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DrPeering -
Q: Just curious here - How do ISPs cost their networks? With the price of transit dropping as shown in your graphs in “Internet Transit Prices: Historical and Projected”, it is a mystery to me how ISPs know if they are covering their backbone costs. Any insights from your work in the field?
Velma Dinkley
A: There is an excellent white paper here because there is a general sense that prices are so low today that ISPs could very well be losing money on every customer.
Transit Pricing Death Roll
Some ISPs that I spoke with said that the market was pricing transit in a “death roll” because of lack of information on how much it costs to move traffic. It would be good to have a white paper that would do an analysis of the base business model for an ISP service so we can identify the cost floor. Since I don’t have the time (or funding) to do such a study, I’ll share what I learned from a handful of ad hoc conversations in the field. Maybe someone else can take a stab at writing this white paper.
The first few conversations highlighted that there was no single way to cost a network. A couple categories of costing models came up though:
1)No Costing Model assumes that the costs will be covered by market charging market prices.
2)Simple Bit-MIle Costing uses a gross bit mile POP-to-POP calculation
3)Aggregate Backbone Cost Model applies that customer load percentage to the backbone cost.
The No Costing model might apply the cost of the customer port but generally sees the network as a cloud with a kind of “keep it big enough” expense.
The Simple Bit-Mile Costing model tries to establish a network component price per bit mile. This calculation might take all route segments and calculate the average cost per mile. The end result would be a $/bit mile cost number. Then gross traffic analysis would be applied to see what a customer actually uses of the network bit mile resources.
For example, if a customer has 55Mbps of traffic from SFO to Seattle (say 1200 miles) multiplied by the $/bit mile yields $X to carry that traffic. The customer also has about 95Mbps from SFO to LA (say 400 miles) multiplied by the $/bit mile yields $Y to carry that traffic. When taken in aggregate, one can get sense of the order of magnitude of the cost of this customer.
The Aggregate Backbone Cost Model uses the cost of the backbone divided by the amount of traffic a customer sends or receives. If the customer represents 10% of your traffic load, they cost 10% of your backbone cost.
Each of these basic models has pro’s and con’s of course and the conversations always lead to a better and more complicated calculation.
One could for example cost each link and each node in the network and try and estimate the per-customer load on each. But these models get hopelessly complex very quickly and tend to include hundreds of assumptions.
Here are some comments from M. Noufal for example:
“I'm a technical guy but i went through this exercise with marketing several times and every time we come up with a new costing model!
important factors to be taken in to consideration :
1- users contention ratio (this is the most important factor in the costing model).
2- IP cost
3- back haul cost
4- network equipment and administration cost ( this will be added to the costing model as a fixed cost)
5- last mile access ( in case of renting the CPE's for the customers )
also possible factors to be added :
1- consulting cost if any.
2- if you are offering a toll free number for your customer care ( add the cost per customer)
3- advertising cost if its a new product.”
If you have the staff to dedicate to this modeling please contact me - it would be great to have a community ISP Costing Guide white paper to document the best approaches in more detail. In the meantime, what I have shared above is just a shotgun sample of the costing used by a handful of ISPs that I happened to have lunch with over the last few months.
How do ISPs cost their network?
January 13, 2011
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