Tuesday, April 21, 2009

The Truth About Consumer Bandwidth Pricing

There's been a lot of noise made recently about Time Warner instituting bandwidth caps. Everyone was angry at Time Warner, whereas Time Warner claims it's losing money because of a few people hogging all the bandwidth, that usage based pricing is more fair and also necessary to pay for building up their networks, and that all of this BitTorrent traffic and streaming video is killing their networks and needs to be capped.

I have an inside perspective on this matter because when I was the Director of Product Management at BitTorrent, we often spoke with ISPs. We knew that Comcast was throttling BitTorrent traffic far before it made it into the news and I flew down to Comcast headquarters in Philadelphia to discuss the situation. I was suprised when the told me that they had plenty of bandwidth and that BitTorrent wasn't anywhere close to crushing their network. Their problem was that they don't want to sell bandwidth, a comodity with a price racing to zero. They want to sell entertainment services, which have a higher profit margin. They are therefore threatened by online video as it competes with cable TV.

The consumer ISP strategy thus has a twofold purpose: raise the price of bandwidth, and at the same time make the Internet a less appealing way to watch video. Both of these purposes are accomplished by bandwidth caps. Additionally, the new pricing models make it complicated to determined how much you're going to be paying exactly for bandwidth, allowing the ISPs to increase prices covertly. If they were to just declare that prices were going up because they felt like it, people would be very angry indeed, and it might lead to government regulation of pricing.

In order to unravel the mystery of the new pricing models, I've made some graphs that show how much you will pay in dollars for a number of total gigabytes transferred in a month. I was very suprised by the results.

To start, here is a graph of a lot of different plans, such as various Time Warner plans, AT&T DSL, and the main 3G mobile carriers.




On the bottom is gigabytes and on the left is dollars. Yes, dollars. 300 GB would costs you $140,000 on AT&T 3G. You'll notice that only the 3G providers show up at all, everything else being squished into a single line on the bottom. This is because while Time Warner is charges overages of $1/GB, Sprint is charging $50/GB, Verison $280/GB, and AT&T a ridiculous $480/GB after you exceed the 5GB cap. Everyone is mad about the Time Warner caps, but it's really the 3G caps that are totally insane. Every iPhone user is on AT&T, so when Hulu for iPhone comes out it's going to be crazy.

So don't use more than 5G of 3G per month or else you're getting ripped off. Let's compare some ISPs just in the 1-5G range to see how they stack up.



Amazon S3 is included here at the bottom just to show how much more expensive consumer bandwidth is than hosting bandwidth. The bottom tier of Time Warner service is a clear winner here, following by the original capper Comcast. 3G services are in the middle, with premium tier cable and DSL services losing. In this bandwidth bracket, you don't really get much benefit from upgrading your service.


Now let's look at ISP choices excluding 3G.



The lowest Time Warner tier wins again if you lose little bandwidth, and then Comcast wins everything else up to 250G where they have put a hard cap.


Now let's look in depth at just the Time Warner tiers.


The graph is interesting because Time Warner imposes an overage fee cap of $75. This causes the lowest tier to come out best for both low and high numbers of gigabytes. The lowest tier charges $15/month for 1GB and $2/GB for each additional GB, up to $75 in overages, meaning that your total bill is capped at $90. You therefore get unlimited bandwidth for $90 with that plan. Whereas their highest tier plan is $75 for 100 GB and then $1/GB after that up to $75 in overage charges. You get unlimited bandwidth for $150 with this plan. So the lowest tier wins and the highest tier loses. The middle tiers only come into play for medium amounts of bandwidth.

So, let's look at medium amounts of bandwidth where the multiple tiers come into play.


This graphs shows a situation similar to the one pitched by Time Warner. There are multiple tiers and you get the best deal by choosing the right tier for the amount of bandwidth you use. However, note that the goal is not to avoid overages. The goal is to avoid having your overage charges cost more than the monthly charge of the next plan up. So while the lowest tier only includes 1GB/month, it's the best plan up to around 10GB/month. Similarly, the standard plan will be better than an upgrade up to 50GB/month. The highest tier is only good for people that use >80 GB/month. And Time Warner Business Class is, as shown on all of the graphs, always just a terrible deal.


It was just discovered that AT&T DSL is implementing bandwidth caps. They have a different model because they don't have a cap on overage fees. That sounds like it would probably be a worse deal than Time Warner. Let's take a look, first at just the different AT&T DSL tiers.


This is the more classical model that you'd expect with overages. Since there are no caps on overage fees, you get the best deal by choosing a plan matched to your usage. If you guess incorrectly, you overpay. The ordering of plans from cheapest to most expensive becomes inverted from low usage to high usage.

Now let's compare the various AT&T DSL plans to the various Time Warner cable plans.


There are a lot of lines on this graph, but you only need to look at the bottom. The lowest tier of Time Warner again wins for low bandwidth. After than, successive AT&T DSL plans win. Despite the fact that their pricing structure is worse, their actual prices are better than Time Warner as long as you're good at guessing how much bandwidth you're going to use. If you're bad at guessing, only the lowest two tiers of Time Warner could ever possibly be better than AT&T DSL and only for a small range of usage. So if you're bad at guessing your usage, your best bet is to get the highest tier of AT&T DSL.

Conclusions

I was suprised by the outcome of these charts. The Time Warner caps are not that big of a deal and the AT&T caps are even less of a big deal. What you really need to watch out for is the 3G caps. Those are just totally off the rails.

The best deal for consumer Internet is AT&T DSL, even with the caps and overage fees. If you know how much bandwidth you're going to use, buy the appropriate tier. If you don't know how much bandwidth you're going to use, you're safest buying the highest tier.

If you're going to go with Time Warner, the lower tiers are a better deal. Go with the lowest tier you can and only upgrade if your overage fees are costing you more than the next tier. Never buy the highest tier or business class, they are ripoffs.

3G is a terrible deal. If you use less than 5G a month, all the 3G providers are priced the same and are not a very good deal for Internet. Use the lowest tier of Time Warner instead. Under no circumstances use more than 5G of 3G in a month, you will get ripped off big time.

Also, Hulu for iPhone is going to be a train wreck.

5 comments:

Anonymous said...

Brilliant!

blanu said...

I just wanted to clarify that I didn't realize it at the time, but all of the 3G carriers seem to differentiate their plans based on whether they are for a phone or for a laptop connect card.

So all of those iPhone users running Hulu get unlimited bandwidth, and laptop users running Hulu with an AT&T card will be charged $480/GB after 5GB. Sorry for the confusion there.

andy said...
This comment has been removed by a blog administrator.
David said...

Where did you get this $480 a GB number?
I am pretty sure that is very incorrect.
For AT&T customers who exceed the 2GB cap, an extra 1GB in the DataPro plan costs $10

blanu said...

Hi David, all prices were taken from the company websites. The pricing changes all the time. In particular, the 3G carriers have been changing their prices, specifically regarding overages. You can find my more recent post about 3G pricing, including updated AT&T pricing here:

http://www.stepthreeprofit.com/2010/06/truth-about-mobile-bandwidth-pricing.html