[10759] in Commercialization & Privatization of the Internet
Re: Settlements
daemon@ATHENA.MIT.EDU (Marvin Sirbu)
Tue Mar 8 04:25:01 1994
Date: Mon, 7 Mar 1994 22:32:32 -0500 (EST)
From: Marvin Sirbu <ms6b+@andrew.cmu.edu>
To: com-priv@psi.com, Craig Partridge <craig@aland.bbn.com>
Cc: dlynch@interop.com
In-Reply-To: <199403071529.HAA07931@aland.bbn.com>
Excerpts from internet.com-priv: 7-Mar-94 re: Settlements by Craig
Partridge@aland.bb
> Dan:
>
> Let me play devil's advocate back.
>
> Suppose the IXC simply billed each connected provider a flat amount
> per month based on the size of the provider's pipe (or pipes) into the
> long-haul network. So, for instance, if PSI had T1 connections to the IXC
> in LA and DC, PSI would pay for two T1 connections.
>
> The IXC could make guarantees about loss rates and service outages, so
> you'd know what you were buying.
If I know that the customer at the end of my IXC network is a network
service provider, e.g. PSI ,(as opposed to an end user) than I can
reasonably assume that PSI will have taken advantage of statistical
multiplexing among _its_ customers, so that the traffic arriving on the
T1 connection to my IXC network is essentially continuous. Moreover,
since I know that PSI has its own national facilities, it's only going
to use my network if its cheaper. Thus, whatever flat rate I charge,
PSI will use my net only for packets going distances greater than could
be carried over a dedicated T1 for the same price.
Ultimately, that means I have to price my T1 access at roughly the price
of a dedicated T1 line from LA to DC or end up losing my shirt as an IXC.
Note that having settlements doesn't necessarily mean per packet
pricing. Look at Frame Relay: You can buy a T1 access pipe, but you
can commit to use only a fraction of the capacity (Committed Information
Rate--CIR), and pay a proportionately lower _flat_ monthly charge. With
this kind of model, PSI would buy a DS3 access line and a 40 Mbps CIR,
while the Cleveland Freenet might be able to pay much less for a DS3
access line but a CIR of only 512 kbps.
Several IP service providers are already offering this kind of "tiered"
service at T1 access rates with different charges depending upon the
average "fill" by the customer on the T1. This amounts to a crude but
effective form of usage based pricing, which is what settlements are all
about.
Or consider another scenario: there are two IXCs, IXC-A charging usage
sensitive prices and IXC-B charging flat rates. They both start out with
data on the average traffic of a typical user, and set their rates so
that if their customers correspond to the averages, they make money.
However, all the users with relatively low volumes go with IXC-A and
save money. All the users with high volumes go with IXC-B and save
money. As a result of having only very heavy users, IXC-B finds it
didn't set its flat rate high enough for the heavier traffic volume it
is experiencing so now it has to push up its flat rate price. Now even
more customers find IXC-A's pricing attractive. The spiral continues
and eventually IXC-B has extremely high prices and few or no customers
-- or it switches to usage based prices to stay competitive.
Marvin Sirbu
