Bandwidth Hogs and Network Performance: Wireless and Wireline Implications

 |  Includes: RCI, T, VZ
by: The Operations Room

By Martin Lariviere

We have not posted on bandwidth hogs in a long time, but this month has seen some interesting developments in how network providers price their services and manage their traffic. One comes from Verizon Wireless (NYSE:VZ), which finally got the iPhone from Apple (NASDAQ:AAPL) and now threatens to throttle heavy users (Verizon Wireless to Throttle Data Speeds for Mobile Bandwidth Hogs, Feb 3, PC Magazine).

Customers who use “an extraordinary amount of data” and fall within the top 5% of Verizon data users might be subject to reduced data throughput speeds. The throttling will occur periodically during the current and next billing cycle at peak times and in locations with high demand, Verizon said in a statement.

First, I don’t know who coined the term “throttling” for giving lackluster service to a handful of customers (I first heard it in reference to Netflix (NASDAQ:NFLX) slowing down how fast heavy users got new DVDs), but he or she is to be congratulated. It’s a great expression. Now one might wonder why Verizon would want to mistreat some of its customers. As they see it, their intentions are pure and for the collective good.

“Our proactive management of the Verizon Wireless network is designed to ensure that the remaining 95% of data customers aren’t negatively affected by the inordinate data consumption of just a few users,” Verizon said.

The second development comes from north of the border. A regulatory change in Canada has effectively killed unlimited Internet plans. Here we are talking about wired service for homes and businesses as opposed to mobile services. Still, people are upset and it has become a political issue. Here is how the Globe and Mail explains it (Why not a metered Internet?, Feb 7).

Bizarrely, an obscure regulatory tweak made by the Canadian Radio-television and Telecommunications Commission last year, which effectively kills the unlimited download plans offered by a handful of smaller providers, has awakened a nation’s rage. And now the national discourse is dominated by how much Canadians should pay for Internet service, down to how much each gigabyte of data should cost them.

Although the CRTC cannot regulate the price of Bell’s retail Internet customers, it can regulate network access that big companies sell to smaller providers, such as TekSavvy. These smaller companies, as CRTC chair Konrad von Finckenstein told MPs, were mandated into existence to “discipline” the market. They did this with the unlimited plans that were safe havens not only for online-movie watchers, but also for small businesses, telecommuters and entrepreneurs.

Then, two weeks ago, the regulator allowed Bell and Rogers to charge smaller ISPs by the byte, in a way that effectively kills all-you-can-eat Internet plans. And despite the fact that few Canadians were on these plans, a nation essentially interpreted this as the end of the Internet as they knew it – as in, the beginning of Internet “metering.” It was really just an extension of it, but they were outraged nonetheless. The government threw it back at the regulator. But Mr. Clement told reporters that, no matter what the regulator’s review found, he wouldn’t approve it.

So Bell and Rogers (NYSE:RCI) (two big, traditional telecom providers) are trying to move all of Canada onto tiered data plans as AT&T (NYSE:T) has done with its wireless services in the states. Why now? I’m not completely sure but Netflix started offering its streaming service in Canada back in the fall. Correlation is not causation but ...

In any event, this has led to the question of whether Internet services are any different than any other utility. The head of the CRTC has asserted that they are not and that usage-based billing is appropriate. That in turn leads to the question of cost. One difference between your ISP and your natural gas supplier is that gas has a real, verifiable cost and rates are tied to that. The cost of moving data is a little more ambiguous. What is clear is that the penalty rates imposed when customers go over the contractual allotment are steep.

This last point is, of course, a little misleading. If the purpose of data caps is to regulate flows on the network, they are not necessarily related to the out-of-pocket costs of moving bytes. Rather, they should reflect the externality imposed on the system. That could be high but it still seems that service providers are getting a steep mark up.

There is another way of looking at this. Both Verizon and the Canadians/AT&T are trying to manage their customers and their network. Verizon’s approach actually impacts service, positively for 95% of customers and negatively for the bandwidth hogs. And the majority of customers might see a noticeable difference when the system is stressed with a lot of volume. The alternative of metered usage may affect total volume but is unlikely to improve service during peak times. If the majority of customers have similar time preferences, they will all want to use their limited allotment at the same time. Thus metering doesn’t address network performance issues the same way Verizon’s throttling does. That suggests that the Canadians and AT&T are really up to something else ... revenue extraction. The punishing penalty rates exist to scare people into higher price data plans.

This is basically the argument behind a recent BusinessWeek article (Wireless: Overstating Smart Phone Data Hogs?, Feb 9):

Let’s be clear, though: Tiered data prices are not in place to save bandwidth. Data hogs aren’t the problem the carriers would have us believe (Cisco has 0.4% of customers using more than 5 gigs a month), and the other customers are very profitable. Dave Burstein, an analyst for DSL Prime, estimates that if capacity were the only factor, no carrier would need to introduce a limit under 10 gigabytes.

There is another point to be made. While Verizon might actually improve service when capacity is tight, it is not clear why they are picking on heavy users. Capacity only really matters when the load is heavy. However, the only way to move into the top 5% of users is to use your phone a lot. So much of that usage has to be coming off peak. This would be a little like me having a student who comes to office hours every week but then refusing to talk to them the week of the midterm because other students have shown up. Why should off-peak usage dictate peak period treatment? It would seem more efficient to penalize those doing really intensive tasks. Those downloading movies at peak times should be penalized while those checking emails should get good service irregardless of their total consumption.