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Sharon E. Gillett, MIT John Watlington, France Telecom June 2005 CFP Broadband Working Group: The Broadband Incentive Problem
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Page 1: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Sharon E. Gillett, MITJohn Watlington, France Telecom

June 2005

CFP Broadband Working Group:The Broadband Incentive Problem

Page 2: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

The Broadband Incentive Problem

• Broadband faces a incentive problem derailing futureimprovements

• Broadband operators need more satisfactory responses to thisincentive problem

• The intent of this white paper is to avert this crisis, by raisingconsciousness of the problem now, and motivating theindustry toward sustainable solutions

Page 3: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

The Broadband Incentive Problem

• Growth in industries in the Broadband value chain relies on growthof broadband access

Page 4: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

A Virtuous Cycle ?

Page 5: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Broadband Incentive Problem

• Origins

• How today’s approaches are inadequate

• Long-Term Solutions

Page 6: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Origins of the Problem: Changing User Behavior

• Narrowband (dialup) access constrained behavior,both over time and across users

• Broadband allows increased difference between peakand average usage

• Broadband shows increased variability between users

• New applications drive higher broadband usage

Page 7: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

The Korea Telecom Story

• The market is approaching saturation: 80% households, 95% of 20year-olds, and 88% of 30 year-olds have Broadband

• New subscription growth rates are dropping: 75% in 2000, but only 5%in 2004.

• Network usage has doubled each year since 2000, with 5% of usersusing 50% of network capacity

Page 8: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

How does increased traffic increase Costs ?

• Increased traffic drives increased investment in internal networks,and in most cases, increased backhaul costs.

Page 9: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Broadband Incentive Problem

• Origins

• How today’s approaches are inadequate

• Long-Term Solutions

Page 10: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Today’s Models: Flat-fee pricing

• Very appealing to consumers

• But:

– Motivates the network operators to discourage rather thanencourage innovative uses of the network

– Difficult given variation between users

• Increasing the flat-rate difficult

– Light usage users priced out of the market, or

– Light usage users may defect to competitors whose pricingbetter meets their needs.

Page 11: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Today’s Models: Pricing Tiered by Peak Rate

• May be effective at market segmentation

• But

– They don’t protect operators from high-usage users

– This problem gets worse with higher access speeds

• Peak-rate tiered pricing may also discourageinnovation (and overall revenues) through limitingadoption of applications requiring high peak rates

Page 12: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Today’s Models: Pricing Tiered by Volume

• Has the potential to allow operators to recover theircosts

• But improvements in volume-based pricing areneeded:

– User perception of their network usage is not clear, andgetting worse

– How to differentiate between “normal” and “extraordinary”usage (especially as new applications emerge)

– Need for closer alignment of user willingness to pay withcosts

• How is user traffic throttled ?

Page 13: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Today’s Models: Vertical Integration

• Using revenues from complementary services is a familiarmodel (e.g. television, telephony)

• Vertical integration can benefit from economies of scope

• But:

– Revenues may not offset growing bandwidth costs, eitherbecause of competition or regulation

– Some applications may not have an associated revenuegenerating service

– Innovation may be stifled through throttling of non-operatorservices

Page 14: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Broadband Incentive Problem

• Origins

• How today’s approaches are inadequate

• Long-Term Solutions

Page 15: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Engineering a network to reduce traffic costs

• Maybe this problem will never appear ?

– Bandwidth exhibits economies of scale

• If the cost of bandwidth drops faster than demand forbandwidth increases there is no problem

• A study conducted by one member showed that in mostplausible models for future demand, the rate of trafic growthoutstrips the rate of price decline

• Likely to be part of the solution, but not enough by itself

Page 16: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

New Pricing Models

• Architectural support for differentiated pricing

Page 17: CFP Broadband Working Group: The Broadband Incentive Problemcfp.mit.edu/publications/CFP_Presentations/CFP_WG... · The Broadband Incentive Problem •Broadband faces a incentive

Conclusions

• Growth in usage combined with “all you can eat” pricingcreates incentives to block additional traffic

• This situation is damaging to other members of the valuechain, and eventually damaging to the network operatorsthemselves

• Good solutions needed to realign the incentives

• For more information, see:http://cfp.mit.edu/groups/broadband/broadband.html


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