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.

There are 2 comments

  1. Anonymous

    Could it ever be fairly charged. I mean Look at the outrageous overages for Cell Minutes….Limiting those minutes does not provide a better service so how can this? Gasoline when demand rises and price goes up consumption goes down, helping no one. If you charge more it will mot make it better. You will still be on the same infrastructure already in place. Or will this plan save money for the consumer? Like you stated though what about overages….it would be over priced.

    Semper Fi

    1. Eric Tucker

      I must say I sympathize with your concern. I have seen mobile providers charge truly inordinate overages, and I myself have been what I’d call a victim of outrageous SMS overages. For example, the commit rate on SMS might be below $20 a month, but I managed to somehow get hit with a bill in excess of a thousand US dollars that I could have avoided with a $20 a month bulk plan. Where’s the logic for the cost basis? Is there any? Is the provider gouging? My contention would be yes. Overages particularly in consumer products are often over-priced as a way of gaining more revenue in a model that may not be entirely fair or fair at all.

      In short, business practices like these give the overage model a bad name. But … I do believe I can demonstrate the validity and inherent fairness of a more ethically conscious application of the overage model.

      On the flip side, some businesses that do offer truly unlimited plans open themselves up to abuse by users. If a user actually uses an unlimited amount of service, no business could ever make money … nor is there such a thing as completely unlimited resources on the planet Earth.

      It’s important to take note that ISPs do have limited resources. A large piece of infrastructure such as a physical fiber optic line between two cities can still only carry but so much internet traffic. The line itself may cost tens of thousands or more per month. If a small number of subscribers paying small fees saturate the line, then the provider must get more capacity or reduce the speed of service to some or all customers. If the provider chooses to increase capacity, this costs a lot of money. If the provider reduces speed of some or all users, this reduces the quality of the service.

      Providers provision a certain amount of infrastructure anticipating a certain amount of usage. Adding more capacity costs money. Adding the capacity temporarily or “on the spot” because it’s a physical resource that is only being used some of the time costs more money proportionally. For example, let’s say you rent an apartment for a week. Let’s say that apartment then sits empty for a month. The landlord still has to pay the mortgage, the taxes, etc. whether the apartment is empty or not. So, if the landlord frequently rents for short periods of time only and the property’s utilization rate is low, then the landlord must charge more money per day or per week in order to actually make any money at all. Internet providers are in a similar position. While most internet providers rent things from one another, sooner or later somebody owns physical pieces of infrastructure that must be paid for and that have fixed or relatively fixed costs whether they are used at 10% or 100%.

      For the businesses to make money or even stay in business, they need you to pay for what you get. Businesses do have a responsibility to tell you what the overage charges will look like without burying those details deep in the fine print. I believe businesses should also take some responsibility to notify you when you are running up considerable overages. Charging overages that are in ways reflective of costs (and with reasonable profit) is different from deceptive practices and highway robbery that some businesses conduct on such overages.

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