Changes in U.S. FTTH Demand and Supply Sides

There are several reasons--both supply side and demand side--why U.S. “fiber to home” business models appear to have changed. 

Perhaps oddly, fundamental demand for home broadband, though higher than ever, also provides less of the revenue to build the networks.

As important as the fiber-to-home business is, it is responsible for less than 10 percent of AT&T revenues. In the fourth quarter of 2022, for example, mobility drove nearly 69 percent of total revenue. 

In the fourth quarter of 2022. AT&T earned $31.3 billion. Mobility generated $21.5 billion of that amount. The fixed networks business generated $8.8 billion. Consumer fixed network services generated $3.3 billion or so. 

Of course, not all contestants are similarly situated. For many competitive internet service providers, revenue does largely depend almost exclusively on home broadband. Again oddly, revenue potential for such ISPs also seems to have declined. 

Where designers once assumed FTTH per-customer home revenue in triple digits ($130, for example), they now assume revenue in the $50 to $70 a month range. That might seem to eviscerate the business case, if network costs are in the $800 range with additional costs to connect actual customers in the $600 to $725 range, with take rates ranging from 20 percent up to about 40 percent. 

Only a firm with low overhead can make money sustainably at 20 percent adoption rates. For larger firms, adoption in the 40-percent range is likely required. At a high level, AT&T has been saying FTTH payback models work at $50 a month ARPU and penetration of 50 percent, though revenue from targeted newbuilds now exceed those figures, AT&T says. 

It is one thing for a smaller ISP to contemplate building an FTTH network and sustaining itself solely on such revenues. It is quite another matter for a dominant firm in a local area (Comcast, Charter, AT&T, Verizon, Lumen, Frontier, Brightspeed). 

Strategic concerns also matter, however. Even if the fixed networks business generates 10 percent of total revenue, that revenue still matters. Without the FTTH upgrade, AT&T risks losing that revenue and profit margin and cash flow contribution. 

In other words, even if never stated so starkly, unless the FTTH upgrade is made, AT&T and others risk losing their fixed networks business to competitors. 

At the same time, though harder to quantify, the payback model for deep-fiber networks can come in other ways. If small cell mobile networks require deep fiber networks, then business value comes also from the value of the backhaul network. So “fiber to the tower” and “fiber to the radio site” become elements of the payback model. 

Fiber access networks also support the business customer revenue stream. For AT&T, fourth quarter 2022 fixed networks business revenue was $5.6 billion, or about 18 percent of total revenue. So “fiber to the business” arguably drives almost twice the revenue as home broadband does, for AT&T. 

In other words, the same network supporting home broadband also contributes to support of the mobility business and business customer revenue streams. 

All that makes for a more-complicated payback analysis for any sizable contestant with dominant mobile revenues. Though the home broadband payback has to be there, the value of what we used to call “FTTH” has to be justified in other ways. 

Smaller ISPs might be able to justify an FTTH network on the basis of home broadband services alone, with 20 percent take rates. It is not so clear a large dominant service provider can hope to do so unless it can reach 40 percent or higher take rates, assuming revenue per account in the $50 to $70 range. 

And even when it does so, total deep fiber network value can hinge on other value contributions. 

Still, there are additional considerations. Supply side support from the federal government can reduce the cost of rural networks builds by 20 percent to 30 percent, which aids the payback model. 

Joint ventures of various types provide similar benefits, at the cost of possibly further reducing net revenue upside. 

And though it is an indirect input, many private equity firms are willing to invest in deep fiber projects with a rather simple formula: buy assets at a five times to six times revenue multiple and upgrade with FTTH to produce an asset selling at 10 times to 11 times revenue multiples. 

Demand side drivers also have changed a bit as well, beyond the “need” for internet access. 

The Affordable Connectivity Program provides a $30 a month subsidy for low-income buyers. That subsidy can be used to buy basic or faster services, and increases demand for internet access. 

In some cases, that means new FTTH facilities benefit both from 20 percent to 30 percent lower build costs, plus $30 a month in consumption subsidies for lower-income households. All those are new elements in payback models that improve the business case on both demand and supply sides.

Computing Now is Inseparable from Communications

Sometimes we only understand the value of something when it suddenly becomes unavailable. 

What is the value of one’s mobile phone, personal computer, applications, television, smartwatch, sensors or transaction appliances when power and internet connectivity are lost? If one could quantify value, it would be a number close to zero, in the absence of power and internet connectivity. 

It is estimated that intentional shutdowns of the internet by governments alone caused $24 billion in economic losses in 2022, for example. Deloitte researchers estimated in 2016 that a one-day internet outage affecting 10 million people in a country with high gross domestic product costs $24 million. 

source: Deloitte 

The point is that modern computing is inseparable from internet connectivity. That applies equally to end users as well as application and service providers; data centers and content owners; transaction platforms, logistics, transport, media and retail operations.

Most computing in the mainframe and minicomputer eras, followed by the early personal computer era, did not rely centrally on wide area networking, though local area connections often were important or essential. That largely remained true in the client-server era. But all that changed when computing became highly distributed in the internet, web, cloud computing and mobile computing periods, when resources were, by definition, remote. 

Paul M. Veillard 

As all media types became digital, content consumption and creation also were decentralized. The obvious implication is that modern computing cannot be divorced from networks and communication. 

Though much computing and processing happens at the edge, in an organization's private data center, onboard a PC, sensor or mobile device, most workloads now require remote processing. Hence the need for good connectivity, ranging from home broadband to mobile networks to metro capacity, inter-city links and subsea networks. 

source: Telegeography 

Why it is Hard to Move up the Stack, Much Easier to Move Down the Stack

Vertical integration and adding new roles in any value chain are traditional ways firms seek to increase value or control costs and value. As much as connectivity providers talk about “moving up the stack,” app providers also can move “down the stack.”

And we might as well just acknowledge that it is easier for an app provider to move down the stack than for a connectivity provider to move up the stack. 

The reasons are somewhat obvious if you think about the issue long enough. Any app, service or product provider already knows lots about their customers. In other words, a business operating above the app level knows what its customers want, why they buy and how much they prefer to pay. 

A connectivity provider has to learn what its connectivity customers want, but typically has no direct knowledge of the intimate details of how those connectivity customers actually create value in their businesses.

In other words, firms operating at higher levels of the stack are intimately involved with the actual business functions connectivity supports. Transport and computing functions at the lower levels are less involved--if involved at all--in the higher level business processes. 

source: Vermont IT Group 

Bluntly, a connectivity supplier only knows what a class or type of customer typically wants to buy, in terms of computing and connectivity services, but has no direct and detailed knowledge of the connectivity customer’s actual business. 

That is why connectivity provider enterprise sales forces have to build domain knowledge. Those in the domain already know all that, in detail. 

It no longer is unusual for an app provider to become an access provider, for example. Google Fiber provides only one example, operating as a retail internet service provider and as an owner and builder of substantial wide area networks across the globe. Meta, Microsoft and other app providers also are anchor tenants if not full owners of WAN assets. 

Tucows, originally a domain name registrar, has become both a mobile services provider and now a gigabit Internet service provider. 

There also is movement by new providers into existing connectivity roles. Cable companies, satellite companies and other original equipment manufacturers likewise have moved into additional parts of the retail connectivity services business, ranging from internet access to mobile services. 

Facebook now leases transponder time to support internet access operations in sub-Saharan Africa and sponsors the Telecom Infra Project that develops new open source tools across the connectivity ecosystem. 

In other words, it is far easier to move down the stack than to move up the stack. 

Where are the Enduring Business Moats for Fixed, Mobile Operators?

As more digital infrastructure assets shift into private equity or institutional investor hands, a logical question is whether there is a change in the perceived business value of network and facilities ownership, or simply a change in network costs and business models. 

In the past, ownership of scarce network access assets was considered to provide value because the cost of such facilities was so high that a business moat was created for the owner of the assets. 

Of course, 50 years ago such business moats also were complemented by government  monopolies as well. These days, under competitive frameworks, only the business moat matters. 

With the caveat that business strategies can change over time, there has been some movement towards layered, disaggregated facilities models in both fixed and mobile realms. In the mobility business, open radio access networks, virtualized functions, tower asset sales and the whole mobile virtual network operator model provide examples of a shift away from vertically-integrated formats.

In the fixed networks business, some countries have moved to “single wholesale network” approaches, which can, in some cases, eliminate the business value of facilities ownership nearly entirely, as all retailers use the same network, with the same features and underlying network cost structures. 

In markets where a range of options are possible, more instances of joint ventures are visible, in large part a means of reducing the risk and cost of new fiber-to-location facilities while arguably also speeding deployment timetables. 

In such cases, it is not yet possible to say the perceived value of an access network (scarcity value) is diminished. In fact, the need to deploy first or early, before other contestants can deploy their own facilities, might tacitly support the notion that the network remains a scarce asset with moat value. 

In other words, if deploying the first FTTH network leads to 40 percent take rates, while following networks only manage to gain about 20 percent each, then the scarcity value remains, even if not as robustly as in the monopoly era. 

That noted, in some cases, fixed network operators have traded a local monopoly in exchange for government permission to expand on a wider geographic basis. Few remember it now, but Rochester Telephone in 1993 opened its network to competitors in exchange for the right to enter the long distance business. 

Singtel essentially did the same thing later, giving up its Singapore monopoly for freedom to expand elsewhere in South and Southeast Asia. 

Those are examples of strategic decisions that do not directly bear on the issue of the business value of access networks produced by their scarcity. 

At least so far, mobile operators have been able to shed tower assets without harming their franchises. They should be able to virtualize their networks--assuming no business or technology missteps--without marketplace damage. 

It is not so clear yet how value could change in the fixed networks business. So far, most joint ventures to build FTTH infrastructure arguably are driven by a need to build faster than the competition, so the value of the joint venture is lower cost and time to market, and not a change in the perception of value. 

In the data center market, changes in ownership have not necessarily signaled a change in belief about scarcity value, either. Whether an owner is one commercial entity or another, or even if ownership changes from private to public, or public back to private, does not intrinsically change the scarcity value of the assets. 

Indeed, the surrounding issues of water scarcity; energy consumption; location and scale all suggest scarcity value remains key. First movers in any geography often have advantages. Environmental and social constraints are starting to limit unbridled expansion as well. 

Still, in the data center market, facilities ownership does not seem to have lost any luster, with the obvious caveat that even the largest hyperscale data center operators lease facilities all the time, rather than building and owning their own assets. 

That pattern appears more open to change in the fixed networks and mobile businesses, where facilities scarcity value has essentially been eliminated, in some markets where a wholesale-only model prevails and a neutral third party provides the network facilities. 

In other markets where a former incumbent also owns the wholesale facilities, some additional scarcity value is retained by the former incumbent. In markets with no restrictions on facilities-based competition, scarcity value remains, but perhaps at a lower level than in the past. 

A typical pattern is ownership in core geographies and sharing or leasing in out-of-region markets. Again, that speaks more to conservation of capital than scarcity value. 

Still, questions about scarcity value seem destined to grow as formerly-vertically-integrated firms adapt to the possibility of a layered approach to their operations. The debates access providers now have about outsourcing operations support to public cloud services providers is an example of that deepening debate. 

At its heart, all such debates are about value, and where value lies.

Service "to Persons" has Key Revenue Implications, Compared to Service "to a Location"

For anyone who has covered or analyzed the U.S. connectivity business for some decades, it now is somewhat shocking how much revenue is produced by the mobility business, compared to the fixed networks business, even granting the importance of the fixed network for business and home broadband. 

Keep in mind one salient element of each business: fixed services are “to a location” while mobile services are “to a person” or “to a sensor.” So revenue per locations is one number while mobile revenue is a compound number based on the humans and network-connected sensors at a given location, 

In other words, mobile revenue can easily be 2.5 to 5 times the revenue of a fixed network connection. 

AT&T mobility average revenue per postpaid account was $55.43 in the fourth quarter of 2023, while home broadband accounts served by optical fiber had $64.82 average revenue per account. 

So you can see the total revenue per account implications when multiple mobile accounts are purchased, compared to a single home broadband connection. 

AT&T, for example, earned $31.3 billion in the fourth quarter of 2022. Mobility generated $21.5 billion of that amount. The fixed networks business generated $8.8 billion. In other words, mobility drove nearly 69 percent of total revenue. 

source: AT&T

The fixed networks business revenue was $5.6 billion, or about 18 percent of revenue, while consumer fixed network revenues represented about 10 percent of total revenue. As important as the fiber-to-home business is, it is responsible for less than 10 percent of AT&T revenues, as voice revenues and copper access are part of those revenues. 

 

 

source: AT&T

Of course, each product has different profit margins, so revenue does not tell the whole story. Business service, consumer broadband (fiber versus copper) and consumer and business mobility all likely have distinct profit margins. 

So smaller revenue contributions might generate higher amounts of firm profit. Still, the law of large numbers is evident. A one-percent improvement in mobility segment revenues or profit should have higher firm impact than a similar one-percent increase in either business or consumer fixed network services. 

Home broadband probably has the highest margins, and those margins might be getting better. Because of federal government subsidies for fiber-to-home construction. Those subsidies might reduce the cost of FTTH builds by 20 percent, in rural and other difficult-to-serve areas. 

We Used to be Able to Count Trans-Atlantic bandwidth in T1s

Back in 1979 when the PTC was formed, trans-Atantic bandwidth was about 1,000 Mbps total, or about 647 T1 circuits. In early 2023 trans-Atlantic capacity is likely above 75 Tbps. 

source: AI Impacts

Sometimes One Has to Stop and Remember How Much Things Have Changed

When PTC was founded in 1979, there was no internet. The Apple II had barely been commercialized. The IBM PC did not exist. Globally, about 4/100 of one percent of humans used a cell phone. We did not text, we called--from a phone connected to the wall. 

There was no World Wide Web, home broadband or consumer GPS. There was no social media, no video or audio streaming. We did not use email. 

Ethernet was not yet commercialized. It did not become a standard until four years later. 

In the U.S. market, consumers could not legally attach their own phone or modem to the network: it was illegal. Phone service was a monopoly. Only one firm could be in that business. 

The amount of bandwidth linking North America and Europe could be measured in T1 circuits. 

So yes, much has changed. 

Nomenclature Change Shows Business Change

Private equity firms say they invest in fiber to premises providers instead of “telcos.” That is the key to understanding the restructuring opportunity they see.

Access providers don’t want to be known as “telcos” anymore. They don’t want to be known as “cable TV” companies, either. Instead, they are internet service providers, or home broadband providers. That trend has been nearly two decades in the making and tells us much about how the business has changed. 

But the very fact that private equity firms invest in digital infrastructure also tells us some other possible things about the business.  

Historically, the private equity business model requires acquiring assets that can be transformed in some way to add value. Sale of those assets is the exit. That might imply there is a “problem” of some type with the asset that PE can fix, before flipping the asset. 

 Institutional investors are the other group that traditionally buys real estate type assets ranging from hotels to airports and toll roads to gas pipelines and electrical utilities. They are more interested in predictable cash flow generated from slow-growth assets with some degree of natural advantage in the form of business moats that protect them from competition. 

The issue that we might contemplate is what the new interest in digital infra assets indicates about business models. Some PE investments are vertical: airport operation, gas pipeline operations, toll road operations and produced cash flow are the value. The physical assets underpin operations. 

In other cases, the model is more horizontal. The value of a wholesale broadband access network is the ability to lease access to the network, rather than operating the retail business to generate cash flow. 

The analogy in the classic real estate business is the “asset light” model used by some hotel, hospitality or entertainment businesses where the retail business operates without land ownership, sometimes without building ownership, sometimes without indigenous management or branding. 

So the issue is how far similar concepts can be applied within the connectivity industry. Everyone is familiar with the “asset light” mobile virtual network operator model in the mobile industry. 

Fixed network operators are moving, in parts of their businesses, in that direction, at least in the form of joint ventures that share ownership of access network assets. 

Up to a point, hyperscale app providers have moved vertically, to integrate transport functions (wide area networks). Google Fiber is an example of full vertical integration, in some ways. So are hyperscale data centers. 

Just how far the fixed network unbundling can go is a question, as is the degree of vertical integration by hyperscalers. 

Bill Barney, PTC Chair on 2023

Marketing Claims Aside, How Much Capacity Do Home Broadband Users Really Need?

How much internet access speed or usage allowance does a customer really need? It actually is hard to say. U.S. data suggests there are clearer answers about what customers expect to pay, which is about $50 a month, on average, even if some studies suggest wildly higher prices.  

source: Broadband Now 

Average prices are lower or higher than $50 a month, depending on what adjustments are made, such as adjusting for currency differences or cost of living differences between markets. Adjustments of that sort tend to show rather uniform global pricing of internet access, also adjusting for “quality” (speed, for example) differences. 

Also, any assessment should be based on service plans people actually buy, not posted retail prices for any particular tier of service. Bundle pricing adds another layer of complication. 

Internet service provider business models always require matching supply with demand; deployment speed and cost. What is needed to market effectively against competitors also matters. 

Time to market does matter. “It took us 22 years to pass 17 million households with fiber: 22 years,” says Hans Vestberg, Verizon CEO. “That’s how hard it is.”

“We basically had 30 million households covered with fixed wireless access in less than one year,” he also notes. 

So there is the trade off: rapid deployment of a lower-cost network versus slower deployment of a higher capacity network; wide coverage now versus higher capacity later; lower capital investment versus high. 

As typically is the case, wireless platforms can be provisioned faster than cabled networks, at lower cost. The Verizon data illustrates that fact. 

Cost also matters, as no internet service provider--especially those in competitive markets--can afford to spend unlimited sums on its infrastructure. Verizon and T-Mobile tout fixed wireless access in large part because they can afford to supply itt and can supply it fast, at lower costs than building fiber-to-home would cost. 

But marketing also matters: internet service providers do compete on the basis of speeds and feeds; do compete on price; do compete on perceptions of quality; terms and conditions and value. 

In that regard, even as home broadband speeds continue to rise, marketing claims are a battleground. Cable executives, for example, make light of fixed wireless as they claim it will not scale the way hybrid fiber coax and fiber-to-home can. FWA proponents argue that the platform does not have to scale as fast as FTTH or HFC to provide value for segments of the customer base. 

For example, even households that buy the fastest tiers of service rarely have a “need” for all that capacity. According to a survey by HighSpeedInternet.com, survey respondents say the “perfect plan” features a “610 Mbps fiber connection for $49 per month.”

In the third quarter of 2022, about 15 percent of U.S. households bought service operating at 1 Gbps, while 55 percent purchased service running from 200 Mbps to 400 Mbps. 

source: OpenVault 

 

The point is that, no matter what they tell researchers, U.S. home broadband customers do not seem especially eager to buy gigabit services at the moment, or services running at about half that speed. 

Speed demands will keep climbing, of course. But it does not appear, based on history, that most consumers will switch to buying the fastest tiers of service, or the lowest tiers of service, either. Historically, U.S. consumers have purchased internet access costing about $50 a month, with performance “good enough” to satisfy needs.

In fact, one might make the argument that is consumption (gigabytes consumed) that matters more than speed. Average data consumption stood at about 500 gigabytes per month in the third quarter of 2022, according to OpenVault. But the percentage of power users consuming a terabyte or more was growing fast: up about 18 percent, year over year, and representing about 14 percent of customer accounts. 

So speed claims are about marketing, as much as customer requirements. “It's turned into really a marketing game,” adds Kyle Malady, Verizon Communications EVP. ISPs compete on claimed speeds, even if there is little evidence most households require gigabit speeds at the moment. 

Beyond a certain point of provisioned capacity per user and device in any household, additional speed brings subtle if any benefits. Consumption allowances do matter, especially for households that rely on streaming for video entertainment. 

Nobody can give you a convincing answer why gigabit per second or multi-gigabit per second networks are required, beyond noting that multi-user and multi-device households need a certain amount of capacity if all are using the ISP connection at the same time. 

No single application, for any single user and device, requires a gigabit connection. So the real math is how much total bandwidth, at any moment, is needed to support the expected number of users, apps and devices in simultaneous use. 

For a single user or two, using one or two devices each, simultaneously, it is hard to see how a gigabit or faster connection is required. 

Some version of that argument--that a customer “does not need” a particular capability, is at the heart of much ISP marketing. ISPs whose platforms have some speed limitations point out that the limits do not matter for some customers, or that the price paid for higher-speed services does not provide value, commensurate with cost.

Communications Regulation Has Obvious Implications for Political Freedom

Communications regulators generally argue--essentially--that “if it walks like a duck, and talks like a duck, it is a duck” when applying policy frameworks to different kinds of communication networks (general purpose public networks; broadcast TV and radio; satellite; cable TV and data networks, for example). 

In other regards, irrespective of technology, protocol or architecture, public networks are regulated one way; other networks often in different ways. Private local area networks such as Wi-Fi have few, if any restrictions beyond power emission limits.  Wide area networks likewise have few, if any, limits.

Data networks are not regulated, or lightly regulated, if at all. The internet seems to exist in a different space, as governments retain the ability to block access, block apps or services if they choose. 

In that regard, the internet is somewhat less regulated than public communications for phones, PCs and other devices, but more regulated than enterprise WANs or other local area private networks. 

Advocates for content freedom and governments often stand apart where it comes to internet regulation. But most of the movement over the last 20 years has been in the direction of “more regulation.” VoIP services increasingly have become regulated just like older forms of voice using the public switched telephone network, for example. 

Private actors often are free to impose their own restrictions as well. And the direction there also has been towards less freedom. 

So “technology is not destiny.” Regulators are free to make their decisions any way they choose. 

Still, all networks these days now are computer networks, even if the manner of use can be different. Broadcast TV, broadcast radio, mobile networks, satellite networks, low power wide area networks and emergency networks, for example, often combine the right to use spectrum with a purpose-built network. 

Quite often, the applications supported by the network are vertically integrated, and the licensee controls who and what gets access to the network. In other cases, use of the network requires authorization (you are a customer of a mobile or satellite network and pay for access,  for example). 

The internet--and internet-based applications--do not operate that way. Each application can set its own access rules for customers and users. 

Oddly enough, highly-regulated networks such as the "phone network" and other public networks have historically not interferred with content, and are, in that sense, about as permissive as are data networks or other media such as newspapers and magazines, in some countries.

Content regulation has at times been more stringent, at times less stringent,  for broadcast TV, radio or cable TV networks. 

Again, oddly enough, it now appears as though private actors are suppressing freedom as much, if not more than governments. Rarely are content regulations imposed by governments as much as they are by private firms. 

The point is that regulators have discretion and choice. So do private actors who use communicatiions. They can make decisions that promote more or less freedom, in almost any sphere where data networks operate. Perhaps it is worth pointing out that societies and people might gain from more freedom, rather than less.

Taxing Hyperscalers to Fund ISP Networks has Losers, Including End Users

For every public policy decision, there are winners and losers. That is no different for proposals to tax a few hyperscalers to support home broadband networks. ISPs would gain; app providers would lose. Ultimately, so would users of internet-delivered apps and services.

Communications policy almost always is based on precedent and prior conceptions. All this might be relevant when thinking about how public networks are funded, especially not that regulators are looking at unprecedented funding mechanisms, such as levying fees on third parties that are not “customers” of connectivity providers. 

It’s a bit like taxing appliance makers whose products create demand for electricity. Today, the electrical networks are common carriers, all the devices are private and the cost of using electricity is borne by the actual end user customers. 

But some regulators want to essentially tax device manufacturers for the amount of electricity use they generate. 

There are simpler solutions, such as charging customers on a usage basis, based on their consumption. That would have a possible added benefit of not disturbing the data communications regulatory framework. 

And that matters, at least for observers who care about freedom of expression. Data networks have always separated the movement of data from the content of data. Devices and software do not require the permission of the data infra owner to traverse the network, once access rights are paid for. 

The important point is that all networks now are computer networks. 

To be clear, some will argue that changes in how networks are built (architecture, media, protocols) do not matter. It is the function that matters, not the media. If a network is used for broadcast TV or radio, that is the crucial distinction, not whether broadcasting uses analog or digital modulation; particular protocols or radios. 

If a network is a public communications carrier, the types of switches, routers, cables, protocols and software used to operate that business do not matter. What is regulated is the function. 

The function of a public network is to allow paying customers to communicate with each other. Each account is an active node on the network, and pays to become a node (a customer and user of the network). 

Service providers are allowed to set policies that include usage volume and payment for other features. In principle, a connectivity provider may charge some customers more than others based on usage. 

But one element is quite different in the internet era. Connectivity providers have customers, but generally do not own the applications that customers use their networks to interact with. There is no business relationship between the access provider and all the other application providers--as app providers. Every app provider is a customer of a local access provider or many access providers. 

Operators of different domains can charge each other for use of each others’ networks by other networks, which is where the intercarrier settlements function plays. And volume does matter, in that regard. 

The point is that it is the networks who settle up on any discontinuities in traffic exchange. Arbitrage always is possible whenever traffic flows are unequal, and where rules are written in ways that create an arbitrage opportunity. The classic example is a call center, which features lots of inbound traffic, compared to outbound. 

So some might liken video streaming services to a form of arbitrage, in that video streaming creates highly unequal traffic flows: little outgoing traffic and lots incoming, for the consumer of streaming content. 

But that also depends on where the servers delivering the content are located. In principle, traffic flows might well balance out--between connectivity domains-- if streaming customers and server sites are distributed evenly. 

Historically, big networks and small networks also have different dynamics. When the media type is voice, for example, bigger networks will get more inbound traffic from smaller networks, while smaller networks should generate more outbound traffic to the larger networks. 

For streaming and other content, traffic flows on public networks might largely balance, since the biggest content firms build and operate their own private networks to handle the large amount of traffic within any single data center and between data centers. Actual distribution to retail customers (home broadband users of streaming video, for example) likewise is conditioned by the existence of server farms entirely located within a single domain (servers and users are all on one service provider’s network). 

The point is that inter-domain traffic flows, and any compensation that different domains might “owe” each other, is a complicated matter, and arguably should apply only to domains and their traffic exchange. 

In other words, one might argue that traditional inter-carrier settlements, traffic peering and transit are sufficient to accommodate unequal traffic flows between the domains. 

In other words, the argument that internet service providers make that a few hyperscale app providers are sending much more traffic than they are receiving “should” or “could” be settled between the access provider domains, as always has been done. 

If the argument goes beyond that, into notions of broadband cost recovery, then we arguably are dealing with something different. Going beyond inter-carrier settlements, such notions add a new idea, that traffic sources (content providers and streaming services)  should pay for traffic demand generated by their traffic sinks (users and subscribers of streaming services).  

This is a new concept that conceptually is not required. If ISPs claim they cannot afford to build and operate their own access networks, they are free to change charging mechanisms for their own customers. Customers who use more can pay more. It’s simpler, arguably more fair and does not require new layers of business arrangements that conflict with the “permissionless” model.

Data networks (wide area and local area) all are essentially considered private, even when using some public network resources. Data networks using public network resources pay whatever the prevailing tariffs are, and that is that. Entities using data networks do not contribute, beyond that, to the building and operating of the public underlying networks. 

Public transport and access providers might argue that they cannot raise prices, or if they did, would simply drive customers to build their own private networks for WAN transport.

That obviously would not happen often in the access function. Local networks are expensive. But there already exists a mechanism for networks to deal with unequal traffic flows between access domains. 

So there is a clash here between private data networking and public communications models. What is new is that, in the past, the applications supported by the network were entirely owned by the network services provider. 

Now, the assumption is that almost none of the applications used by any ISP’s customers are owned by the ISP itself. So the business model has to be built on an ISP’s own data access customer payments. Application revenue largely does not factor into the business model. 

But that is the way private computer networks work. Cost is incurred to create the network. Revenue might be created when public network access and transport is required. But all those payments are made by an ISP’s local customers, even when the ISP bundles in access to other ISP domains required to construct the private network. 

“Permissionless”  development and operation now is foundational for software design and computing networks. All networks now are computing networks, and all now rely on functional layers. 

The whole design allows changes and innovation at each functional layer without disturbing all the functions of the other layers. What we sometimes forget is that below the physical layer is layer 0, the networks of cables that create the physical pathways to carry data. 

Of course, any connectivity network must operate at several layers: physical, data link and network. By the “transport” layer functions tend to be embedded in edge devices. 

source: Comparitech 

To be sure, connectivity networks--especially access networks that sell home broadband and other connectivity services to businesses--must operate at many layers, including the modems used to support broadband access. 

So some might add, in addition to a “layer zero” network of cables, a layer eight for software and applications that run on networks. 

source: NetworkWalks 

Local area networks typically are less complex, but still use the layers architecture. The difference is that LANs (Wi-Fi, Ethernet  or other) primarily rely on layers one to three of the model. 

source: Electricalfundablog 

“Permissionless” access and transport have sparked enormous innovation. That should remain the case. Additional taxes, which means higher costs, will not help that process. Other networks charge for usage. Public IP networks could do the same. Settlement policies between access domains already exist. And, to be clear, app domains can create facilities that do not cross access domains, if they choose. 

So ISPs can charge for usage if they choose. Unlimited usage could be a higher price. Lower amounts of usage can still be sold in tiers. Problem essentially solved.