Bandwidth costs greatly impact profit margins of organizations that deliver enormous amounts of data. Several products and services that are immediately impacted by bandwidth costs are:
- Content Sites
- Internet Archive
- Social Sites
- Utility Computing Services
- Amazon Web Services
- Sun Grid
An example of this is iTunes Movies, TV Shows, and Movie Rentals. Why can’t we have full HD 1080p, instead of the current HD 720p or 480p resolutions? The reason is bandwidth. Most High-Speed Internet connections are currently less than 10 Mbits/s (1.25 MB/s). Let’s do the math, assuming you have a 10 Mbits/s connection and the site that hosts the content can let you download at that speed. Now, let’s take a look at file sizes. For example, on Apple’s Movie Trailer site, the trailer for “The Chronicles of Narnia Prince Caspian” which is 2:30 minutes long is:
- 41 MB @ 480p (32.8 s)
- 77 MB @ 720p (61.6 s)
- 184 MB @ 1080p (147.2 s)
As you can see the 1080p file size is 4.5x of the 480p. Thus, storage and bandwidth costs are going to be in that proportion; while a 720p is only 1.9x of the 480p.
As you can see, the 1080p version takes almost the same amount of time to play (2:30 min or 150 s) as to download (147.2 s). Now let’s assume that a movie is 90 minutes, which is 36x in length of the movie trailer I picked in this example. Thus, a 90-minute movie would be approximately:
- 1476 MB @ 480p (1180.8 s)
- 2772 MB @ 720p (2217.6 s)
- 6624 MB @ 1080p (5299.2 s)
Now, Apple iTunes needs to make a profit off of these downloads. iTunes currently uses Akamai as its CDN. Assuming Apple secured a great bandwidth deal at $0.10/GB.
- 1.44 GB @ 480p, would cost Apple $0.14 or so in bandwidth.
- 2.71 GB @ 720p, would cost Apple $0.27 or so in bandwidth.
- 6.47 GB @ 1080p, would cost Apple $0.65 or so in bandwidth.
- Apple streams free video previews. So Apple has to eat those costs when people want to see if they want to buy or rent a video. Additionally, most video podcasts are free to download, so Apple has to pay for those bandwidth costs, as well.
- Apple pays studios movie licensing fees.
- Apple pays for maintenance fees, such as equipment to store, process, and distribute files.
iTunes currently charges for movie rentals at $2.99-$3.99 for 480p; and $3.99-$4.99 for 720p. We will assume each movie is 90-minutes long. Let’s look at the costs:
- 480p movie rental +$2.99 or $3.99
- 480p movie rental bandwidth -$0.14
- 480p movie preview bandwidth -$0.004
- license fees -$x
- maintenance fees -$x
- 720p movie rental +$3.99 or $4.99
- 720p movie rental bandwidth -$0.27
- 720p movie preview bandwidth -0.008
- license fees -$x
- maintenance fees -$x
So the profit margins look pretty good on the surface. However, you have to factor in what Apple gives away – we already factored in a single movie preview before the movie rental. What if you stream several previews before deciding what to rent? How often do you think people download free stuff vs. paid stuff on iTunes? I would assume people frequently download much more free than paid content. Thus, profit margins are slimmer than you may think, with the above mentioned license and maintenance fees. So, in effect, Apple looked at the numbers and 1080p is still too early, because of bandwidth delivery and storage costs. Thus, they settled for 720p at this time. Bandwidth affects profit margins and ultimately the consumer!
Google YouTube is the largest streaming video site on the Internet. Their revenue model, as with everything else Google, revolves around advertising. Bandwidth greatly affects their profit margins. I believe they have yet to break even. According to this article, YouTube consumes anywhere from $1-3 million in bandwidth costs a month. While another article says it might be as high as $5-6 million a month! If you look at this analysis, you can see that there is a strong possibility in future profitability. But bandwidth plays a big part in YouTube’s ability to make money at the moment.
There are several models that are used to deliver data over the Internet.
Content distribution networks (CDN)
- Level 3
- a host of others
This is what most services use. CDN is old-school, but effective. Especially, since they often have tiered pricing.
This is the backbone. Think of this as AT&T for phone delivery; Verizon for Internet access; or Comcast for cable TV access. Usually, CDNs are expensive, but as the volume of traffic increases, the prices become more reasonable.
Peer-2-Peer (P2P) model has worked for file distribution services such as Napster, VoIP services such as Skype, content delivery sites such as Joost, etc.
This distribution model saves the service from having to have a huge backend. Instead, the distribution is offloaded to users computers and uses their bandwidth to transfer information to other computers. There is often a central server, but the P2P distribution handles the majority of the traffic. A huge cost savings for the service, however, this model does not usually work well for extremely, high transaction services — such as a stock brokerage where trades must happen in x time period.
Bandwidth has rarely sold as a utility: pay-per-use. Amazon Web Services is changing this with services such as EC2, S3, and bandwidth.
However, CDN’s may start looking to this model as bandwidth becomes a commodity like electricity and water. Only pay for what you use. One CDN challenger, EdgeCast, is hoping to make bandwidth a utility!
Bandwidth costs impact profit margins. That is one reason that large companies, such as Google, build their own data centers. They use fiber to transport data between data center sites.
Not only can they save money on equipment, but also on utilities such as electricity and bandwidth. In fact, there is talk that Google is building a trans-Pacific pipeline to increase data transfer between North America and Asia. Amazon Web Services, run on Amazon’s own data centers. The profit margin for Amazon is through the economics of scale. They buy everything on the cheap and resell it to you at near wholesale prices. Google, Yahoo, Microsoft and all the other online giants are looking to do the same, both internally and resale to the consumer.
5 replies on “The Impact of Bandwidth Costs”
This is a great post, congrats. It’s great to see somebody looking at the economics of providing services over the web. However, I disagree with your initial statement that there are no 1080P movies available over the web because of bandwidth. In fact, there is so little demand for 1080P that it’s not worth setting up the basic infrastructure to provide it. As you point out, 1080P content would be downloadable even over a 10 meg (or a 5 meg) home connection. But Apple would have to set up the infrastructure to (a) get content in that format from Hollywood and (b) house it in its own data center and ship it to the CDNs. Those costs would be high.
Secondly, while I agree with your desire to see more bandwidth to the home, I think ultimately the cost of bandwidth needs to rise. Service providers can’t make decent profit margins today and if you want them to build more infrastructure for higher bw, they need better profits. Essentially they are taking the place of movie theaters and retail stores as the chief distribution mechanism for a growing number of products. Yet they are trapped in a high-fixed-cost model. They need to (a) drive down their costs more and (b) figure out a way to get higher prices including and especially on P2P services. The steps to meter Internet pricing make a lot of sense: if you want to watch glitzy glamorous 1080P movies of Tom Cruise and Daniel Craig all day, why shouldn’t you pay more than me, if I sit here all day reading and writing skinny little blog posts of only a few kilobits.
Cheers! Keep up the good work.
This Analysis is Typical of Many it has got the basis of it core info incorrect Caspian trailer is not 41MB,77MB and 184MB it is in fact 79MB 480P(Twice the size in report) 152MB 720P (again twice) and 203MB 1080P.
#1 – To clear up the confusion, I mentioned that Apple is not ready for 1080p on iTunes because of economics, but I didn’t mention that there aren’t 1080p files floating around on the Internet. I’m sure they are. Currently, Apple iTunes HD movies are encoded at 720p.
#2 – If you look at the “Chronicles of Narnia Prince Caspian” link in the article above, it sends you directly to the Apple Movie Trailers section for the movie. And the file sizes are listed there as I said.
Where did you get your files? They may be encoded differently than on Apple’s site.
Hey Jesse, this is a GREAT article and really truthful about today’s bandwidth needs and possible shortage. ISP’s all across the country have upgraded this month to higher throughput for internet users… varying in the region, but some going from 5mbps to 10mbps, other up to 15 or even 20mbps! However, the “server” bandwidth of these big sites haven’t changed to take that into account, and if they did it would be costly…but I’m sure in time as their market grows and they are more profitable, they will inevitably upgrade too. In reality, they have plenty of bandwidth to share, but they need to make money too so they can’t give away the bank or they’d go broke. Thanks for this article!