Who Pays for the Internet?

Who Pays for the Internet?

Who Pays for the Internet?

A cheat sheet for the news.
Aug. 24 1996 3:30 AM

Who Pays for the Internet?

Even a fairly short midday telephone call from, say, Los Angeles to Paris, can cost $10. Yet, that same amount will buy you a month of an online service that includes unlimited e-mail all over the world. For $20, you can make one to three hours of long-distance telephone calls. Or, for the same $20, you can surf the Web day and night for a month, download as much data as your modem can handle, enjoy unlimited e-mail, and even--if you own the right software--make as many telephone calls to New York or Paris or Timbuktu as your heart desires.

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How is this possible? Worldly cybernauts may find the question naïve--though fewer know the answer than think they do. To newcomers, the economics of the Internet is among its greatest mysteries. Herewith, a primer.

David Plotz David Plotz
David Plotz is an assistant editor at Slate.

First, the wrong answer: that the Internet is high-tech pork. The Defense Department created the Internet in the late '60s, and the government supported the Internet heavily from the '70s till the early '90s. But no more: The last major subsidy ended in 1995. Now, except for a few small, shrinking, and unnecessary federal grants, the Internet is a commercial concern. Telecommunications companies, computer companies, and Internet service providers (ISPs) built, own, and operate all the phone lines and computer networks that comprise the Net.

The real explanation of the Internet's cheapness lies in the difference between the telephone system and the Net. (A note: The rest of this article applies to the United States. The same basic rules apply to Internet users elsewhere, except that they probably pay more for Internet service, and lots more for phone service.)

Consider a typical long-distance telephone call from me in Washington, D.C., to my aunt in San Francisco. My long-distance company (which happens to be MCI) gives me an uninterrupted, real-time circuit between my house and my aunt's. In exchange, I pay MCI about 20 cents for every minute I'm connected. Of that 20 cents, MCI pays about 2 or 3 cents to my local phone company, Bell Atlantic, for carrying the call from my house to MCI's lines. It pays another fraction (probably 5 cents) to Pacific Bell for delivering the call the last few miles to my aunt's house. MCI pockets the rest.

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The actual cost of a long-distance call--after all capital costs have been counted--is only slightly more than that of a local call. But for decades, Congress and the FCC have mandated artificially cheap local phone service and artificially expensive long-distance service. MCI's payments to local phone companies--called "access charges"--are a subsidy. It costs Pacific Bell less than a cent to deliver my call. The other 4 cents are payback for giving my aunt cheap and unlimited local calls.

Now, consider the Internet. In one very important way, using the Net is no bargain. You need $2,000 worth of computer hardware to connect to it, about $1,960 more than the price of a telephone. But once you've got the gear, the Internet beats telephone costs for three significant reasons.

1. The Internet exploits low local phone rates. Unless you live somewhere remote, you reach the Internet by making a local call to your Internet Service Provider. Your ISP, in turn, leases super-fast long-distance fiber-optic cable from MCI, Sprint, AT&T, regional Bells, and other telecommunications companies. (These firms have plenty of fiber to spare.) These fiber-optic lines carry your Internet traffic around the country, delivering it to "Network Access Points," which link different networks like highway interchanges. When your data reach a Network Access Point, they hop on a line owned by another company and travel to their destination. But because the Internet travels on leased lines, the data entirely avoid the long-distance phone companies' own networks, and therefore avoid the access charges the long-distance companies must pay to local phone companies on normal telephone calls.

2. Talk isn't cheap, but data are. ISPs can offer unlimited access on their lines for two reasons. First, it saves them billing costs; telephone companies, by contrast, spend billions every year calculating who used what line and when. Second, Internet data transmission is remarkably efficient. When you make a 10-minute long-distance voice call, the phone company maintains an open circuit from end to end. You pay for every second, even if you're on hold. When you go online to check out a Web page, you may spend 10 minutes reading the page (and 10 minutes dialed into your ISP). But you only use the Internet for a few seconds: the time it takes to send your request to the page's Web server and for the server to deliver the page to you. For the other 9 minutes and 50-plus seconds, the ISP's long-distance line is free. Many Internet users can share a line that would need to be occupied full time by a telephone call.

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3. There are no guarantees on the Internet. Telephone service is a promise: You can be almost certain that you can complete a call immediately to anyone else with a phone. Internet service is a shrug: You can be reasonably sure, but no more, that you can send your data to another Internet user pretty quickly.

The Internet is an uncertain network because it is "packet-switched." This means that data are broken up into small pieces, or packets. Each packet seeks the cheapest route, at the instant it is sent, to the destination. When all the packets arrive at that destination, a computer reassembles them. Packet switching is a frugal, efficient way to send data from point a to point b (albeit via points c, d, q, and k). But packet switching is not terribly reliable: Packets routinely get lost or delayed, crippling communication.

Internet telephony, one of the coolest new online applications, illustrates packet switching's drawbacks. If two Internet users own the right software, they can talk by telephone over the Net. It is miraculously cheap: Speech is digitized, packet-ized, and sent over the Net, for no more than the cost of online access. But because the Net gets clogged and packets are waylaid, the sound quality is low and interruptions are common.

The Internet may soon be less of a bargain. It is clogging as more and more Net heads use packet-intensive, real-time applications such as Internet telephony and RealAudio. These "streaming" applications swallow enormous chunks of bandwidth for long periods of time, eliminating one of the Net's chief economies. There are three principal remedies for Internet congestion:

1. ISPs can lease more and bigger lines.

2. Customers who want to ensure fast access can replace their modems with pricey, high-bandwidth ISDN lines, T1 lines, cable modems, and so on.

3. ISPs can discriminate between heavy and light users. Customers will pay a premium to use streaming applications or send high-priority messages.

Remedies 1 and 2 are already taking place. The third is coming soon. All of them will make the Internet easier to use. And in the short term, all of them will make the Internet more expensive.