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What's the real cost of internet video?

The economics of prime time

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Analysis Can anyone afford to satisfy the demand for internet video?

Users want it, but today, the business models give operators the incentive to throttle, rather than encourage, high-bandwidth uses of the internet. MIT calls this the 'Broadband Incentive Problem'.

Last July, my company IP Development published research into the cost of 1080p HDTV [PDF, 128k] delivered over a UK LLU network and came to a figure of £2.10 per two hour film. This research was of interest to a wide community, from ISPs who bear this cost to internet evangelists who believed that we were somehow in the pocket of the big telcos in the Net Neutrality debate.

(We were not paid by anyone for that research - but the conclusions then and now clearly support the view that Net Neutrality is likely to neuter the internet.)

The point is that such figures are not economically viable, and if this is the best the net can do, then so long and thanks for all the fish...

We stand by those conclusions today as the economics of the LLU (Local Loop Unbundling network) have not changed in the last nine months. If you are just looking for headlines, this is probably where you should stop reading. The cost of two hours of HD TV over LLU in the UK is £2.10 and this is too much. IP TV, if fully deployed, would break the internet - except it, won't because ISPs will never allow it to go that far. Most content will never reach the internet and the stuff that does will be throttled back by drastic measures that kill the experience for those that try. All but the most determined will be deterred and those that persist will be easily tracked by the sheer volumes over their connections. TV will stay on broadcast platforms until structural issues that drive this £2.10 cost are resolved.

Doing the maths

We will attempt to explain how we build up our cost base to help you understand the nature of this problem in greater, financial detail.

Last year's research also looked at the comparable cost of delivering the same file over an IP Stream network, which we will not be looking at in this piece as the figures published last year will be out of date on 1st May 2007 when BT Wholesale's new IP Stream pricing comes into effect. The rest of this article will look at the £2.10 figure in more detail, so let's start by making two things clear, the first is that this is the incremental cost for end to end delivery over the internet using an LLU access network and the second is that this is for 1080p (1920 x 1080 pixel) HD.

The importance of the first point is that it includes internet transit as well as the cost of the LLU network. It is worthwhile breaking down that figure into its constituent parts: £1.03 for the transit and £1.07 for the LLU network. This breakdown is important because it highlights the importance of what the source of the content is and whether that means that the ISP has to pay to receive the file as well as to deliver it.

The fact that we analysed 1080p and not 720p or 480p is important too. 1080p is regarded as "true HD" and needs at least 10 Mbps to stream. You can get a 1080p TV from Currys online today for £279. 720p needs "only" 6.4 Mbps. It is worth adding to this that 480p requires around 2.5mbit/s, standard definition is around 700 kbps, while YouTube is 200 kbps.

So we looked at the highest resolutions and thus arrived at the highest figures. But as you can see from the Currys web site, 1080p is already affordable and becoming more so every day.

So where is this £1.07 cost on the LLU network?

Frighteningly, it does not include the cost of the local access loop or the DSLAM / MSAN access equipment, as these are fixed price items that do not vary with the amount of traffic. We are purely looking for the incremental cost of carrying a file.

This is where it starts to get a little complex, because networks are inherently shared between many users, so you have to start allocating costs on what will always be an arbitrary basis. This is an important part of the problem.  

We need some numbers here, so using our LLU backhaul model we would cost out Joe Bloggs' usage for that month (along with everyone else who was using the service at that peak time) at £80 because Joe is using 8mbits/s of the 100mbits/s that we are paying £1,000 a month for the backhaul circuit.

The problem with this model is that Joe would be one of a few very expensive customers, who just happened to be using the service at the peak point in time, that month. Next month, Joe may be using the service at 9.30pm or even at 9pm again, but that may not be the peak point in time next month, so his usage would be free.

This model while accurate, it is full of uncertainty that may lead to a light user having the full network cost allocated to them (£80) once every 350 months, with nothing the rest of the time.

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