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/

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.

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.

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.