Overview. What is Usage Based Billing? Internet metering, or Usage Based Billing (UBB), has become a growing issue for Internet users in Canada.

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1 Overview Internet metering, or Usage Based Billing (UBB), has become a growing issue for Internet users in Canada. UBB is a mechanism seemingly aimed at deterring Canadians from using their Internet connections so as to lower costs for Internet service providers (ISPs). It is also a way for ISPs to increase revenues. Much of the concern in Canada surrounding UBB is generated by the fact that, even as ISPs sell faster access connections to customers, there are increasing limits and restrictions on the ways in which these connections can be used. Some have pointed out that Canada is rapidly becoming the only OECD country where unlimited usage plans are not even available. [2] Whereas in 2008 the average monthly usage limit on a 5.8 Mbps connection was 54 GB/month, in 2009 this fell to below 43 GB/month. [1] In 2010, many large ISPs reduced their monthly caps even further. Canadians are concerned about this trend, and particularly about the added costs this will impose on them. Citizens also concerned about the harm to online innovation and the migration of services from other jurisdictions. Larger ISPs, on the other hand, claim such fees are fair and are necessary to address unmanageable levels of traffic growth. What is Usage Based Billing? What is UBB intended to do? What is Network Congestion? Isn t this like gas if you use more, shouldn t you pay more? If monthly usage fees do not address congestion, why are ISPs using them? Can t an ISP charge whatever price it wants for its services? How does competition try to keep Internet access prices low? Why can t market competition reduce UBB to fair levels? Will there be unmanageable traffic growth without UBB? Doesn t UBB only affect the bandwidth hogs? How does UBB harm innovation and service migration? What is Usage Based Billing? Typically, monthly Internet service fees are based on modem connection speeds. Internet service providers will charge higher monthly rates for higher connection speeds, which are controlled by way of the connecting party s modem. In addition to this, many ISPs will impose further fees on individual users who use more than a given amount of bandwidth in a given

2 month. As these added charges are intended to relate to usage, they are referred to as usage based billing (UBB). What is UBB intended to do? ISPs argue that UBB is essentially a means of controlling unmanageable traffic growth on their networks. They argue that without UBB, they cannot effectively operate their networks because a few abusers will generate so much traffic that it will disrupt services for all others. Even if these ISPs were able to build networks large enough to accommodate these few abusers, the cost for other users would be so high that it would be unfair. What is Network Congestion? The Canadian Radio- television and Telecommunications Commission (CRTC), Canada s telecommunications regulator, has broadly defined network congestion as a situation whereby the amount of traffic transiting the network may lead to a deterioration in service for some end- users. [3] This definition is adopted because any network traffic that does not lead to any deterioration in service has little impact on an ISP s ability to provide its services, and does not impose any costs on an ISP. Isn t this like gas if you use more, shouldn t you pay more? Though this appears to be a very compelling and intuitive argument, it does not relate very closely to the realities of Internet traffic. This is because there is no finite amount of bandwidth, and monthly usage correlates only loosely to congestion. Illustrative Example: There are about 2.7 million seconds in the month of January. If Alice uses her 2.8 Mbps connection to generate a constant rate of 400 Kbps, her total usage for the entire month of January will amount to approximately 134 GB, well over her 20 GB monthly cap. However, since her ISP has sold her a 2.8 Mbps line, its network will be built large enough to accommodate far more of her traffic than this at any given point of time. This means her 400 kbps is not likely to cause any network congestion and will cost her ISP next to nothing. Meanwhile, her neighbour Bob, uses the same 2.8 Mbps connection to stream a 2- hour movie twice each week during peak traffic periods. Streaming a standard definition movie generates approximately 1 GB of network traffic per hour of viewing. [4] Bob s movie viewing is far more likely to contribute to network congestion than Alice s (although still unlikely). But, assuming Bob does not use his connection for anything else in the month of January, he will have generated no more than 16 GB of traffic and will remain unaffected by the cap.

3 Internet bandwidth is very different from electricity. The per- MB price of bandwidth will in many cases be close to nothing for an ISP. Regardless, the cost of an additional GB of usage for an ISP is a few pennies, while large ISPs will charge between $1.50 and $2.50 per additional GB. [5] Additionally, as some have noted, prices for natural gas and electricity are not subject to market forces, but rather overseen by Provincial regulators and kept at reasonable, affordable rates. [6] If monthly usage fees do not address congestion, why are ISPs using them? Some monthly usage fees may address congestion if they are calibrated to target excessive usage. ISPs argue this type of UBB helps reduce unmanageable traffic growth on their networks. Many argue that monthly limits in the range of 20 GB on a 2.8 Mbps service, which are becoming prevalent in Canada, more closely resemble attempts to increase revenue rather than attempts narrowly tailored attempts to manage traffic. Example: If an ISP penalized Alice for generating 600 GB in January using her 2.8 Mbps service, this might not be unreasonable. This would mean Alice had used her access service at a constant rate of 2 Mbps every second for the entire month. Can t an ISP charge whatever price it wants for its services? While Internet services are regulated in regards to access, at this point price itself is not regulated. In most urban areas, an ISP can typically charge whatever price it thinks the market can bear for its services. Because of a Policy Direction issued by the Government in 2006, the CRTC must rely on competition as much as possible to keep prices just and reasonable. The CRTC has very limited power to force ISPs to lower their monthly caps. How does competition try to keep Internet access prices low? Since entry costs are extremely high, there are only a very small number of large ISPs (often called facilities- based ISPs or incumbents) with the infrastructure necessary to connect each Canadian s home to the Internet. To keep the market competitive, the CRTC mandates incumbents to let smaller ISPs (often referred to as competitors or resellers ) use a portion of the incumbent s network in order to reach customers, for a fee.

4 SHARED NETWORK ISP end-customer ISP Border Router DPI DEVICE Central Office Public Internet Bell Border Router Backbone Network Broadband Access Server (BAS) Aggregation Network DSLAM Bell Retail end-customer IMAGE SOURCE: Bell Canada, Submissions in CAIP v. Bell, An Application before the CRTC Requesting Certain Orders Directing Bell Canada to Cease and Desist from Throttling its Wholesale ADLS Access Services, July 11, 2008, Figure 1, The smaller competitor ISP (in red, above) pays the incumbent (Bell/blue, in the example above) at a per- customer rate set by the CRTC for this access. This is called a GAS tariff. In general, this is the mechanism that provides for some level of competition in an environment that would otherwise be completely dominated by one or two companies in any given geographic area in Canada. Even with this competition in place, the five largest ISPs (Bell, Telus, Rogers, Vidéotron, and Shaw) dominate the market and capture approximately 76% of all Internet access revenues (2008 figures). [7] The CRTC relies on the presence of a number of smaller ISPs in order to prevent the larger ISPs from fully imposing monopolistic prices on Canadians. Why can t market competition reduce UBB to fair levels? The CRTC has held that UBB is not a pricing matter, but rather an attempt to reduce unmanageable traffic levels. It has further held that, because the traffic produced by smaller ISPs customers will travel in part over networks owned by larger ISPs, the larger ISPs must be permitted to impose their monthly caps onto these customers in addition to their own. Larger ISPs argue that they will be overwhelmed by too much traffic and unable to build networks with the capacity to manage all of it. It is because of this framing that smaller ISPs will no longer be able to place competitive pressure on larger ISPs, and impede their ability to set and price UBB caps as they please. Will there be unmanageable traffic growth without UBB? Some large ISPs claim that we are in an era of unmanageable traffic growth as the Internet is increasingly being used for bandwidth- intensive purposes such as video streaming. They further claim that because of this unprecedented level of growth, new measures to deter Internet usage are justified. While, on average, Canadians are using more bandwidth every year, the rate at which traffic is growing is at a very manageable rate. For example, in , traffic on Canadian

5 networks grew by an annual rate of 43%. [8] North American Internet traffic in general is currently growing at an annual rate of about 40-50%. [9] This is far below the historical growth rate of the Internet, which throughout most periods of its existence persisted at a rate of about 100% annual growth. [10] Large ISP capital expenditure has not risen in the past four years and has, in fact, fallen in some cases, even as revenues continue to increase. [11] Doesn t UBB only affect the bandwidth hogs? No, UBB affects all Canadians in a number of ways. First, as more bandwidth intensive services become available on the Internet and as monthly bandwidth caps continue to fall, more and more Canadians will fit the bandwidth hog moniker. Even now, while some ISPs argue that UBB currently only impacts on the top 10% of users, it is not the same 10% users in each month. Some users are discouraged from using high bandwidth applications after a few hefty monthly bills. So it is difficult to say how many Canadians are already impacted by monthly caps and, as these caps continue to plummet, these numbers are certain to rise. Further, the cost to innovation and service migration, while difficult to quantify, is far more serious and impacts on all Canadians. How does UBB harm innovation and service migration? Many of the most innovative products and services being developed for the Internet today rely on users ability to access large amounts of bandwidth. Since the majority of OECD countries (such as the United States) do not have ubiquitous monthly usage caps, these services and business models are designed in a manner that assumes customers will be able to use a large amount of bandwidth without incurring additional costs. High- bandwidth video streaming services, for example, are less likely to migrate to an environment where high monthly usage costs make it more difficult to compete with traditional television and IPTV offerings. In addition, a UBB model that deters high monthly usage by imposing a cap will stifle any innovators from utilizing the full potential of the Internet in developing their future services and products.

6 References [1] Table Part 2 of 2 [2] based- internet- billing- a- global- comparison/ [3] [4] netflix- effect- results- from- a- revealing- study- in- canada/ [5] news/ubb- internet/why- not- a- metered- internet/article /page2/ [6] [7] tfinalen.pdf [p. 214] [8] [para. 5]. [9] [10] [11] [Tables and 5.1.9]. Annual capital expenditure by the major incumbents has remained steady over the past four years at approximately $4 billion per year [Table 5.1.9]. High- speed Internet wireline (as opposed to wireless) revenues grew by about 10% per year [Table 5.3.1].