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The real barrier to innovation isn’t the cost of bandwidth

By 26 May 2010 11 Comments

Populist dogma from Free Press would have us believe that all websites are supposed to be equal in capability and reach regardless of what they pay to connect to the Internet, but broadband providers are the evil gatekeepers scheming to price all but the wealthiest corporations out of Internet content delivery.  The conclusion that Google would have us draw from such fantasies is that new regulations are needed to marginalize and restrict the broadband providers from offering premium delivery services to content providers under the guise of “nondiscrimination”.  The problem with this line of reasoning is that it has no basis in economic or legal reality.

The basic premise that all websites are supposed to be equal in outcome is a fantasy.  Instead of having equal service at equal cost where outcome varies depending on the amount of money spent, the Internet regulation advocates push the idea that service should be equal regardless of cost.  But anyone who has ever purchased broadband or Internet connectivity knows that higher priced services perform better.  If they didn’t perform better, no one would ever pay the higher prices.

The idea that broadband and Internet transmission services are a serious economic barrier to innovation or smaller groups or individuals has no basis in reality.  That’s because broadband connectivity for most homes and businesses cost less than electricity or other basic utilities.  From a budget perspective, Internet connectivity costs aren’t very high on the list of expenditures.  Digital Society spends $50/month on server colocation and we can host 10 million page views at 100 KB per view.

Those who don’t care as much for vanity domain names can host text, images, and even 1080P high definition video for free at many competing websites.  Google will even pay the content owner a share of advertising revenue to host their content at YouTube.  Since content delivery is essentially free for the individual or small nonprofit group, the real challenge in getting to be seen on the Internet is having worthwhile content, good search ranking placement, and advertising.  The problem is that search and advertising is orders of magnitude more expensive than the cost of content delivery.  In fact we can see the massive difference in table 1 below.

Table 1

Item Low High
Bandwidth for 1000 page views (100KB per page) [1] $     0.0006 $      0.003
Bandwidth for 1000 video views (10 MB per SD 360P video) [2] $     0.030 $      0.093
Bandwidth for 1000 video views (100 MB per 720P HD video) [2] $     0.300 $      0.926
1000 Vimeo Plus HD video deliveries (assuming no unused budget) $      2.400
Advertising 1000 impressions (hoping to get  fraction of page views) [3] $     1.000 $    40.000
Getting 1000 visitors from clicks [4] $  50.000 $  200.000

[1] Based on $2 to $10 per Mbps per month IP transit cost
[2] Based on $1 to $3 per Mbps per month for Paid Peering
[3] Based on $1 to $40 CPM (cost per 1000 impressions)
[4] Based on $50 to $200 per 1000 clicks

As we can see, bandwidth costs are almost negligible compared to other costs even when it comes to High Definition video.  The vast majority of applications on the Internet fall somewhere between web page delivery and Standard Definition video.  The challenge is producing worthwhile content and paying for the advertising.

In light of these facts, there is no reason to see broadband and Internet providers as economic barriers and there is no reason to prevent them from offering their services to content providers.  Preventing content providers from entering into voluntary and nondiscriminatory business arrangements with broadband providers will harm innovation.

11 Comments »

  • Wes Felter said:

    The cost of negotiating prioritization contracts with ~10 major ISPs discriminates against small companies, even if the actual prioritization fee ends up being small.

  • George Ou (author) said:

    @Wes Felter

    First of all (maybe I’m misreading you that you’re opposed to this kind of business model), but I object to the use of the term “discrimination” in this context. There is no unreasonable discrimination over the current unregulated Internet today, but there is plenty of discrimination and differentiation on the Internet just like every other facet of business and life. The Internet never has been and never will be an equal outcome platform. The Internet has and always will favor those who spend more money building and/or leasing infrastructure.

    Second, the vast majority of applications don’t need QoS access so they don’t do it today and they won’t do it tomorrow. Content providers that need bandwidth rely on CDN services and/or transit and/or peering services.

    Third, all the hysteria over the possibility of ISPs deliberately degrading non-premium customers is nonsense. There has been no law that prevented ISPs from degrading their standard customers over the last 10 years yet none of them have done so because they cannot afford to anger their core user base. Never mind degrading existing services, the ISPs don’t even have the luxury of maintaining the status quo and they’re forced to spend tens of billions of dollars in per year in capex to upgrade their network.

    The central issue is the right of content/application owners to conduct voluntary transactions with CDNs or broadband providers. While the market for QoS is small, it is important to some application providers. For example, Blizzard has a prioritized application contract with Teliasonera? It is a small fee (due to the fact that it’s less than 100 Kbps per customer) that makes their premium $15/month customers much happier and much more likely to stay customers.

    Blizzard has a very different business model than Steam and it is no more and no less valid. Steam relies on free community ad hoc servers which rely on best effort service over the Internet. If a Steam user playing Team Fortress 2 experiences poor network performance to a particular server, they go and find another server that is closer with a better ping. There is no expectation that the only server they can connect to perform to a very strict standard.

    For Blizzard, they offer a relatively expensive pay service and they want the best experience for their customers. While the performance difference is marginally better than ad hoc servers, the premium that they have to pay (which might not be a premium at all where Teliasonera just uses the QoS feature to attract/retain Blizzard) is clearly worth it to them.

    What I object to is advocates from Linden going to the FCC to demand that Blizzard be pulled down to the lowest common denominator using dubious claims of an impending doom that ISPs will start degrading everyone else.

  • Digital Society » Blog Archive » Reality check – Americans like their broadband service said:

    [...] fact is that broadband is simply another commodity and even though the costs are rapidly declining, the cost is and will always be non-zero and will therefore act as a limiting [...]

  • Digital Society » Blog Archive » When Net Neutrality advocacy becomes scaremongering said:

    [...] claim that fast lanes are tantamount to censorship of websites that can’t pay even though bandwidth costs are so low they’re irrelevant these days and there are plenty of free video hosting services like YouTube and [...]

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