Inefficiency is Not Beautiful

I've been wondering whether there's an opportunity for taking advantage of the way web hosting providers oversell bandwidth. A $100 dedicated server often includes a 1000+ GB/month allowance. In contrast, GNAX, a colocation provider, charges the same amount for a 1Mbps commit rate, which supports 316.4 GB/month of data transfer in each direction (upload and download).

GNAX's pricing does not include server hardware, software licenses, cabinet space, power or tech support.

The beauty of the dedicated servers model, I've been told, is that high traffic customers (I'll call them "H") are subsidized by those with more modest bandwidth requirements ("L"). This allows web hosting providers to win H's business by advertising low prices, while relying on L's under-consumption to maintain a profitable level of average usage.

It's good to be H - unless their bandwidth needs exceed the 1000 GB limit. In such cases, they are subject to excess usage fees of $0.50+ per GB, or offered the perplexing option of upgrading their equipment (to a more expensive server, or a multi-server system; both would increase bandwidth allocation) - even if there's absolutely no need for additional processing power or storage space.

So here's what I'm thinking: wouldn't it make sense for H and L to set up a bandwidth coop? Rather than allowing web hosting providers to profit from their under-usage, L could sell their leftover bandwidth to H at rock bottom prices. This produces cost savings for both sets of customers - while cornering web hosts into the impossible position of having to honor bandwidth offers to the letter.

There are of course challenges associated with setting up such a system, but where there's a will, there's a way. Or as a Chinese saying goes, rule benders tend to make 3x more progress than rule makers. The demand for affordable bandwidth can only rise over time. Some day soon, someone will come up with a way to leverage L's unused bandwidth. At which point, the dedicated servers model will no longer be quite as beautiful.

Comments

[Dan]

Isabel,

Wouldn't that trash any hope of profitability for a budget dedicated server provider? Sounds good for
the consumer but there has to be an equilibrium. Somehow, the provider has to make money.

It would make more sense to stop competing based on price alone... but who is willing to take that risk?

Dan

[Isabel Wang]

Um, but dedicated server providers made the rules; is it the consumer's fault if they're hard to live with? And if profitability depends on customers not using promised resources, maybe there's something wrong with the market?

There are risks either way - from not keeping up with the competition as well as overselling. The latter is much more dangerous, I think; a trading system for low-traffic customers' unused bandwidth could take down a lot of companies.

The current bandwidth pricing scheme has been around since dialup was state of the art. We can't expect the world to stand still so web hosting companies can make money? It's time to change the game, before someone outside the industry does.

[Tem Balanco]

There's overselling in all types of industries. Do you think your local 24 Hour Fitness can support it's average of 3000+ members at once? Such a business depends on the Ls as well. I don't see why there's a constant need to knock the economic model of today's hosting companies when such tactics exist in other industries and is accepted as common practice.

Tem

[Isabel Wang]

Oh, but Tem, I can't resell the hours I don't spend at the gym to someone else. But I do have a few ideas as to how high traffic and low traffic customers might be able to pool their bandwidth allocations...

[Dan]

Isabel,

I think you are right and wrong. The market DID decide -- but it decided based on what consumers wanted. More allocation, less price. Duh.

One point that I didn't think of until now is that as a dedicated server customer you already are free to sell off a portion of your servers space and bandwidth to help pay for it. I did it when I first started Hosting Catalog back in the day, and I am sure a lot of people still do this. It only makes sense.

Also, there are a lot of unmetered server offers out there now. This adds a certain degree of flexibility... Why pay per gigabyte used when you can have more usable bandwidth and the flexibility for spikes with a per megabyte per second deal?

I think that an outsider would have a hard time getting heavy bandwidth users to switch over. They would end up getting a lot of light bandwidth users looking to sell their bandwidth off. A heavy user would already be on an unmetered type of deal and wouldn't need something like this. Supply and demand would mess it all up.

My opinion...

Dan

[Isabel Wang]

Ok, some quick math. Let's say we have an imaginary hosting company with 5000 $99 servers. Each is given a 1000 GB/month data transfer limit. In aggregate, customers will have been promised 5 million GB of bandwidth.

For the sake of simplicity, we'll make the super conversative assumptions that customers generate equal amounts of upload vs download traffic, that traffic is evenly distributed over time, and that average usage is 50%. The total sold capacity within this data center will theoretically be 8 Gbps, of which 4 Gbps will be unused.

I did a quick search for unmetered servers. It seems a 100 Mbps connection would add $1K-$4K to your monthly fee, depending on bandwidth quality. So if you bought 4 Gbps from our imaginary provider, it'd cost no less than $40K/month, and perhaps as much as $160K for premium bandwidth.

On the other hand, your fellow customers - if they manage to find each other and band together - might be able to sell you the same 4 Gbps for $10K/month, or perhaps as little as $5K. From their perspective, their unused bandwidth is 100% free; every cent they could generate would be icing on the cake.

Might a potential cost difference of $150K/month motivate someone with super-high bandwidth requirements?

[Dan]

Isabel,

It would be very appealing to save six figures a year on bandwidth costs. But consider this: the bandwidth industry oversells their capacity too... That overselling is the reason why bandwidth can be sold at low prices. If everyone uses all their bandwidth by trading it, then it would throw things out of whack.

I realize that isn't your point, but all things considered I think this is one of those ideas that sounds great but isn't feasible in reality. Also, where are the guarantees? An enterprise client using six figures worth of bandwidth per month would demand a guarantee that the bandwidth would be there for them to use. That means that the bandwidth they are buying for a fraction of the cost would have to come from a lot of sources, and a lot of providers. My company uses a fair amount of bandwidth and we choose our suppliers carefully. We'd love to save the money, but it sounds risky.

A hundred things come to mind every time I read this thread so far... and almost all of them poking holes. Usually I agree with you, but in this case I don't, I just don't see how it could work...

Respectfully yours,

Dan

[Isabel Wang]

I agree that the idea isn't feasible right now. On the other hand, from the consumer's point of view, there's a great deal of paid for (theoretically) and un-used bandwidth capacity waiting to be set free. I'm concerned that this might create an incentive to make a bandwidth coop feasible. In which case, there'd be much gnashing of teeth across the industry.

Aren't there more rational ways of selling bandwidth? Preferably a pricing scheme that doesn't force customers to choose between unnecessary hardware upgrades and much more expensive bandwidth?

[Dan]

Isabel,

Well, you have to think. If a user needs more bandwidth, there is a good chance they need more processing power. That aside, they always can buy bandwidth in bulk in advance.

For those who are not using what they have, they may simply find comfort in it being there for when they get slashdotted... or they may want to sell some of their servers space off to friends.

But, you're right. There very well may be a much more logical way to sell bandwidth. The industry may not be ready for it or no one has thought of it yet. One thing that does come to mind is the bandwidth spot marketing, check this out: http://www.invisiblehand.net/