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  From: Jason Tan <jason@rebel.rebel.net.au>
  To  : Mark Newton <newton@atdot.dotat.org>
  Date: Wed, 24 Jan 2001 16:09:46 +1030 (CST)

Re: AOL? or best ISP

On Wed, 24 Jan 2001, Mark Newton wrote:
> Anyway, moving on:
> 
> On Wed, Jan 24, 2001 at 10:36:22AM +1030, Jason Tan wrote:
> 
>  > If they werent cheaper ISPs would not in most cases be caching.
>  > Most dont do it for speed, they do it for profit.
>  
> I think that in once sense you're oversimplifying, and in another 
> sense you're not recognizing that those two are quite similar.
> 
> Please let me illustrate with some ISP-neutral examples.
> 
> If any ISP has a cache which is delivering, say, 30% savings on bytes,
> that means two things:
> 
>    - That's 30% worth of volume charges which they don't have to pay
>      on volume charged links (if their links are volume-charged) -- this
>      maps to your "doing it for profit" bit above, and it represents
>      a 30% decrease in the "cost-per-megabyte" on average;  and
> 
>    - That's 30% worth of "free" capacity on a fixed-bandwidth link which
>      they haven't needed to buy -- this maps on to your "doing it for 
>      speed" bit above.
> 
> For example, a small ISP on a 2 Mbps connection will be able to behave
> as if it's a 2.6 Mbps connection if they have a cache which is delivering
> a 30% byte saving.  So in one way that's making things faster (they've
> freed up 600 kbps), but in another way it's also making it cheaper (that
> 600 kbps isn't costing them as much).
> 
> Note that "not costing them as much" isn't the same as "not costing them
> anything." 

Which is of course why I said cached bytes are very cheap as opposed to
free.

> 
> Let's have a closer look at that small ISP.  Pretend they're connected
> to Telstra with a Megalink 2Mbps circuit.  If you, as a walk-in consumer,
> connect to Telstra you'll be able to buy bytes from them at 19c/Mbyte,
> GST ex.  Now guess what their wholesale rate to ISPs which will compete
> with them is?  You guessed it, 19c/Mbyte GST Ex!

Now your oversimplifying.

And using the most expesnive provider around.

A recent survey I have done seems to indicate that bytes area avaialable
at a price about half what telstra charge  on a reasonable volume. The
sort of volume a small(very samll)isp might draw - in fact the sort of
volume some home users would conceivably draw if they could. eg 5 -20 gig
per month.

> So, there's this ISP.  It's getting a wholesale access deal which is 100%
> identical to the retail access deal which you could get if you didn't use
> them as your ISP, *and* that's before they factor in overheads, profit 
> margin, etc.  So, in leiu of other factors, there is absolutely no reason
> for a customer to use that ISP.
 
This appears to me to be unrealistic and a gross oversimplifcation.
I also note you specificlaly choose a small ISP for your example, ie the
least profitable, the size inthe worst prositionto beneift form economy of
scale, and the size in the worst bargaining possiotn, with the least 
buying power.

I am not saying a samll ISp cna do the stuff I say can be done.

But even so your 19 cents a meg, does not seem to be a reasonable price
even for a small ISP.

> So the ISP installs a cache, which effectively cuts their wholesale price 
> per megabyte to 14.6c/Mbyte (30% down).  They factor in overheads, profit,
> infrastructure, etc, and come up with a retail figure of 18c/Mbyte (GST Ex),
> but that's on a cut-thin-to-the-bone margin, and only if they sell A LOT
> of megabytes:  It's only *JUST* profitable.

> ... then you come along and say, "But what about caching?  You should be 
> selling it for 14c/Mbyte + GST!"

No I say that if you are charging for bytes you should charge at a fair
price, ie a diferentiated rate or one that soemhow reflects that
difference between cached bytes which afre very c very cehap tro deliver
and bytes delivered from extrenal links..

Ie if you pay say 3 cents for cached bytes and your profit maginis 50%
then you charge 6 cents for cached bytes to your consumers.

If you pay 8 cents for externally deleivered bytes then you charge
16 cents for extrenally delivered bytes to your users.

You maintain your profit maring, but not the same level of profit overall.

I am saying this is possible to do.

I am not saying that any ISP should do it, althoughI am sayign tha some
do, do it.

> It just doesn't add up, Jason.  To do what you're doing would involve running
> at a loss, at which point the ISP might as well not be there in the first
> place.  When you're having that kind of discussion, remember that the 
> wholesale rate is already higher than the retail rate, and the only reason
> it can continue like that is due to caching, use of local peering points,
> etc.

This is not solely some fantasy I have come up with Mark,

There is at least  ISP that use this model for retail consumers(on some
account styles), and apparently report profit.

> 
> Note that the figures above have been made-up (i.e.: I'm not presenting 
> you with a real-life case study), but a quick look around the marketplace
> shows that they're pretty spot-on.  You'll find that variations in that
> cost are due to ISPs getting varying wholesale prices by using providers
> other than Telstra for their upstreams (including peering points), rather
> than variations in cache efficiency.
> 

I disagree with that statment about the figures beign "pretty spot on" on
the basis that 19 cents a meg is not the sort of price most ISP actually
payt for bytes. I dont think your 19 cents is very realistic at all.

I think the variations you are talking about are very considerable and I
think you are understating the signifiane of them (thso e variations).

I would think that a large regional ISP, say internode, senet or chariot
size would be paying in the region of and probably _about_ half what
telstra charges some one off the street actually probably less than half
the straight off the street price, on the _majority_(not all) of their
incoming bytes _most_(not all) of the time.

Presumably national and international ISPs are in an even better position.

> Also note that the "good-fast-cheap, pick any two" principle hasn't been
> applied here at all -- This mythical ISP isn't really making enough money
> to have the luxury of making that decision on the profit margins used
> here, they'll be lucky enough to just keep hanging on for dear life.
> They're not making enough money to use the latest equipment and employ
> good staff ("good"), they're not making enough money to plough it into
> infrastructure ("fast"), and they're not big enough to have the economies
> of scale you need to start dropping the wholesale price by playing one

Exaclty they are not big enough to have econonmies of scale.
which is why I think your eample is not all that relvant for our
discusiion. It appears to be much the worst case.

> wholesale provider off against another ("cheap").  Hopefully that helps 
> you to understand why so many ISPs start up with a bang, then quietly 
> whimper themselves to death over the course of the next year or two.

But when you are big, and you do have economies of scales, things do get
cheaper, and I suspect the cache gets cheaper, you gain more benefit
from peering(I suspect).

>  > Alternately you could just charge a lower price for all bytes, based on
>  > the average efficeny of your cache.
>  
> As I've shown above, this is pretty much what most ISPs do, and which is
> why it's unsettlingly annoying to have people ask you to lower your prices
> to take caching into account when the fact that you've already done that
> is the only reason you're still in business.  How many iterations is that
> process supposed to go through before the customer demands that the price
> per megabyte drops to zero due to the effect of caching? :-)
> 
>  > Or do lots of oteh rhtings.
>  > The real pointis that the internode guys keep telling about all the
>  > expense, which soudns very reaosnable and is, but they are not mentioning
>  > the techiniques they can and almost certianly do use to decrease actual
>  > bytes downloaded.
>  > Ie I dont think they are presenting a very accurate picture.
>  
> Excuse me?
> 
> You seem to have an impression that reducing bytes downloaded is the be-all
> and end-all of a cheap Internet access plan.  That's simply not true, and
> I think that if you're going to throw around accusations of inaccuracy 
> you really should be justifying them.

I think that reducing the cost of delivered bytes is a fairly resonable
part of reducing the cost of Internet access overall, for most Australian
ISPs.

I usnderstand that there are port costs and monthly line rentals which are
spread of some number of users per port (once again in this wrea I think
large scale helps).
I understand there is a set up time for new users where you exepct they
will need some support to get configured. 
I understand that there are support costs for ongoing users.
I understand there is maintenance for servers znd routers, all of which
means staff, sparesa dn probalby expensive wararnty optionson some
eqiuipment.

I understand that there are other costs quite  few of tehm over and above
these fairly obvious ones mentioned above.

But I also undertand that a gorss profit marginof say %50 is less on
say 3 cents than on say 8 cents, I I thiknk that this should be passed on
to the user, and can be passed onto the user, whiout hitting a gross %
profit rate.

Although almost certainly hitting your gross profit.

> For what it's worth, your usage of the plural "techniques" is misleading:
> Apart from caching, there really *aren't* any techniques to descrease bytes
> retrieved from upstreams.  And Napster, which constitutes a double-figure

Peering, local archives, the thing that starts with 'a; agami??
akami?? (though this is in effect caching), redirection (I guesss this is
caching too, but some people dont consider it as such or think of it when
they think caching).

> percentage of traffic, isn't cacheable at all.  Factor that into the real-
> world price of a $25 "leech account" and you'll see that it *REALLY* doesn't
> add up.
> 
>  > Lots of peopel here woudl kow this, whether they woudl recall it or not
>  > while reading the email, who knows.
>  > I  just think that if a pricture is rpesented it shoudl represent the
>  > whole picture, to soem extnet, and not just the bits that are convenient
>  > for your argument.
> 
> What bits haven't been covered?

Well you have covered lots of it now, but you did not in your orignal
posts.

>  > Yes but every time that someone mentions one of these ISPs that use a
>  > dffrent combination to gpood and fast, that person gets a interndoe person
>  > telling them why this is nto good, or how this is unsustainable, which is
>  > blatantly not true in many cases.
>  
> I take it you're referring to me, since I've been the one using the word
> "unsustainable."

Not to you personally.

Unsustainable is not an uncommon term in this type of conversation.

What I was saying was that combinations of service other than good and
fast are sustainable.

Eg cheap and slow( a seriously oversubscrubed service for example).

> I'm happy to debate this further (off-list if necessary), because you've
> basically called me a liar above.  Where, exactly, have my accusations of

It was not my intention to call you a liar, I apologise if this is how you
have taken it.

I dont  however retract the substance of my statment of what I siad ie
other models apart from good and fast are sustainable.


> unsustainability been "blatantly not true"?  You must know, because you've
> referred to "many cases" -- Right now I'm interested in knowing whether
> these "many cases" are occasions you can actually cite, or whether you're
> just blowing smoke.

I can cite a particular case of a national ISP based in adelaide which
offers differentiated pricing on byte limited acounts to retail consumers
as far as I am aware, or at least did when I signed on the the current
plan I am on now ( ia asusme it is still cuirrent as I hve nto received
anything to tell me anything different).

> 
> As far as the historical record goes, I think there's ample evidence of
> imploding ISPs to show that what I've been saying has quite a bit of 
> merit.  But maybe you know something I don't.

Sure there are lots of isps that go bust, no denying that.

But it is not just because of the account styles they offer, though in
some (probably many) cases this is likely true.

However that does still not mean it is not possible to run a sustainable
isp that is cheap and slow, or slow and not limited in (directly
ie with x meg per account or time period I accept this is
still limited )download or time, but is simply limited on a saturated
incomding link  lots of other combinaitons that are not "fast and good".

Some people (I suspect many) are happy to accept compromise for price.
Not all people but a lot.

Still more people dont know there is a difference in service, apart from
price.

In other words I still think that combinations of operation otere than
fast and good are sustainable.

I probably wouldn't use one myself, but I know  a lot of people who are
happy to.

>  > And when someone does poke holes in or ask quesitons about  the
>  > statements made, which lead to areas which may not be so favourable they
>  > ignore it.
> 
> Again, you're going to have to cite some examples, off-list if necessary.
> I've tried my best to give complete answers, while attempting to work 
> within the graciousness which the mailing list has demonstrated by the
> fact that this thread has been allowed to continue at all (and now that
> Richard has suggested drawing discussion of my employer to a close I've
> done just that -- my discussion here is generic to any ISP in Australia).

> But I suspect the real reason we're having this conversation right now
> is that you have a less-than-complete understanding of what it costs to
> run an ISP.  A word of advice:  Instead of looking at a retail price and
> working backwards to estimate what the likely wholesale price must be,
> why not look at the (publically available) wholesale prices and determine
> what you'd be retailing the service for if you were running it.

What makes you think this is not exactly what I have been doing?
Your appear to be making some large assumptions here.

I have a fair idea of current wholesale prices for small scale ISPs.
I am basing my statements on thsese prices.
Of course I assume that larger ISPs, with more traffic icoming get better
prices, but I am not making my assumptions/statements on this basis.

jason


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