Huge ISPs want per-GB payments from Netflix, YouTube

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Poor Internet providers. They have to carry all that horrible, horrible traffic from Netflix and YouTube, and they just can’t afford it anymore. Unless they start charging end users 21 percent more for Internet access, or unless they’re allowed to bill Internet companies at 3.7¢ per GB, the Internet could “become unusable at peak times” due to congestion.

The huge incumbent ISPs have a fairly obvious agenda for the future of the ‘Net, one that involves traffic prioritization, more “managed services,” and high prices, but rarely is the wish list on such prominent display as in a recent report from consultancy A.T. Kearney. Four of Europe’s biggest ISPs—Deutsche Telekom, France Telecom, Telecom Italia, and Telefónica—commissioned a study from the company on “A Viable Future Model for the Internet” (PDF), which involves giving lots more money to ISPs.

The basic argument is simple and well-known. The ISPs claim that they just can’t afford all the investment they’ve been making, and that’s it totally unfair that companies like Netflix get to make nice business on their pipes without paying their fair share. Yes, it’s the old, tired claim about “freeriding”:

Most Online Service Providers [like Netflix or YouTube] pay a fee to their Connectivity Provider(s) [ISPs like France Telecom] to be connected to the Internet, which is generally based on the bandwidth they require, while the largest ones act as if they were Connectivity Providers in their own right and connect to others via peering agreements. In both cases these charges are generally flat fees, not linked with usage and they form a very small part of their total expenditure/cost structure. In effect, Online Service Providers are paying to connect their services to the network but are not paying for downstream service delivery.

A.T. Kearney has four ways to give ISPs the cash they need to prevent the Internet from grinding to a halt:

• Charge people more for Internet access (an extra €6 per month should do the trick)
• Charge every Internet company €0.05 per gigabyte to deliver traffic (and a staggering €3.03 per GB if delivered to a mobile network)
• Allow paid prioritization, so sites like Netflix could go faster than everyone else if they cough up the cash
• Deploy more “managed services” that operate over the same last-mile IP pipe

That’s it. Those four choices are the only way to stave off the coming Internet brownouts—a warning we’ve been hearing regularly since at least 1995, when Bob Metcalfe warned of the coming “gigalapses.” It wasn’t true then, and it hasn’t been true since (one thinks of the worries about the “exaflood” and “Internet brownouts”).

The Kearney report at least takes a slightly better approach to the fear-mongering, at least admitting that Internet backbone traffic is fine—it’s those last-mile networks that need all the cash.

The report is worth a read, if only to see how the next ISP push to charge more money will look. Commissioned by big European operators, it’s not surprising that the targets are generally content companies—especially American content companies. The whole piece has more than a whiff of the old Ed Whitacre comment about companies using “my pipes free.”

“Nobody gets a free ride” #

Paul Budde, a longtime telco analyst who heads up his own Australian consultancy, isn’t impressed by the complaints.

“When I received research by A.T. Kearney on ‘A Viable Future Model for the Internet,’ I immediately checked who had paid for that report,” he notes. “On seeing the names Telefonica, Deutsche Telekom, Telecom Italia, and France Telecom I could almost predict the viewpoint that the paper would present—that content companies should also start paying the incumbents for the delivery of information over their networks—this despite the fact that the users are already doing that. And, given that it was the European carriers who commissioned the report, the American content providers are, of course, the main target.”

As for the freeriding argument…

In the world of the Internet nobody gets a free ride. The only way you can connect is if you pay, and the more you use the network the more you pay. The good thing, however, is that the customer can choose who they spend their money with. In principle, the more customers an ISP has, the lower its costs will be, and the lower its prices will be. So ISPs and content providers alike try to get more customers, and to get global connections at lower prices.

If they can bypass their national incumbent network supplier and get lower costs by connecting directly to other (competitive) networks on a different continent, they will. A good example is Google, which became part of a consortium that is laying a fibre optic cable across the Pacific—in the long run this investment of hundreds of millions of dollars is cheaper than using the networks from the incumbent national telcos.

This puts pressure on the network providers to continue to reduce prices, and to do this they need more customers and lower costs themselves. This is how normal business works. However incumbent telcos are very worried about competition, since in the past they had little or no competition and were able to charge what they liked.

ISPs really do seem to believe that content companies are “dumping” traffic onto their networks, but the “source” of all that traffic isn’t the content companies; it’s the users who have chosen to access those services. Having popular online services is of course the very reason that people pay for Internet access in the first place.

While usage-based billing has already come to places like Canada, it’s clear that ISPs would like to extend it to Internet companies as well as to end users.