business model. His argument was that it would solve many of the problems the mobile industry has with data costs, if the sender of the data was charged instead of the user requesting the data. My main point was that it was an interesting business model for ringtone type content. I didn't feel that it was a cure for all the problems described, mostly because of the effect of termination costs. The internet doesn't use sending party pays for this reason. It uses a model called peering and transit.
Simon went on:
... you seem to be displaying the outrage we so often see in the Internet religious zealots, who elide the supposed impracticality of the solution with the negative effect it would have on those who currently free-ride.
I'm afraid you're showing a poor understanding of the business model you are mocking. You say "Just think of the pricing madness that we would see if every network in the world would have the pleasure of setting its own prices for the incoming traffic it receives". But this is exactly how the successful, multi-billion dollar application-to-person bulk SMS business actually works!!!
To this rather harsh statement I reacted with a second, bit more thought out, response. Andrew Bud (the Mblox gentleman ) then reacts to my reaction that
This is a very cogent argument indeed. What I think it neglects is the fact that value, cost and charging are beginning to move badly out of alignment in the ISP world.
This leaves me wondering whether I'm a madman or whether I've actually understood the problem well. If I look at the two statements, I think the answer lies in three elements of the response of Simon and Andrew: freeriding, costs and the overloading of networks.
What it comes down to is whether you believe that
- content providers are using the internet for free and/or
- costs of carrying traffic are too high and/or
- that networks are getting overloaded.
- The argument that the content providers are free loaders has often been heard. Most of those arguments rest on a complete lack of knowledge of peering and transit or a misinterpretation of the "free" that peering offers. Bits don't float around the internet for free. You and Youtube pay for sending bits around the world. The prices aren't as high as when I entered this business, but an ISP/content provider who forgets to pay the transit bill is not an ISP/content provider for long. With transit down to $4 to $10 per mbit/month and lower, a typical content provider can send 100Gigabytes for 10 dollars around the world (leaving 200 Gigabyte slack for off-peak). With the right peerings a significant portion of traffic can be exchanged via peerings saving on the transit bill. Do pay attention: transit prices (and port densities) are currently such that at its General Meeting in November last year, AMS-IX announced it would stop taking orders for new 10 and 100 Mbps ports. So at larger IX's like Amsterdam 1Gbit ports as the minimum for peering. In my opinion the argument that someone is freeloading on the net doesn't hold.
- The second argument is harder to verify. Are the cost of running a network such, that bits are expensive? Certainly in the UK the costs of backhaul are high and ISP's have been locked into a price war for some time. It is therefore understanble that some UK parties have the view that everything that generates traffic (iPlayer, Youtube, Bittorrent) is bad and expensive. On the other hand, the UK is quite backwards with bandwidth speeds and is still living in the up to 8mbit/s world of ADSL. Operators in other countries are not as fearful of bits and seem to be able to run a profitable business. NTT in Japan thinks 900Gigabyte of upstream traffic is enough for their customers and has put its monthly limit there (no download limit). This is three times more than any Brittish DSL user can send from their pc. Free in France is providing up to 28mbit down for €30 (with phone, HDTV, remote access to your harddisk recorder etc) and is still making a decent profit. It seems that the costs of operating a network are different in various parts of the world and the perception of what new applications cost to the ISP vary as well. The case of ISP's in mainland Europe and Asia tells us sending more bits on existing networks shouldn't necesarrily lead to a dramatic decrease in ISP profitability.
- The second item can also be viewed from the perspective of mobile networks. On mobile networks the consumers costs of 1 gigabyte of traffic can vary from anywhere between 10 euro/month for an unlimited internet connection to 1.5 million euro if you were to use SMS as the data carrier. Since technically it's all bits we can attribute the cost difference to very cunning pricing. I'll try to make an estimate of what the costs of bits on a mobile network really. is. We've all been told that it is expensive to run a mobile telco. That is why terminating rates for voice to a mobile network are much higher than the other way round to a fixed network. In general 700% more expensive. Now if we would accept that running a mobile network is 7 times more expensive than 10 euro's per gigabyte may sound about right if we take Telenet's notoriously high overage fines of 0,23€/150Mbyte.
- The third item, that networks are overloaded with traffic? Sorry but that just isn't true. Everybody who knows the industry sees that traffic is growing with 50% per year or less. Growth is actually decelerating. Properly run networks who upgrade their infrastructure regularly shouldn't face any problems coping with a non existant flood.
I do salute the mobilecos for keeping prices up as high as they have. It is great business even though from the perspective of consumer welfare it isn't the optimal situation!
Updated on wednesday: grammar and sentences cleaned up after some comments from readers