What does a gigabyte of internet access really cost?

internet access to somebody. We can get a sense of that by looking at some of the most expensive bandwidth in the world, the bandwidth being provided to Africa. There's an article that appeared a couple of weeks ago that describes this and provides some really interesting data. According to the article entitled massive undersea cable connects Africa, there are several interesting facts that we can glean. First, there is a cable being placed from Europe to Africa at a

cost of six hundred and fifty million dollars. This is an undersea cable that's being laid and not to go into service any day now. This cable provides five point one terra bits per second of data or five thousand, one hundred twenty gigabits per second of data. That cable provides fifteen access points along the coast of Africa. And that cable is incredibly long. It's fourteen thousand kilometers or

eight thousand, seven hundred miles. It could go from Los Angeles to New York, then back to l A and then back to New York. It's an immensely long cable and that's why it costs six hundred fifty million dollars. Now, let's make several assumptions about this cable that they're installing. First, the cable will need to be maintained, so let's round that six d fifty million dollar price tag up to

one billion dollars to cover that expense for maintenance. Second, the cable will eventually become obsolete, so let's imagine that this is going to happen on a really aggressive schedule of ten years. So ten years from now, let's just assume that that cable is completely obsolete and it's abandoned on the ocean floor, so it will never be used again. Third, the people who put this cable in place wish to make a profit on their investment, so let's assume a

two percent return on investment or per year. So after investing a billion dollars, the operators wish to receive three billion dollars, they get two billion dollars in profit. Given that cost structure and the fact that the cable can handle in round numbers, five terra bits per second or five hundred gigabytes per second, how much does a gigabyte cost in this system? We can say that each year the system is going to cost three hundred million dollars.

That's three billion dollars divided by the ten years to obsolescence that we've assumed. Second each year, the system can transmit five hundred gigabytes per second times three thousand, six hundred seconds per hour, times twenty four hours in a day times three hundred sixty five days in a year, which means there are fifteen point seven billion gigabytes to go around, and that three hundred million dollars divided by fifteen point seven billion gigabytes works out to one point

nine cents per gigabyte. One point nine cents. That one point nine cents per gigabyte is the rate on the most expensive system we can possibly imagine. That's an immensely long and expensive cable they're laying to Africa. Remember that we've already baked in a two percent profit margin. But even if you want to get greedy and mark that up in additional a hundred percent, it's only three point eight cents per gigabyte this cable. In other words, bandwidth

by the gigabyte is incredibly inexpensive. Even on the most expensive system we can imagine, it's pennies per gigabyte. The question we have to ask, however, is this, does that number one point nine cents per gigabyte represent the true cost of the bandwidth, And the answer to that question is no, because of congestion and the way that the Internet is used throughout the day. Note that people tend

not to use bandwidth evenly throughout the normal day. If they did use it evenly, then the cost per gigabyte truly would be one point nine cents per gigabyte on this system. However, at four am this undersea cable is likely to be very underutilized. At other times during the day, demand could be high. The big uproar right now is the problem that Netflix and Hulu are causing. These online streaming services use a lot of bandwidth, relatively speaking, and

usage tends to concentrate in the evening hours. So let's look at the very worst case scenario that Netflix and Hulu could cause. Worst case, imagine that every customer on that African cable wants to watch Netflix every night at exactly the same time. And let's make it even worse. Let's imagine that a household has multiple people in it

and there are three simultaneous Netflix feeds going to each customer. Now, we need approximately ten megabits per second for each household that's connected to the cable during a three or four hour window every night. The demand caused by this Netflix loading caps the number of Internet accounts that we can

give out. The undersea cable can only handle five terabits per seconds, so we have at most five terabits per second over ten megabits per second for the Netflix feed, which equals five hundred thousand possible customers on this cable with this peak loading. So we have to spread the three billion dollar cost of the cable and its profit over those five thousand customers. What does that work out to per month in the ten years we've assumed there are a hundred and twenty months, so that works out

to exactly fifty dollars per customer per month. Fifty dollars per month is the worst case scenario. We're assuming that every single customer will be watching three simultaneous high deaf Netflix movies at ten megabits per second simultaneously every night. The pipeline can handle that kind of worse case load with a two profit margin for fifty dollars per month, and that would be some of the most expensive bandwidth

in the world. What is the cost per gigabyte? Now, if you assume that each customers allocated a true ten megabits per second, and if you assume that the customer is pulling that true ten megabits per second for six solid hours a day, then each customer is pulling twenty one gigabytes per day, or roughly six hundred gigabytes per month. Fifty dollars over six hundred equals eight point three cents

per gigabyte, less than a dime. In other words, Internet service can be provided profitably for pennies per gigabyte in the absolute worst case scenario. Let's imagine that we lived in a rational world where i sp s were not trying to gouge customers and we were all trying to utilize resources efficiently. Then we have to admit that Netflix and Hulu really can increase the cost of bandwidth because

they create congestion in finite pipelines. There are a number of things we could do working together to relieve that congestion. For example, bandwidth that low usage times would be essentially free, and bandwidth at eight PM might cost a dime per gigabyte because many people are trying to use the pipe simultaneously. If time of use pricing like that were put into place, what would happen. Many activities like Internet backups, bit torrent, file uploads and downloads and so on would likely move

to low cost hours, spreading out the load. Places like Netflix and Hulu might offer customer services that pre download what they want to watch tomorrow. People might voluntarily choose lower bandwidth versions of shows they're watching during peak hours. New applications might spring up to take advantage of essentially

free bandwidth and early morning hours, and so on. In other words, the marketplace would take actions to spread out band with usage throughout the day to make better use of the resource, and the cost of bandwidth would actually go down, not up. We can at least dream that that would happen. That's what would happen in an ideal universe. Be sure to check out our new video podcast, Stuff from the Future. Join how Stuff Work staff as we

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