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August 17, 2011

Distance-based Pricing - Georgia Tech Paper Suggest Possible Back to the Future Scenario

By Peter Bernstein, Senior Editor

If you are not familiar with it, Georgia Tech’s College of Computing is one of the United States’ true national treasures. For this and other reasons, it would not be a bad idea to pay attention to a series of papers they will be presenting at the annual AMC SIGCOMM event in Toronto this week. They point to the validity of the industry returning to the days of distance-based pricing along with some other intriguing topics. In case you are not attending below are two of their fascinating presentations with links to the cited papers:

  • Broadband Internet Performance: A View From the Gateway — A study of network access link performance measured directly from home gateway devices. It raises the question, “Could an Internet ‘nutrition label’ help consumers make more informed choices in selecting broadband service? Once they make that choice, they can also monitor their ISP’s performance?”
  • How Many Tiers? Pricing in the Internet Transit Market — Examines that, in the face of Internet service providers starting to charge based on how much data customers consume, what if they also charged according to how far that data travels? The authors say some already do—and it’s a smart move.

While the papers are for the technically inclined, their conclusions can be understood relatively easily and are food for thought for the FCC (News - Alert) going forward.

The first paper says lessons learned include:

  • Continual measurements, directly from home network gateways are crucial for understanding the details of home access network performance.
  • Different ISPs use different policies and traffic shaping behaviors that make it difficult to compare measurements across ISPs.
  • There is no “best” ISP for all users. Different users may prefer different ISPs depending on their usage profiles and how those ISPs perform along performance dimensions that matter to them.
  • A user’s home network infrastructure can significantly affect performance.

In the context of the FCC and Congress’ interest in truth in advertising for all segments of the communications industry, understanding that there are going to be different strokes for different folks in a tiered pricing world means the industry may need to be forced to have “nutritional labeling.” The problem already highlighted by such a regime would be the level of sophistication a customer may require to understand what the labels even mean.

The second paper on transit pricing studied two questions.

  1. How does tiered pricing benefit both ISPs and their customers?
  2. How should ISPs structure the connectivity tiers they sell to maximize their profits?

The modeling and mathematics behind the conclusions are interesting based on a model the authors constructed for enabling ISPs to evaluate how they should arrange traffic into different tiers, and how they should set tier prices. The conclusions are enlightening. To quote the paper, “We find that:

  • The common ISP practice of structuring tiered contracts according to the cost of carrying the traffic flows (e.g., offering a discount for traffic that is local) is suboptimal.
  • Dividing the contract into only three or four tiers based on both traffic cost demand and the cost of carrying it into only three or four tiers yields near-optimal profit for the ISP.
  • Other strategies such as cost division bundling also work well.
  • Networks with primarily lower cost traffic (either local or traveling short distances) require fewer tiers to extract maximum profit than other networks do.

As they say, the bottom line is the bottom line. The authors correctly observe that, as the price of Internet transit drops, transit providers are already selling connectivity using “tiered” contracts based on traffic cost, volume, or destination in order to maintain profits. In addition, the math says that the second point, including a distance cost in the calculus, makes this a smart move.

For those who are not huge football fans, you may not know the words of the Georgia Tech Yellow Jackets. They are, “I’m a Ramblin’ Wreck from Georgia Tech, and a hell of an engineer…I’m a ramblin’, gamblin’, hell of an engineer.” Yes they are.

One thing that can be said; what policy-makers ultimately make of this will be of great consequence.


Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest brands, including Avaya, Alcatel-Lucent, Telcordia, HP, Siemens, Nortel (News - Alert), France Telecom, and others, and having served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.

Edited by Rich Steeves
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