The Montreal Gazette ran a major story over the weekend focused on the costs for ISPs to transport a gigabyte of data (picked up by others as well). As those following the usage based billing issue will know, the ISP overage costs – which run as high $10 per GB in Canada – have attracted the ire of customers and raised questions about the actual costs for ISPs.

Developing a better understanding of actual network costs was a big part of the paper I posted last week on UBB. This post features part of the discussion on costs, though the complicated appendix that uses Bell’s submission on network costs as part of the deferral account proceeding must be accessed from the original paper.

Costs related to Internet access pricing structures sit at the heart of the UBB debate, yet the most important data point remains shrouded in secrecy. The incumbent ISPs have long been reluctant to disclose their actual costs in maintaining their networks, arguing that the information is sensitive, confidential commercial data (though the CRTC has begun to push for greater disclosure from telcos and cable companies). In recent months, owing to the fact that data caps and overage charges are typically based on gigabytes of data, the cost issue has crystallized around the question of the cost to transfer 1 GB of data.

Reliable cost information would be extremely helpful in order to respond to at least two issues. First, the claims regarding light users subsidizing heavy users would be a more informed discussion, since it would allow for a realistic assessment of the actual costs of servicing both light and heavy Internet users. Second, reliable cost information would allow for analysis of the reasonableness of current overage charges. While retail Internet access pricing is unregulated, efforts to analogize Internet access to regulated utilities raises the specter of assessing the reasonableness of the markup for Internet access services.

i. Internet facing data costs

Calculating the cost for an ISP to transfer 1 GB of data involves at least two cost components. The first component is the Internet side of the equation. The user’s traffic travels through three stages – the last mile, the ISPs internal network, and the public Internet. The public Internet cost is relatively easy to calculate since all ISPs depend upon peering and transit arrangements to carry data between networks. Independent ISPs advise that the cost of a 1 Mbps (megabit per second) connection is roughly $5 per month (the cost is likely considerably less for large incumbent ISPs given their economies of scale as some estimates put the price at $3 per Mbps).

With a 1 Mbps connection, an ISP is permitted to transfer 1 Mbps of data per second on a continuous basis. That is the equivalent of 7.5 MB (megabytes) per minute (60 megabits is equal to 7.5 megabytes), 450 MB per hour, and 10,800 MB per day (or approximately 10.5 GB). Over a 30 day month, it adds up to 316.4 GB or roughly 1.58 cents per GB. For larger ISPs able to negotiate lower costs, the $3 per month fee allows them to transfer a GB of data for under one cent.

Estimates of transit arrangement pricing typically point to between $3 and $5 per megabit per second per month. This figure is declining rapidly, with some estimates suggesting that it may drop to under $1 per megabit by 2014. Transit arrangements are used when two ISPs do not have a direct connection and therefore rely on an intermediary network provider to complete the Internet connection. Some ISPs may directly connect with one another (known as a peering arrangement) that would further reduce costs since the data transfer travels directly from one ISPs network to another ISPs network with the ISPs agreeing to offset each other’s traffic. Yet another alternative for web-based traffic and video streaming is the use of Content Distribution Networks, such as Akamai. These companies are often used by content distributors to manage traffic more efficiently and provide ISPs with the advantage that the traffic may not run on their networks, thereby further reducing costs.

These numbers are consistent with other public numbers for large-scale data transfers. For example, the Amazon EC2 service, a leading cloud computing provider, charges one cent per GB for all regional data transfers. Regions include the U.S. East Coast, U.S. West Coast, and Europe. For data transfers outside a single region, the Amazon EC2 service costs ten cents per GB for all in-bound data transfers in North America and Europe and as little as 8 cents per GB for out-bound data transfers.

ii. Internal Network Costs

The far more difficult cost calculation involves the internal ISP network, namely the last mile and the internal network. ISPs zealously guard this information, demanding that virtually any potential disclosure remain confidential. While the ISPs often disclose this information to the CRTC, most of the public record of CRTC proceedings has been redacted of information that would be useful to estimate the costs of increased network traffic on confidentiality grounds.

There is one notable exception, however. As discussed at Appendix B of the paper, unredacted information about total costs and total subscriber numbers for Bell’s proposals for funding broadband expansion to underserved communities from the deferral account is available. Three separate sets of data were disclosed in 2010, representing different designs for the access network. Bell’s preferred option is based on High Speed Packet Access (HSPA) technology. Other options investigated included a pure DSL technology option and a hybrid option, combining both technologies.

It should be noted that Bell’s data describes a â€œworst case scenarioâ€ in the sense that Bell was making the case that such a network would not be economically viable and would therefore merit additional support through the deferral account process. The Bell data disclosed the total cost of the project (over 15 years), the number of communities and premises where service would be available, the projected revenue, and the peak number of subscribers.

The detailed analysis of the Bell data, which admittedly involves a number of assumptions, suggests that the costs of building a new network would lead to estimates of roughly seven cents per GB. The actual costs vary considerably between networks – capital expenditures, network usage, subscribers, and properties of the backhaul links all influence actual costs. While the actual numbers may be higher or lower, the seven cents/GB estimate is fairly consistent in several network models.

When combined with the Internet costs of roughly one cent per GB for larger ISPs, a high end estimate of the per gigabyte costs for large Canadian ISPs is approximately 8 cents per GB. This assumes the creation of a new network and accounts for all aspects of the data transfer â€“ the last mile, internal ISP network, public Internet transfers, and other associated expenditures. While this is higher than the 3 cents per GB that has been invoked in some discussions, it is far lower than overage costs imposed by some ISPs, which run as high as $10 per GB in Canada.