Who Pays for the Internet?
Even a fairly short midday
telephone call from, say, Los Angeles to Paris, can cost $10. Yet, that same
amount will buy you a month of an online service that includes unlimited e-mail
all over the world. For $20, you can make one to three hours of long-distance
telephone calls. Or, for the same $20, you can surf the Web day and night for a
month, download as much data as your modem can handle, enjoy unlimited e-mail,
and even--if you own the right software--make as many telephone calls to New
York or Paris or Timbuktu as your heart desires.
How is
this possible? Worldly cybernauts may find the question naïve--though fewer
know the answer than think they do. To newcomers, the economics of the Internet
is among its greatest mysteries. Herewith, a primer.
First, the wrong answer: that the Internet is high-tech
pork. The Defense Department created the Internet in the late '60s, and
the government supported the Internet heavily from the '70s till the early
'90s. But no more: The last major subsidy ended in 1995. Now, except for a few
small, shrinking, and unnecessary federal grants, the Internet is a commercial
concern. Telecommunications companies, computer companies, and Internet service
providers (ISPs) built, own, and operate all the phone lines and computer
networks that comprise the Net.
The
real explanation of the Internet's cheapness lies in the difference between the
telephone system and the Net. (A note: The rest of this article applies to the
United States. The same basic rules apply to Internet users elsewhere, except
that they probably pay more for Internet service, and lots more for
phone service.)
Consider a typical long-distance telephone call from
me in Washington, D.C., to my aunt in San Francisco. My long-distance company
(which happens to be MCI) gives me an uninterrupted, real-time circuit between
my house and my aunt's. In exchange, I pay MCI about 20 cents for every minute
I'm connected. Of that 20 cents, MCI pays about 2 or 3 cents to my local phone
company, Bell Atlantic, for carrying the call from my house to MCI's lines. It
pays another fraction (probably 5 cents) to Pacific Bell for delivering the
call the last few miles to my aunt's house. MCI pockets the rest.
The
actual cost of a long-distance call--after all capital costs have been
counted--is only slightly more than that of a local call. But for decades,
Congress and the FCC have mandated artificially cheap local phone service and
artificially expensive long-distance service. MCI's payments to local phone
companies--called "access charges"--are a subsidy. It costs Pacific Bell less
than a cent to deliver my call. The other 4 cents are payback for giving my
aunt cheap and unlimited local calls.
Now, consider the Internet. In one very important way,
using the Net is no bargain. You need $2,000 worth of computer hardware to
connect to it, about $1,960 more than the price of a telephone. But once you've
got the gear, the Internet beats telephone costs for three significant
reasons.
1. The Internet
exploits low local phone rates. Unless you live somewhere remote, you reach
the Internet by making a local call to your Internet Service Provider.
Your ISP, in turn, leases super-fast long-distance fiber-optic cable from MCI,
Sprint, AT&T, regional Bells, and other telecommunications companies.
(These firms have plenty of fiber to spare.) These fiber-optic lines carry your
Internet traffic around the country, delivering it to "Network Access Points,"
which link different networks like highway interchanges. When your data reach a
Network Access Point, they hop on a line owned by another company and travel to
their destination. But because the Internet travels on leased lines, the data
entirely avoid the long-distance phone companies' own networks, and
therefore avoid the access charges the long-distance companies must pay to
local phone companies on normal telephone calls.
2. Talk isn't cheap,
but data are . ISPs can offer unlimited access on their lines for two
reasons. First, it saves them billing costs; telephone companies, by contrast,
spend billions every year calculating who used what line and when. Second,
Internet data transmission is remarkably efficient. When you make a 10-minute
long-distance voice call, the phone company maintains an open circuit from end
to end. You pay for every second, even if you're on hold. When you go online to
check out a Web page, you may spend 10 minutes reading the page (and 10 minutes
dialed into your ISP). But you only use the Internet for a few seconds:
the time it takes to send your request to the page's Web server and for the
server to deliver the page to you. For the other 9 minutes and 50-plus seconds,
the ISP's long-distance line is free. Many Internet users can share a line that
would need to be occupied full time by a telephone call.
3.
There are no guarantees on the Internet . Telephone service is a promise:
You can be almost certain that you can complete a call immediately to anyone
else with a phone. Internet service is a shrug: You can be reasonably sure, but
no more, that you can send your data to another Internet user pretty
quickly.
The Internet is an uncertain network because it is
"packet-switched." This means that data are broken up into small pieces, or
packets. Each packet seeks the cheapest route, at the instant it is sent, to
the destination. When all the packets arrive at that destination, a computer
reassembles them. Packet switching is a frugal, efficient way to send data from
point a to point b (albeit via points c, d, q, and k). But packet switching is
not terribly reliable: Packets routinely get lost or delayed, crippling
communication.
Internet telephony, one of the coolest new online applications, illustrates
packet switching's drawbacks. If two Internet users own the right software,
they can talk by telephone over the Net. It is miraculously cheap: Speech is
digitized, packet-ized, and sent over the Net, for no more than the cost of
online access. But because the Net gets clogged and packets are waylaid, the
sound quality is low and interruptions are common.
The Internet may soon be less of a bargain . It is
clogging as more and more Net heads use packet-intensive, real-time
applications such as Internet telephony and RealAudio. These "streaming"
applications swallow enormous chunks of bandwidth for long periods of time,
eliminating one of the Net's chief economies. There are three principal
remedies for Internet congestion:
1. ISPs can lease more and
bigger lines.
2. Customers who want to
ensure fast access can replace their modems with pricey, high-bandwidth ISDN
lines, T1 lines, cable modems, and so on.
3. ISPs can discriminate
between heavy and light users. Customers will pay a premium to use streaming
applications or send high-priority messages.
Remedies 1 and 2 are
already taking place. The third is coming soon. All of them will make the
Internet easier to use. And in the short term, all of them will make the
Internet more expensive.
