Some Basic Truths About Broadband (Economics)

walshI confess I have a rather odd hobby. I seek out and collect statements from broadband regulators and lobbyists that reveal a fundamental misconception about the networks they oversee. Stacey uncovered this gem in April from New York state’s CIO: Consumers should be able to “know the actual data transmission speeds” of their broadband services. And in July she noted that lobbyists, petitioning the NTIA over perceived shortcomings in the recent broadband stimulus package, complained service providers often “advertise speeds of up to 3Mbps while refusing to guarantee those speeds.”

Many believe that broadband service providers selling, say, a 5Mbps service should be required to set aside the same amount of capacity in order to fulfill that implicit service-level agreement (SLA). In other words, if you pay for 5Mbps, it’s there when you need it. But the reality is that networks, just like hotels and airplanes, are almost always oversubscribed — the owners of these assets sell more capacity than they have available.

This is actually an economically rational thing to do. It accounts for the fact that not all requests for capacity (or seats or rooms) are used, and results in greater efficiency and lower overall costs. But whereas hotels and airlines might sell 10 percent or 20 percent more capacity than they have, broadband operators typically sell a few thousand percent more capacity than they have. This may sound egregious, but it’s really not. It’s a reflection of typical usage patterns on broadband networks and necessary to achieve the price points consumers are willing to pay.

According to Pew Internet’s Home Broadband Adoption 2009, Americans pay an average of $37.60 per month for broadband, and according to Akamai’s first-quarter 2009 “State of the Internet” report, the average actual (not advertised) downstream speed in the U.S. is 4.163Mbps. This means that consumers are paying a little over 0.0009 cents per bit per month. That doesn’t sound exorbitant.

Most large carriers (e.g., AT&T, Verizon) offer broadband services that absolutely guarantee speeds. Verizon, for example, provides Internet access with guaranteed speeds up to 2.5Gbps and a written SLA. I don’t know what Verizon charges for this service, but a wholesale OC-48 (2.488Gbps) Internet access line from US Access costs $60,000 per month, or 0.0024 cents per bit per month.

The reason the latter is 2.7 times the former on a per-bit basis (and almost 1,600 on an absolute basis) is not that one is for businesses and the other for consumers (although they clearly are), it is that one has dedicated bandwidth and availability and the other does not. The reason broadband operators oversubscribe their networks and do not make minimum speed guarantees is that they must deliver these “high-speed” services at very low price points. Keep in mind, it wasn’t all that long ago that 128Kbps ISDN lines ran several hundred dollars per month.

The regulators, legislators, lobbyists and interest groups clamoring for broadband speed guarantees ought to be cautious. Broadband operators are perfectly capable of guaranteeing speeds, but they’ll need to ask consumers for more dollars to do it — and folks might not like the price tag.

Kevin Walsh has over 25 years of telecommunications and networking industry experience and is currently an executive at Zeugma Systems.