Average Per-Bit Delivery Costs

Version 0.9
July, 2004
Bill Woodcock
Packet Clearing House

The latest version of this document can be found at:
http://www.pch.net/resources/tutorials/average-per-bit-delivery-cost/

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Lesson 1: Calculating APBDC

If an ISP has an E1 line of transit, which runs at an average of 40%
utilization, that's 2 megabits per second (2mbps) of _potential_
capacity, but 800bps of _actual utilization_.

  800kbps 
  = 48mbits/minute 
  = 2.88gbits/hour 
  = 69.12gbits/day 
  = 2.10816tbits/month

If the ISP is spending US$12,000 per month for that circuit, a naive
intepretation of that price is that it's US$6,000
megabit/second/month.  However, that doesn't take utilization into
account at all.

APBDC for 2,108.16 gigabits at US$12,000 is:

  $12,000       $5.69
  ________   =  _____
  2,108.16        1
  
Or $5.69 per gigabit.


By contrast, the ISP might also have a 10mbps wireless link to an
IXP. If they spend US$3,000 on equipment, and they amortize the
equipment over two years, they have a monthly cost of US$125/month
associated with the peering.  If they run that connection at 15%
utilization, that's 1.5mbps.

  1.5mbps
  = 90mbits/minute
  = 5.4gbits/hour
  = 129.6gbits/day
  = 3.9528tbits/month
  
APBDC for 3,952.8 gigabits at US$125 is:

    $125      $0.0316
  _______  =  _______
  3,952.8        1
  
Or $0.03 per gigabit.
  
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Lesson 2: Aggregating APBDC

If the ISP mentioned above can has only those two circuits as means
of delivering packets, it's delivering a total of 2.3mbps, and
spending US$12,125/month:
  
  $12,000  +  $125     =  $12,125
  
  800bps   +  1.5mbps  =  2.3mbps

  2.3mbps  *  2,635,200 seconds/month  =  6.06096tbits/month
  
  $12,125     $2.00
  _______  =  _____
  6060.96       1
  
So the overall APBDC for the ISP is $2.00/gigabit.  There are two
contributing cost-factors: transit at $5.69/gigabit, and peering at
$0.03/gigabit.  Obviously if you're buying two products, and
reselling them at the same price, you _want_ to be buying as much of
the cheap one as possible, and as little of the expensive one as
possible.  Particularly when there's a three-order-of-magnitude
difference between them.

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Lesson 3: Shifting Traffic to Improve APBDC

The inflexibility-with-respect-to-demand of circuit costs is a major
problem for ISPs wishing to bring their contributing costs into line
with their needs.

If the example ISP were able to shift 200kbps of traffic (8.7%) from
transit to peering, that would reduce their transit from 800kbps to
600kbps, and increase peering from 1.5mbps to 1.7mbps.

That would reduce average utilization of the 2mbps transit circuit from
40% utilization to 30% utilization. If that allows the ISP to reduce
the capacity of the circuit from 2mbps to 1mbps, which might reduce the
price from $12,000 to $8,000, yielding a new utilization of 60%, still
well within the commercially-reasonable envelope.

  600kbps  *  2,635,200 seconds/month  =  1,581.12gbits/month
  
   $8,000      $5.06
  ________  =  _____
  1,581.12       1

  1.7mbps  *  2,635,200 seconds/month  =  4,479.84gbits/month

    $125       $0.0279
  ________  =  _______
  4,479.84        1
  
  2.3mbps  *  2,635,200 seconds/month  =  6.06096tbits/month
  
   $8,125     $1.34
  _______  =  _____
  6060.96       1

So here, by shifting 200kbps of traffic from transit to peering, the
ISP has reduced APBDC from $2.00 to $1.34, and real-world costs from
$12,125/month to $8,125/month.

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