Bandwidth Costs Plummet as Providers Eye Tiered Internet Access

Stephen Yagielowicz

LOS ANGELES — As adult entertainment websites seek to satisfy consumer demand for high quality video content, one bright spot emerges: it is getting cheaper to deliver it.

According to a recent white paper issued by a team of researchers from Georgia Tech and Stanford University, the ongoing and increasing commoditization of Internet transit traffic is having a profound downward effect on pricing in the bulk bandwidth market.

“Although residential Internet Service Providers (ISPs) and content providers are connecting directly to one another more often, they must still use major Internet transit providers to reach most destinations,” the report states, adding that “these Internet transit customers can often select from among dozens of possible providers.”

The report notes that as major ISPs compete with each other, Internet transit services continue to plummet in cost — falling approximately 30 percent annually. This of course is forcing players to re-evaluate their business models, with the notion of offering tiered services gaining traction — despite lingering questions about how best to do it.

“ISPs are increasingly selling ‘tiered’ contracts, which offer Internet connectivity to wholesale customers in bundles, at rates based on the cost of the links that the traffic in the bundle is traversing,” the report added. “Although providers have already begun to implement and deploy tiered pricing contracts, little is known about how to structure them.”

The research team noted that employing finer granularities as service differentiators improves market efficiency, but these numerous choices are more costly to implement and more difficult for customers to understand.

“Our results show that the common ISP practice of structuring tiered contracts according to the cost of carrying the traffic flows (e.g., offering a discount for traffic that is local) can be suboptimal,” the report states. “Dividing contracts based on both traffic demand and the cost of carrying it into only three or four tiers yields near-optimal profit for the ISP.”

According to a report in The Economist, while massively tiered systems would be much cheaper to manage; coarser block-level tiers may prove to be nearly as profitable.

“An infinite number of tiers would, of course, be the most economically efficient. However, it imposes its own costs, such as highly complicated billing,” stated the post in The Economist. “With three or four tiers, transit providers’ margins would be only slightly lower (and, conversely, consumers would, on average, get a minimally better deal) than if they charged each packet for the precise distance travelled.”

Points relevant to the online adult entertainment industry include the continued lower bandwidth pricing trend and its cost-effective enabling of higher bit-rate video and other large file-size content; as well as providing a clearer picture of consumer understanding and acceptance of tiered offers — which are increasingly used by adult membership paysites and other sites — as well as some of the common challenges in deploying tiered data offers.

If you are an ISP, or a website owner pumping serious bandwidth, or an entrepreneur looking for clues to aid in developing new adult business models, this report will provide some valuable insights.

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