Cloud

Bandwidth Limits and Pricing Effects Must be Accounted for in Cloud Plans

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Based on U.S.-based carriers’ actions and announcements in recent months, the era of one-price, all-you-can-use bandwidth is reaching its end. Saugatuck sees this as unsurprising, inevitable, and eminently predictable. The ungoverned, unrestricted use of any resource will increase its scarcity and its price over time.

What we do see as surprising is the number of enterprises small and large that have not yet accounted for the increasing, and increasingly variable, costs of bandwidth into cloud IT and cloud business plans, strategies, and spending.

Failure to account for bandwidth costs and failure to plan for bandwidth price variation will not cripple cloud adoption, but it will unnecessarily increase the costs of managing cloud IT and business. Interestingly, bandwidth pricing in the U.S. could help to drive the expansion of cloud IT and business services availability and use overseas.

Why is it happening?

The root cause of this (so far) U.S.-oriented bandwidth crisis is a combination of market shifts, regulatory factors, and carrier business/operations planning.

It often takes two or more years for carriers or cell tower companies to obtain local regulatory approval (at the municipal or county level). The same processes can also slow down new terrestrial improvements – either for new towers, or for major upgrades. Most carriers in the U.S. foresaw the need to build out more infrastructure as they saw growth in such consumer behaviors as video-on-demand and online gaming.

What none foresaw was the explosion of cloud-oriented services demand and use by consumers and business, especially via 3G services. These networks (and the terrestrial back-haul networks supporting them) were designed, and mostly built out, based on 1990s-era cellular usage patterns; i.e., they were designed and built to support voice traffic. Even today, most of the backhaul uses T1, not Ethernet services.

The net result: Cellular/wireless traffic grew into broadband-hungry cloud-based services and use far more quickly than carriers imagined, let alone planned and budgeted for; and the slow, grinding machinery of local regulatory and political process have so far failed to keep up with the carriers’ now-urgent requests/demands for new construction. Wireless and terrestrial networks, including 1990s-era network switching and management systems, are taxed to the max. And after significant build-outs and M&A/market consolidation in the 1990s, carriers have focused more on profitability than on infrastructure investment, which requires massive capital spending. They recognize the need for, and potential profits from, enhanced infrastructure, but also have to satisfy shareholders’ demands for margin improvement over time.

Market impact

Just as the 1970s-era oil crises did not stamp out the automobile and associated industries in the U.S., shortages and high costs of bandwidth will not stamp out cloud IT and cloud business. The applications that require bandwidth, just like automobiles and petroleum products, have become an inextricable part of today’s business and consumer lifestyles, not only in the U.S. but overseas as well.

But until infrastructure build-outs/capacities significantly exceed demand, bandwidth will continue to become more expensive in the U.S., just as any other resource becomes more expensive when it is used in an unplanned, unrestricted manner over a prolong period of time.

One of the first responses we get when discussing tiered bandwidth pricing with enterprise IT leaders is a belief that such plans affect only individuals’ wireless or home use.

But the cloud+mobile business revolution is driving ever-greater bandwidth use everywhere, including by individuals, whether on behalf of an enterprise or interacting with an enterprise. And while today it may be the top five percent of individual users who meet or exceed carriers’ data use limits, their habits are indicative of the leading edge of cloud data usage. Where today the bandwidth hogs might be streaming video and music, in six to 12 months it may well be live, multi-threaded, collaborative applications used by geographically dispersed enterprise business users.

This means that individuals, SMBs, and enterprises will all face several cloud IT and cloud business uncertainties that need to be integrated into planning, budgeting and management in order to optimize profitability and avoid a “death by a thousand cuts” – or for those relying more and more heavily on mobile cloud IT, profitability attacks by a thousand (or more) smartphones. Factors contributing to this uncertainty include the following:

1. Potentially unrealistic and complex pricing. What constitutes high-end bandwidth usage and pricing today is likely to become commonplace within two to four years in the U.S. – and most likely within two years. Carriers may or may not elect to raise those limits. Thus today’s “premium” bandwidth pricing level could become “standard” pricing relatively quickly. And once pricing plans are established, without strong competition in most regional U.S. markets carriers are unlikely to reduce pricing per-tier even after significant infrastructure build-outs increase capacity. Rather, the few remaining nationwide providers will focus on maintaining and increasing profit margins.

Today’s data usage pricing plans are simplistic and tend to penalize users who exceed lower-tier usage parameters but do not approach higher-tier limits. Saugatuck expects some changes in these plans as users’ needs shift, and as carrier network management and operational systems (and billing systems) become more sophisticated. Carriers will develop and refine data pricing plans to better reflect real-world usage; but these plans are most likely to remain tiered. Those tiers will vary from carrier to carrier (and between business plans versus consumer plans).

2. Less competition. In the U.S., the regulatory approach favors an environment with one to three carriers per market, whether national or local/regional, or terrestrial, wireless/mobile, or CATV. This reduces the number of providers that need to be managed, but also reduces choice and competition. And the growth of cloud suggests that the national carriers will continue to raise rates charged not only to enterprises and individuals, but also to competitive and alternative carriers/service providers that lease long-haul/back-haul capacity from those national carriers.

3. More opportunities overseas. Uncertainty (and higher prices) in one market tend to drive business to other markets. When it comes to cloud, this could mean going overseas. Many national carriers overseas provide comparatively low-cost bandwidth across multiple network types, albeit quasi-monopolistically. So even where there may be little to no choice or competition, low bandwidth costs may entice more U.S.-based enterprises to locate cloud-based business operations overseas, or at invest more heavily in/sell more into markets where low-cost bandwidth enables low-cost cloud access and use.

As we often say when it comes to cloud IT and business, we are in the earliest days of market change, evolution, and growth. Today’s bandwidth pricing concerns may become little more than a series potholes in a long road toward cloud. But even small potholes can cause significant damage when traveling at high speeds – which is how many enterprises are entering cloud IT and business today. Slowing down, seeing the potential pricing problems, and taking action now will make the travel to cloud more smooth and uneventful.

Bruce Guptil is SVP and Head of Research for Saugatuck Technology. This research was originally published on August 3, 2011 as a Research Alert (928RA), and delivered to subscribers of Saugatuck’s CRS-Base subscription research offering.

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