Scott Cleland of Precursor has posted a very interesting analysis of Google’s usage of bandwidth and the associated costs. He claims that Google is underpaying for its bandwidth by a factor of 21 based on a variety of calculations and estimates. The analysis is sound up to a point but it then makes the mistake of conflating two things that are really separate and don’t make much sense being treated the same. I posted a comment on his blog but since it hasn’t appeared (neither have any others) I’ve posted it here too.
In essence I think Scott’s doing a solid job of representing his clients – the telcos – but he also repeats a trope that began, I think, with Ed Whitacre – that Google is somehow using telco bandwidth for free when it should be paying for it. I use an analogy below to critique the analysis because this stuff is complex enough to benefit from it. Let me use another here to critique this idea that Google somehow ought to be paying its fair share. Say a store in a certain area suddenly starts doing great business, and customers are flocking to it on the local bus system. Would it be reasonable for the bus company to start charging the store to recoup some of its costs when all its customers are already paying the prices it has decided to charge in order to ride the bus? No. If it is unable to fund its costs from the prices currently being paid then it needs to charge more or seek ways to reduce its costs. The store isn’t the problem – in fact it’s doing good by creating more demand for the company’s services.
The telcos have no business asking Google to fund the costs of consumer broadband connections any more than the bus company has any right to ask the store owner to subsidise bus tickets. With that, I’ll leave you to the comment I posted on Scott’s blog.
Scott,
You’ve done some very interesting and useful analysis here. Thank you for sharing it with us.
However, one criticism is that you conflate two things and treat them as if they were the same and part of the same category: namely, consumer broadband spending and service provider bandwidth spending. These two things happen at opposite ends of the internet value chain and are entirely separate.
In chart VI of your report you act as if consumer broadband and dial-up internet access spending and Google’s spending on bandwidth were the only chunks of money being spent on bandwidth/broadband in the US. This is, of course, not true. Google’s spending should properly be put in the context of overall service provider spending on bandwidth, not treated as part of consumer internet access spending.
Measuring Google’s spending as a proportion of consumer internet access spending is meaningless – it’s like asking how much it costs the Yankees to drive their players to the stadium as a fraction of how much it costs all the fans to get to the stadium. You’ll get a number of out that but it won’t mean anything.
I would suggest calculating how much Google pays for bandwidth as a portion of all the spending by service providers on bandwidth used to serve US consumers. Your numbers might be just as stark, but at least then you’d be measuring the right thing.
The study attempts to push a theory that AT&T under Ed Whitacre but also others among the broadband providers have attempted to push for some time, which is that consumers and Google and others should all just pay their “fair share” of the costs of the Internet. However, this simply isn’t the way free markets work: the fact is that there is a value chain and different players pay for different parts (as they do in any other free market).
Google pays less than it otherwise might because it has so many peering arrangements (entered into voluntarily by the various parties to them) which it doesn’t pay anything for. That’s the way the system works, and large broadband providers benefit from it too. AT&T, Verizon, Qwest and the cable companies are perfectly free to develop their own business models to compete with Google and are entirely within their rights to sign whatever agreements they want to. No-one is forcing them into anything. They can also charge their customers less or more if they think that will solve the problem. The real issue here is that bandwidth use is skyrocketing and broadband providers don’t want to pass the costs on to their customers, but those customers are causing the increase in costs and should rightfully pay for it.
I’m not a stooge for Google or the broadband providers (though the broadband providers are clients of mine) but I think this analysis needs some tweaks before it becomes really meaningful. Thanks again for some very interesting groundwork though.
Note: I’ve heard Scott argue against net neutrality at a couple of industry events and I think he actually makes some really good arguments (although I think there – as here – he sometimes overplays his hand). I have a lot of respect for the work he does and I’m grateful for the analysis he’s done here too.
Note 2: Google has posted its own critique / response here.
