Business Premise: Video Service Providers outsource Internet video distribution to two or more transit providers in a single collocation center. The VSPs instead focus on the Content Server Operations, marketing, sales, etc. and oversight of the entire supply chain for video content. This is usually based on the following assumptions:

a)Transit Providers can handle the Internet traffic better and cheaper because they can leverage economies of scale and aggregation efficiencies.

b)Transit Providers have the network expertise, the peering arrangements, the billing engines, etc. required to maintain and scale an Internet network.

Definition: Transit is a business relationship whereby an entity sells access to the Internet to a customer.

Transit is best considered a pipe in the wall that says “Internet This way”. The customer sends its packets out to the Internet, and the transit provider announces reachability of the customers’ network to the rest of the Internet.

Transit in the U.S. is a metered service, charged on a megabits-per-second basis, measured at the 95th percentile. Traffic is sampled every 5-minutes and the deltas are stacked lowest to highest every month. The 95th percentile value is used to determine the volume on which transit is charged.

Wholesale transit prices in 2006 vary widely but appear to hover around $10-$20/mbps with a 1 gigabit-per-second commit as sampled at NANOG in February 2006 and as shown in the graph below.

However, these wholesale transit prices are not generally available to content providers. The traffic flow is almost entirely outbound which has the effect of adversely affecting the ISP’s traffic ratios. Further, we are assuming multi-homing so the bandwidth commit to any single ISP is split among multiple ISPs. Without the full volume commitment to a single transit provider, pricing may be a bit higher. To properly set VSP expectations, Jeffrey Papen (Peak Web Consulting) suggests we model Video Service Providers (VSPs) using slightly higher (approximately retail) transit prices. Based on walkthroughs of this paper we have settled on the following transit pricing:

•Model A:  1,600Mbps @$25 /Mbps  [Editor’s note: 2006-2007 Pricing]

•Model B: 16,000Mbps @ $18/Mbps

•Model C:160,000Mbps@ $10/Mbps

Note: the pricing here has generated a lot of controversy. About half the reviewers say the prices are about right or a bit lower than the market price, and others stating that these prices are higher than the current market price.

Pro: Transit is Simple. One virtue of transit is that it is simple and the unit price decreases as the commitment increases. There is also a contractual obligation for the transit provider to deliver the content to the rest of the Internet, a feature that we will see later is not a feature of peer-2-peer systems. The transit provider takes the packets and delivers them to the rest of the Internet. This simplicity allows the content provider to focus on content creation rather than network engineering.

Con: Video Transit can be expensive. One potential downside of transit for video distribution is that the traffic volume can grow very large. At the same time, some video content (i.e. YouTube hits, new popular TV shows) exhibit viral qualities so the volume can also spike unpredictably. As a result, the cost can grow large and unpredictably. Consider YouTube for example; founded in 2005 and within a year it was already pushing 20 Gbps of video traffic across its transit providers.

To illustrate the costs involved, let’s assume YouTube was able to acquire transit at $10/mbps. With 20% monthly traffic growth, as shown in the graph below, the resulting expense would approach $1 million per month within the next year! This is pretty expensive for a startup company, although we now know with the subsequent purchase by Google for $1.65B it turned out to be a good investment..

Figure 4 – Projected YouTube Transit Expenses

At least one source cites YouTube paying one million dollars per month already in September 2006, and in March 2007 rumors have their traffic volume exceeding 200Gbps.

Now we will model the three video loads across each distribution model, starting with a basic commodity transit service.