[9351] in Commercialization & Privatization of the Internet
Re: Cost vs benefit of internet services
daemon@ATHENA.MIT.EDU (Karl Denninger)
Thu Dec 30 00:17:29 1993
From: karl@mcs.com (Karl Denninger)
To: stpeters@dawn.crd.ge.com
Date: Wed, 29 Dec 1993 23:16:17 -0600 (CST)
Cc: karl@mcs.com, com-priv@psi.com
In-Reply-To: <9312300146.AA05025@spare-parts.crd.Ge.Com> from "Dick St.Peters" at Dec 29, 93 08:46:09 pm
>
> > Uh, excuse me for being stupid today, but if I'm a big national carrier
> > and have to pay $10k for each regional/small reseller/whatever that
> > I sign up and provide routing to, how can I do that and not pass it on?
>
> C'mon Karl, you're supposed to be a capitalist who understands the
> concept of making a little less profit on each customer in exchange
> for having more customers. I'd expect you also understand the concept
> of investing in market growth - offering discounts to new customers
> while they develop.
Sure I do. Among other things, what you propose ends up with a real legal
problem (and an ethical one for me)
I also understand that if I have a fixed expense of $10,000 per customer,
that means that I have to raise my "lowest priced service" by at least
that amount. What you've done is tax the national providers, in effect, for
each resale link they sell off -- and then let them deal with it how they
see fit.
There are only two possible outcomes of this:
1) Raise the "can't go below 'cause I'll go broke" price by $10,000 for
these classes of customers. Ouch.
2) Subsidize the link cost <from some other revenue source>. If you're
going to waive the cost for X period of time that's one thing,
but to expect people to <eat it>, especially when there is no real
reason to believe the situation is going to change, is insane. Your
coop examples are things which aren't going to change -- if they
were, and a profit was to be made with the pass-through in there
then you would have just done it yourself and wouldn't care.
Example: I'm big national carrier. I sell you a resale link. I have
to pony up to the bar for another $10k to the CIX, and
<somehow> I have to charge at least what the link costs me to
provide or I go broke over the long haul. All of this is
over a multi-year period in some cases, of course. So
to do this long-term I have to <take profit from some
other line I sell>, that is, the <other line's> price
goes up to pay for <your> request.
I think not. Among other things, the only ethical way I could invoice that
would be like this:
T1 connection (annual): $25,000
CIX membership (annual): $10,000
-------
$35,000
"I wanna make you good customer" -$10,000
Total $25,000
Something like that, right? That's "eating" it, right? The customer never
even feels the CIX cost. Except that what you've now done to your income
picture is this:
Was: $25,000.00
Now is: $15,000.00
A 40% drop in revenue.
I hope you can run your network on the remaining income, at least until the
discount expires. If you offer this you just told the customer that you have
at least $10k profit in the usual and customary price or you're willing to
risk insolvency (if too many people take advantage of the offer). That allows
me as a customer to size your service, your commitment to it, what I think
you can afford in your offices and what kind of car you probably drive. :-)
Finally, the CIX and membership would get sued for a price-fixing conspiracy.
You can't go around arbitrarily putting price floors (other then the one you
can't change, which is zero :-) on other people's services in this fashion.
Only the Government gets away with that, and much more indirectly than you
are proposing here.
One other thing. I know there are people out there doing links that appear
to be selling something for nothing. 'Taint so folks. Everyone knows there
is no such thing as a free lunch. There is <some> compromise, somewhere.
There <has to be>, otherwise the businessperson risks going down while
giving away the building a brick at a time for too long. As a customer you
must evaluate this risk, and evaluate not only your own needs but the
motivations and capabilities of your suppliers, as well as how fine-grained
your requirements really are.
> If you're the big national carrier who doesn't want to do this, well
> then maybe someone else will. Actually, though, I had more envisioned
> you as the kind of guy who would throw a line to the CIX, join up as a
> national carrier, and keep everybody else from getting too fat and
> complacent - including, I might add, keeping the total CIX revenue in
> bounds compared to actual CIX needs, instead of being open-ended.
Ah, but you know, MCSNet is indeed joining the CIX. Effective January 1st,
1994, and everything should be working before the end of January. We'll
have a second POP online within a week or two as well, and have more
locations on the boards. Its a Chicago area thing though, at least for now.
As I tell everyone, "I listen to all offers at the time they're received."
Its a good business practice :-)
I've run some numbers on the CIX income and projected expenses. Nobody is
getting rich doing this. If someone does while I'm involved, I'll be the
first one to be very pissed off and screaming. That's especially true if
its anyone related to or on the Board of Directors. Funny bizness there
is good for time in jail, especially with a 501c entity. I don't believe
there's a problem.
Finally, I will make the observation that in most marketplaces absent
significant distortion arrogance is rewarded and recognized by the
immediate appearance of solid competition. ]:->
> I'm not begrudging the CIX it's reasonable revenue; I just don't like
> to see the cost distributed without regard to use and turning into a
> barrier against startup of small operations - intentional or otherwise.
I believe, in fact, it is an <incentive> to small operations. You and I
just define small differently. You see it as a person with three or four
companies or houses that want connectivity. Hell, that's <within reach>
now; before the CIX what you wanted would have been completely <impossible>!
Could you have possibly pulled 13 lines across the country with your little
coop? No? Just how were you going to talk to Alternet, PSI, NearNET and
ANS anyway? Certainly you'd see those on your provider the way things used
to be -- but what about the others? SOMEONE is going to pay for that.
Guess who that is? :-)
The CIX has brought near-global connectivity within reach at a reasonable
price, <even for startups>, and its improving daily. I think its a good
deal for everyone, and serves to improve (rather than limit) competition. I
think I can defend that statement easily with a few object examples:
MCS, Inc. included among them.
By the way, this is one thing that ANS has completely failed to do. It was
one of the things I was quite concerned about a year ago too. I'm quite
convinced that the CIX being here had something to do with that. No
offense, ANS, but this is a <good thing>. A diverse marketplace is good
for the consumer, and I prefer this situation as a customer to a constricted
marketplace, even though I know it means that I'll face significant
competition too. All part of the game....
If there's a buck to be made, someone will find a way and/or be interested
in doing it.
> > The last collapsed backbone that I built had over a half-million bucks
> > in CISCO gear in residence at the central site alone. That backbone
> > served only 56kbps tail circuits. (It did serve 12 states and something
> > like 300 actual sites however. :-)
>
> I fail to see any relevance here to the problems faced by small startup
> providers.
Uh, the point was that the alternative to pulling one connection to the CIX
and paying the $10k yearly (whether you pull the line personally or not) is
going to be to <install one of those rooms> - in short order. Right now
you'd be looking at doing what -- at least three T1s to talk to PSI, Alternet,
and ANS -- and then you get to figure out what you're going to pay each of
'em, and that doesn't do anything for you with some of the regionals. Have
you priced long-haul T1s (or even local ones) and large routers lately?
Now what was that about the CIX being expensive for small providers?
I can build rooms like that, and the networks connected via them, and have
them work. It is not easy, it is not reasonable in cost and its gawd-awful
expensive to maintain and operate.
--
Karl Denninger (karl@MCS.COM) | MCSNet - First Interactive Internet and
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