FAQs about Internet pricing Jeffrey K. MacKie-Mason Hal R. Varian University of Michigan Benefits of usage pricing · make more efficient use of bandwidth and capacity · generate revenue for growth and expansion · support new applictions more effectively Costs of usage-based pricing · accounting and transactions cost · reduction in voluntarism? · costs of attention (...but computerized agents may help) Increase profits? · Profits depend on degree of competition · Don't necessarily depend on form of pricing · Profits drive investment for additional capacity Increase in users' costs? · Costs go up due to billing and accounting · Costs go down due to reduced usage Low-intensity users would probably pay less (low-intensity = text rather than multimedia) How should prices be set? · Prices should reflect costs So people can make intelligent decisions · More specifically, price should equal incremental social cost. incremental cost => cost of additional use (not counting fixed costs) social cost => all costs of additional use What are the costs? NSF paid $12 million a year for NSFNET backbone · 80% of this went to line rental and equipment charges · 7% went to Network Operations Center mostly these are fixed costs What about "social costs"? Congestion costs that users impose on each other When a network is near capacity everything slows down · packets are delayed or dropped · potentially significant social cost History of congestion 1987 (56Kbps backbone): congestion was very bad Temporary fixes to prioritize traffic · priority went to telnet over ftp · administrative traffic got special treatment What's congestion like now? Applications · Archie (too successful) · Mosaic (1.3 million accesses/week) backbone capacity · backbone is only 5% utilized on average · but peak can be 5-10 times average · start to see problems at 20% average utilization · just starting to see (small) packet loss on NSFNET Traffic has doubled every year for the past 5 years What will multimedia do? · ASCII text: 44 bits per word · low-quality voice: 21,000 bits per word · high-quality sound: 466,000 bits per word · TV (noncompressed): 100 Mbps · TV (compressed): 45 Mbps (or less) · video conferencing: .5-1.5 Mbps File sizes 1 megabyte = 700 page ASCII book = 2-4 GIF images = 8-12 JPG images = 3 seconds of compressed video · monthly traffic on NFSNET backbone = 56 billion packets · 10 million users? = 1 megabtye per month per user What about the future? · NSFNET traffic has been growing at about 6% per month = doubling every year · ASCII email is about 15% of network traffic · 40% is file transfers (10% of these are images) · Gopher, WWW traffic has had dramatic increase What about technology? · Routers are computers · Increase in the supply of bandwidth... also increases demand for bandwidth · Sometimes demand and supply will be out of sync Pricing and TOS? Different types of traffic need different service · email: tolerates delay · real time video: no delay · file transfer: depends Users have to declare priority/type to deal with traffic appropriately Have to give them incentive to do this What about fixed costs? · Probably don't want usage prices to recover fixed costs of network capacity · Better done with capacity-based connection fees Two-part tariff · subscription fee · congestion fee How big would prices be? NSFNET bacbone costs about $106 per month per packet · carries 60,000 x 106 packets · cost per packet = 1/600 cents per user ·10 million users of NSFNET backbone? ·10 cents per user per month What if everyone used video? But video could use 103 as much bandwidth! which would mean $100 per month The point of pricing useage is not to recover costs of current use... But rather to match use to capacity How to price? · Time of day? · Priority? · Smart markets? Smart markets · Users set "bid" for immediate access · Users with highest bids are admitted (others are buffered or dropped) Other proposals · Prioritization · Congestion quotas · ATM pricing theory practice Market pricing · Prices should be up to market (as long as it remains competitive) · But there needs to be some standardization Incremental costs of accounts "Over 80% of your telephone bill is accounting..." Incremental costs and average costs Mitchell (1990 RAND report R-3909-ICTF) · summary billing: 0.1-0.2 cents per call · itemized billing: 0.7-1.2 cents per call · account maintenance: 50-75 cents per month incremental cost of call · non-busy period = essentially 0 · busy period = 6-11 cents per call · averaged = 1.2-2.4 cents per call Average cost of accounts · 1984 long distance carriers paid RBOCs $2 billion for billing and accounting · ATT's 1984 total revenue from long distance was $31 billion · billing/revenue = 6.5% Telephone and internet accounting · Phone is connection-oriented · IP is not; ATM is · Who should be billed, client or server? Other ways to do accounting? Distributed accounting · centralized model: phone companies · decentralized model: post office Practical experience · Chile: not so good · New Zealand: not so bad NetTraMet peak load pricing Summary · increased usage and new application are going to radically increase demand for bandwidth · supply of bandwidth will increase too, but they won't always be in sync · makes sense to think about ways to price before a crunch rather than after Bottom line: think about how much bandwidth your application uses...it may not always be free.