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After enjoying a 'free ride' for the last decade or longer, will unavoidable financial reality now invade the internet?

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The New Internet Paradigm

Will We Soon Start Paying for Everything?
 

Tiny strands of fiber optic cable offer what was once a seemingly limitless capacity to carry internet data.  But the corresponding growth in data carried is now straining the underlying internet backbone.

Part 2 of a two part article - see also part 1, 'Warning - The End of the Internet as We Know It'.

 

 

The spread of fast reliable internet into every part of our lives has brought about many benefits to everything we do these days.

But what would happen if we now needed to start paying for services and data we've come to rely upon as being available without limit, and without cost?

In the first part of this two part series, we looked at how the internet has grown extraordinarily over the last 15 years or so, with the development of applications mirroring the enhanced and improved access we all have to the internet.

But in the real world, nothing can be free for ever.  Sooner or later, someone will have to start paying for it.  And, in the case of internet access, it seems that the time is unavoidably approaching where a new charging paradigm must replace the previous 'all you can use for a single flat fee' concept.

The End of Unlimited Data

Yes, the concept of allowing people unlimited internet data flows seems sure to end in the near future.  Indeed, as I write this, many Canadians are finding their formerly unlimited internet connections are being replaced by 'usage based billing' where there monthly fee allows them a limited amount of data transferred, and any extra data above that allocation will cost more.

The effective change in cost when ISPs switch to a usage based charging system is of course a key point.  Whereas the cell phone companies have done a good job of replacing unlimited data plans for cell phones with capped maximum data plans, and reassuring people that 95% or even 98% of customers will pay the same or less than before, the same calculus is unlikely to apply to regular 'wired' internet users; it may be that as many as half or more of us might end up paying twice or more our current internet connection costs.

How much does it cost an ISP to transfer data to their connected customers?  According to Netflix - a company with a huge vested interest in seeing these fees as low as possible - it costs only about a penny per GB.  But internet companies are charging as much as $1/GB for extra data usage.  Netflix of course says that if there is to be any charge for excessive internet consumption, it should be at close to the cost of providing the extra data, not at a cost one hundred times greater.

The internet service providers are also trying to make money at both ends of the equation - charging companies such as Netflix for the data they send out onto the internet as well as charging end users for receiving the data (isn't that a bit like charging you to check a bag at the airport you fly out of, and then charging you a second time to claim the bag at the airport you arrive at?).

A hint for the future can be seen in this article which details changes to internet connection contracts in Canada.  Will it be long before similar provisions appear in US contracts too?

Implications of Paying Per GB for Movie Watching

The loss of unlimited internet access has many implications.  It strikes at the heart of the evolved business model of Netflix and its competitors.

Until now, the idea of being able to instantly stream a movie to a customer, for free, was clearly preferable to the alternative of paying to mail a movie to the customer - a process that requires substantial handling of DVDs, packaging, lead times, and the twin postage costs of having the movie mailed out to the customer and then mailed back again subsequently.  This also appealed to the customer - not that they have ever needed to pay the postage costs, but being able to get any movie instantly, rather than having to wait three or four days, is clearly a major benefit, as is the ability to 'overdose' on movies, to hold movie festival nights, and to watch movie after movie after movie, pretty much without limit.

But if both Netflix and its customers each have to pay a dollar or two (or three or four) each time a movie is watched, this destroys the whole concept, returning primacy of movie sourcing back to the earlier bricks and mortar stores and/or the 'in the mail' service originally offered by Netflix, and/or new variants such as the Redbox vending machines.

Netflix streamed movies are also inferior to regular movies - not just in sound and video quality, but also in terms of the loss of all the extra features, deleted scenes, commentary, and other goodies that are on most new DVD and Bluray disks.

If you had to choose between paying, say, $2.50 to have just the basic movie streamed to you, or $3 to rent the movie from a neighborhood rental outlet (or through the Netflix mail service), complete with highest quality video, up to seven channel surround sound, and hours of extra bonus features, which would you choose?

Indeed, this change in underlying cost/benefit also suggests a return to the concept of buying movies to keep, particularly if they are available at prices of $10 or less, as is the case for thousands of DVD title.  Even Bluray titles are now starting to break down below $10 too.

Implications for All Other Internet/Cloud Based Services Too

Paying per GB of data transferred adds a negative disincentive for us as internet users to consider adopting any and all new internet services, no matter what they are, because they will all require additional bandwidth and therefore additional cost.

For example, maybe you already use, or are considering using, realtime automated backup of your data from your computer into the 'cloud'?  That might represent 5 - 10 GB of data transferred a month - quite likely enough to push you up into a higher tier of account pricing, or at the very least, adding another $10 - $25 to your monthly internet bill.

Are you using Google Docs or some other type of SAAS (software as a service)?  How many GB will that consume a month?  Photo sharing?  Be careful before you upload photos - at maybe 4MB - 6MB per picture, you'll eat through the GB (and dollars) with that, too.  And so on and so on.

Even humble audio streaming from eg Pandora, at say 160kbps, can run up 1GB of data every 14 hours.  If you listen to internet radio/audio streaming four hours a day, that is almost 9GB a month of data - perhaps another $20 there.

And talking about audio streaming, paying for data means the next time you use Skype, it is no longer free.  Someone will have to pay for the voice data being shuttled between you and the other person; and if you add video conferencing too, your cost per minute just leapt up even higher.

Impacts on Service Providers Too

It is not just us as information consumers who stand liable for new consumption based internet pricing.

Most of the 'free service' providers on the internet make only a small fraction of a penny out of every web page view they provide, or of other data they serve for users - money they get from hosting ads on their pages.  Some services are completely free, even though they are very 'costly' to someone or something, somewhere, in terms of bandwidth used.  The obvious example of that is Youtube - although Google is adding advertisements to the bottom of some Youtube videos, most have no advertisements, and they are easy to switch off.

What would happen to the business case for Youtube and other similar free video streaming services if they had to start paying for bandwidth?  Their already fragile revenue models would implode due to the massive increase in costs.

Imagine if Twitter and Facebook also had to pay for their bandwidth and passed those costs on to you - how would you feel if you had to pay a 1c fee every time you posted a tweet or updated your Facebook profile?

And so on through all sorts of other internet services we currently take for granted, all of which rely upon a close to zero cost to send and receive sometimes very broad data streams to the users of the services.

The Bottom Line

So start adding this all up.  Start off with perhaps $50 for internet service a month anyway.  Add $8 to Netflix for their internet movie service, and then maybe $25 for the data costs of watching some movies each month.  Add maybe $5/month to an online backup service and another $10/month for the data transferred there.  Add another $10 for some audio streaming.  And next time your friend sends you a 5MB powerpoint file in an email (you know the files I mean!), then you've just paid a penny or so for that, too.  Send it on to three of your friends, and there's another 3c.

And then who knows what other internet uses you will use or will add.  Oh - all the spam you hate receiving in your email?  You'll hate it even more when it is costing you money to download it.

The bottom line?  Your $50/month internet bill suddenly became $100, maybe more.

And then remember the fact that internet usage grows 50% a year.  Which do you think will be more likely - each year our ISP reduces the cost per GB we use to keep our bills more or less steady, or each year our bill increases by 50% too?

The rapid rate of increases at 50% a year

A 50% increase in each year can see a terrific change.  Look how the $100/month changes over just five years.  For the first year, you are paying $100 a month.  In the second year, $150.  Third, $225.  Fourth, $338.  Fifth, $506.  Is that starting to hurt?  Would you pay $500 a month now for your present internet connection?  If the answer to that is an emphatic no, what will you do in five years if it then costs $500?

And why stop there.  Look ahead a bit further into the future.  At the start of year six, it becomes $759, and at the start of year seven, $1139.  Year eight and we're at $1709, year nine and it grows to $2563, and at the start of a tenth year, what cost $100/month at the start of the ten years will now be costing $3844/month.

Something will have to change.  Drastically.

It Will Affect Us All

And if you think this only applies to 'the other guys', think again.

A survey released in January 2011 is predicting that by 2015 (barely four years from now) 75% of all HD tvs in the US will be connected to the internet - 150 million of them.  When you factor in other devices such as Apple's iTV, Google's television connectivity, the increasing ability of Blu-ray disc players (now to be found for less than $100) to also connect a television through the player to the internet, and we'll all be getting a growing amount of our television type programming through the internet.

The irony of this is that the 'wire' we connect to the internet with was, for many of us, originally a 'cable' connection for our television only, and then a connection shared by television and internet and even phone/voice service too.  Now, increasingly, the prime use of this 'wire' will be for internet, and the television cable served data will diminish, being supplanted with television type data sent to us via internet protocol.

Paying for our internet service based on how much we use it (as measured by the data we upload and download) is almost unavoidable.  It is also potentially fair - why should the person who uses 1,000 times more internet data pay the same as the person who uses it 1,000 times less?

But the reality of the fairness will depend on how the ISPs set their fees.  Will they charge closer to 1c/GB, to reflect their incremental costs of serving more data?  Or will they charge $1 (or more) per gigabyte, just because they can?

Based on the Canadian example above, there's every reason to fear outrageous profiteering.

This was part two of a two part article.  Please click to read the first part - 'Warning :  The End of the Internet As We Know It'.

 

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Originally published 11 Feb 2011, last update 28 May 2011

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 
 

 


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