Metered Broadband? It’s Not Particularly New or Totally Evil – A Brief Introduction to Commercial Bandwidth Services Pricing

Many consumers are in arms over announcements by several providers that they will begin charging overage rates or limiting data transferred. In fact, much of the hosting industry and higher end commercial solutions provide Internet connectivity on a basis of (1) the physical line and (2) the amount of bandwidth actually used.

For example, a provider might charge $20 a month for a network connection that might have a capacity of a 100 megabits or 1000 megabits per second. The provider might then charge a separate fee depending on how much of that connection is used. Bandwidth is often metered on a megabit per second (8 megabits in a megabyte) or based on the total amount transferred often measured in gigabytes.

When bandwidth is sold on a megabit per second (often abbreviated “mbps”) utilization rate, it is often metered by reading actual bandwidth flowing through the connection every so many minutes. In industry standard 95th percentile billing, the highest 5% of those readings are thrown out. The customer is then billed based on the “sustained 95th percentile”.

Under 95th percentile assuming a monthly billing cycle, the customer could in principle use much more bandwidth than usual for up to about 36 hours and would not be billed for the increased amount. So, the 5% in 95th percentile lets customers retain some flexibility for less frequent “bursts”.

Per “bucket” or “data transferred” billing is just so much money per gigabyte (or other amount).

Customers typically pay for:
(1) the line –
Physical line or uplink to provider.
(2) commit –
The amount of bandwidth for which the customer agrees typically over some contract term to purchase. This bandwidth is sold at a “commit rate” which is often less expensive than the overage rate.
(3) overage –
The amount of bandwidth over the commit rate. Overage bandwidth is sold at an “overage rate” which is often double or so the commit rate.

Higher overage vs. commit rates encourage customers to take on larger commits ensuring ISPs can better plan their infrastructure. Higher overage rates also account for the inherently often higher cost and over provisioning necessary to provide services when demand is less predictable.

A service provider that has unpredictable bandwidth utilization must choose among (1) over provisioning infrastructure and charging more money for services or (2) providing a lower quality of service particularly at peak times and likely cutting corners elsewhere.

A service provider that has many customers all paying the same rate but using very different amounts of bandwidth must (1) charge all customers higher rates or (2) deliver a lower overall quality of service to all customers.

Your power is metered. Your cell phone is metered. You pay for the gasoline you burn in a car. You choose whether to buy expensive or inexpensive products. You choose the nature and quality of what you consume often based on what you’re willing to pay.

In spite of some of the uproar, I believe that charging for or even capping bandwidth based on usage is in fact fair. Implemented properly, such efforts could result in a higher quality of service for all consumers.

The key issue should be whether prices charged for overage and larger commits are fair.