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On Oct 14, 2006, at 7:42 PM, Peter Sherbin wrote:

>> Are you suggesting that incremental cost of service delivery should
>> the basis for pricing inter-provider network services?
>> Would that rule also apply to provider-to-end customer pricing?
>
> The model only states that a packet originator has to cover  
> transfer costs, at any
> level an individual or a provider. Pricing is determined by the  
> market.
>
>> Should costs define the upper as well as lower limit for pricing?
>> Who calculates what costs "really" are?
>
> The cost is a fundamental business variable but not the only  
> determinant of the
> price. It is assumed that business entities understand their costs.
>
>> You proposal suggests to me that you don't think the market is taking
>> care of at least some elements of this equation now -- i.e., that
>> pricing is "irrational" in the economic sense.
>
> Models from a few Tier 2 ISPs that I have seen indicated a vague  
> understanding of
> the Internet costs.

Generalizing from that set of observations is perilous, for many  
reasons.
Out of curiosity, have you seen cost models of Tier 1 ISPs or access  
facility / local telephony providers that inspire greater confidence?

> IMO the Internet from its start has been and still continues to
> be subsidized by a local telephony and/or a local cable.

This is a common belief/assertion among PSTN employees. Local  
telephony providers also thought they they subsidized long-distance  
and international voice services -- all "value-added services" in  
fact, wherever these are treated differently from "basic services" by  
local law. The same special interest groups also generally believed  
that third-party devices (voice terminals, faxes, modems, etc.) were  
too risky and unpredictable to be allowed to attach to the local  
access platform. In some places, those views remained unchanged, and  
continue to dominate -- and in those places value-added services  
still tend to cost an arm and a leg, and the Internet often barely  
exists at all.

IMO this view is one of the biggest reasons why the Internet  
continues to be more concentrated than one might expect given rapid  
global growth. Mobile factors tend to exit expensive markets and take  
up residence overseas, in exactly the same way that "outsourcing"  
works in every other commercial sector. The possible adaptations are  
basically the same too -- normalize up, normalize down, or close the  
border and go your own way.

> Pure-play ISPs exist because they pay for the access below cost.

What is a pure-play ISP anyway? Is it any ISP that is not a telco,  
i.e., an incumbent access facilities owner?

How is that cost calculated, exactly? Is it "whatever we (access  
facilities owner) choose to spend on whatever we choose to spend it  
on" (ala rate-of-return arrangements)?  If so, then of course the  
cost is completely subjective/fictitious/arbitrary. That pure  
arbitrariness, and the harm that it inflicts on the rest of the  
economy is what typically causes telecom regulators to create and  
maintain a "wholesale telecom" market segment --  which is the thing  
that makes it economically feasible for non-incumbent facilities  
owners to offer communications services of any kind.

>> Put another way, doesn't your proposal entail the elimination of
>> bypass and the restoration of closed territorial markets (aka "local
>> circumstance sovereignty") that only exchange traffic at the border?
>> Do you think that markets like that -- there are still many many
>> around the world -- are more rational, and should be emulated?
>
> On the Internet a territory is determined by AS boundary rather  
> than geography. The
> model suggests that a provider charges a "fair" price covering the  
> transit of
> originators' packets.

This seems to me to get the equation backwards. Operators extend  
ASes / logical boundaries across physical segments in order to  
improve their terms of business. Sometimes business is served by  
insourcing -- extending the AS to new territories or market segments;  
sometimes by outsourcing -- handing off the traffic to someone else.  
So my question remains unanswered -- doesn't your proposal require  
that ASes revert to being explicitly geographic-territorial?

> Based on costs/traffic patterns a provider negotiates a deal
> with a bordering AS(s). Geography where AS is located could  
> influence costs.

If ASes are explicitly geographic, then this is a description of  
something like the traditional (pre-1996) ITU settlements system. If  
ASes are not explicitly geographic, then this is just a description  
of the internet as it exists today.

>> Your proposed goal of exposing cost drivers is redundant if local  
>> costs
>> continue to be subject to extra-local competition, and your proposed
>> mechanism for exposing costs would almost certainly devolve into a
>> mechanism for eliminating such competition.
>> Or am I missing some element that might forestall this outcome?
>
> Here is the model:
> 1. Bob is willing to send a packet to Alice
> 2. Bob must cover the cost

What is the cost? Who calculates the cost? By what mechanism?
(refer to previous)

> 3. Cost unit/driver = 1GB upload

When your cost unit/driver goes down -- as it did by several orders  
of magnitude during the last decade -- how does that affect the  
calculation of "fair" "costs" or "prices"? Bob's demand for  
connectivity with Alice is price elastic, but Bob's service provider  
would be much happier to sell him 2mb of traffic exchange for $50  
than to support 2mbps monthly flat rate service for the same price --  
no matter what the cost of service delivery is. In places without  
competition and/or a strong regulator Bob tends to get the former; in  
other places Bob gets the latter, or maybe 20Mbps or 200Mbps. Bob  
would want to know how your proposal would affect the calculation of  
his cost of service, because he really likes Alice ;-)


> The above applies at all levels: node, network, AS. Providers  
> compete freely with no
> requirement or need to expose costs.

Today there are many places where multiple ASes straddle the same  
territory, and offer interchangeable/competing services.
Why is that not "free competition"? If it is "free competition," what  
advantage would be achieved by redefining this concept in the terms  
that you propose?

TV


> Peter
>
>
> --- Tom Vest <tvest at pch.net> wrote:
>
>>
>> On Oct 12, 2006, at 1:31 PM, Peter Sherbin wrote:
>>
>>>> Or, put another way, I don't understand the problem
>>>
>>> The model aims at identifying a fundamental *cost driver*  on the
>>> Internet, e.g. a
>>> certain amount of electrons carrying data from the origination
>>> point to its
>>> destination. Subsequent arrangements will follow naturally shaped
>>> by whichever local
>>> circumstances.
>>
>> *(emphasis mine)*
>>
>> Are you suggesting that incremental cost of service delivery should
>> the basis for pricing inter-provider network services?
>> Would that rule also apply to provider-to-end customer pricing?
>> Should costs define the upper as well as lower limit for pricing?
>> Who calculates what costs "really" are?
>>
>> You proposal suggests to me that you don't think the market is taking
>> care of at least some elements of this equation now -- i.e., that
>> pricing is "irrational" in the economic sense. Could this perception
>> be based on the fact that some pricing and "arrangements" are based
>> on regional/global rather than locally bounded circumstances?
>>
>> Put another way, doesn't your proposal entail the elimination of
>> bypass and the restoration of closed territorial markets (aka "local
>> circumstance sovereignty") that only exchange traffic at the border?
>> Do you think that markets like that -- there are still many many
>> around the world -- are more rational, and should be emulated?
>>
>> Forgive my cognitive dissonance, but we got to where we are today
>> because globalization (erosion of local market sovereignty) exposed
>> places with different prices and cost structures to pressure from the
>> prices and cost structures of other places, i.e., "competition." Your
>> proposed goal of exposing cost drivers is redundant if local costs
>> continue to be subject to extra-local competition, and your proposed
>> mechanism for exposing costs would almost certainly devolve into a
>> mechanism for eliminating such competition.
>>
>> Or am I missing some element that might forestall this outcome?
>>
>> TV
>>
>>
>>
>>
>>
>>
>>
>>
>
>
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