Carriers Reluctant to Talk Usage-Based Pricing

NEW YORK — With Time Warner Cable’s fumbled efforts to test demand-based broadband pricing still fresh, it might not have been a surprise that network carriers are shy about discussing the need to raise prices.

Instead, panelists here yesterday at Capacity USA 2009, Capacity magazine’s 9th annual U.S.
wholesale telecommunications congress, were more eager to talk about how increased demand is resulting in lower revenues per megabit. However, it was the audience that brought the issue of how carriers plan to make more money back to the forefront.

In the audience, Carlos Da Silva, director of customer marketing and
development for Orange America, a division of France Telecom, asked whether telcos should start charging each other for bandwidth they deliver to one another. Typically, many peering agreements between carriers are free.

Da Silva’s question was all the more provocative since one panel member, Level 3, disconnec
ted Cogent in 2005
when the two sparred over peering fees.

Four years later, bandwidth pricing remains a sensitive issue.

In response to Da Silva’s question, panelist Andres Jordan, vice president of innovation and business development at the international
carrier sales and solutions (ICSS) division of Deutsche Telekom North America
refused to go on record on the subject entirely. Andrew Swart, vice president of
emerging opportunities and strategy at Level 3, repeated what he’d written on his
slide deck — that broadband access providers would “need to participate in
the value chain” and added that peering must be settlement-based, so that
every provider pays for or receives payment for the value of traffic
delivered and sent.

Thanks to debacles like the spat between Level 3 and Cogent, and the more recent controversy surrounding Time Warner Cable’s testing of usage-based pricing — and its eventual tabling of the idea — it’s anyone’s guess who will implement usage-based pricing first.

Although panel members were reluctant to talk about the solution, they
were eager to discuss the problem: as bandwidth usage rises, users pay the
same price or just a little more. “There is a collapse in revenue per
megabit” said moderator Mark Wheeler, group vice president of IDC‘s worldwide telecommunications practice.
“A smart phone generates 300 times more traffic than a basic mobile phone,
but generates only 1.5 times the … average revenues per user.”

DT’s Jordan said that the result is a massive increase in bandwidth
demand. He cited a study by Frost & Sullivan predicting a 28 percent
compound annual growth rate in bandwidth demand in Europe during the five
year period from 2008 to 2013.

Need for speed

One possible solution to the problem is the content delivery network (CDN) , whose purpose is to place content at the edge of the network, as close to the user as possible. Doing so reduces the load on the originating server and on the Internet’s backbones.

The capacity of the oldest CDN illustrates the rate at which bandwidth demand has increased. Level 3’s Swart co-founded Sandpiper in 1996, making it one of the first CDNs. He said that demand from content providers grew in part in response to findings like that of Zona Research, which concluded that 50 percent of all users abandoned a Web page if it failed to load in eight seconds.

When it opened in 1998, Swart said, Sandpiper had a capacity of several
megabits per second. In contrast, Akamai recently delivered a stream that peaked at 125
gigabits per second.

Swart said that demand has been driven by video content for some time, but noted that carriers may not have noticed until now because they now have better network monitoring tools.

“During 2003-2006, Level 3 realized that over 50 percent of all traffic was video,” he said.

The experience of other, more advanced nations can provide useful insight. Japan already has capacity and lacks content, said Kazuhiro Gomi, vice president and CTO of NTT America.

Better content, which will drive demand, is on its way, said Adam Greenbaum, senior director of business and technology solutions for Move Networks, a startup that specializes in developing Internet TV technology to enable the delivery of TV episodes, news, and sports over the Internet. Clients include ABC, Fox, and ESPN.

Greenbaum warned his fellow panelists that higher quality content results in greater bandwidth usage. He said that once users obtain a high quality stream, they are willing to watch it like TV, for over half an hour, as opposed to the shorter viewing times of viral video clips.

He said that the largest number of simultaneous viewers of a webcast to date was of Oprah: A New Earth, with 500,000. He challenged the panel to deliver 10 million simultaneous streams at 10 Mbps. Of course that would require smart technology: no single pipe on earth can handle a 100 petabit stream.

A CDN might be able to do it. Gomi said that a CDN is like a wormhole because it delivers content to the edge without affecting the backbone. He added that it can protect originating servers by lowering the load on them.

Who will build it if they come?

But however much intelligence you build into the network, the audience recognized a need for infrastructure investment and for new business models to fund the build.

“There’s revenue sharing models, but some worked and some didn’t,” said one member of the audience.

IDC’s Winther said that mobile networks will have an advantage here: While all fixed subscribers are served on an all-you-can-eat pricing model, mobile users are accustomed to paying for usage, except for those who have the highest-priced plans. asked the panel how advertising revenue could support the delivery of video content. Jordan said that the future is in ad insertion and targeted ads, and noted that Akamai recognized this when it acquired an ad-targeting company called acerno in November 2008.

Move Networks’ Greenbaum noted that while targeting is easier on mobile phones, serving ads is harder because every phone has its own screen size. He said that Move’s goal is to encode the ad once and deliver a customized version of it to phones by taking advantage of a client on each phone.

“The potential of mobile is huge,” agreed NTT’s Gomi.

For fixed networks, the future is uncertain, because the costs fall so heavily on operational expenses. In a post to CircleID, Internet commentator Gordon Cook quoted Craig Partridge, chief scientist of BBN Technologies, who explained the situation: “Costs have declined only slightly in the past decade. Exactly how this effects the ‘bandwidth is infinite’ argument is not entirely clear to me — except that we can conceivably build networks with more bandwidth than we can afford to operate.”

As long as revenue per megabit declines as fast as the cost per megabit of equipment, carriers will be reluctant to build — and will be carefully examining the potential of new revenues to supplement their existing subscription revenues, even if they are unwilling to talk about it.

NTT must continue to invest even in hard economic times because demand is increasing, Gomi said in an e-mail to “Our network traffic is not slowing down, and in fact it has a very healthy growth rate. Investment in the network is predicated upon traffic patterns, traffic growth, current sales and our forecasts,” he said.

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