These costs are based on the information in the BT Wholesale Service Provider Price List. They do not include staff costs, data centre costs, ISP links to the Internet, or indeed any costs byond the basic price of getting you ADSL and a connection back to the ISP. All prices exclude VAT.
I am using IPStream pricing, as this is the easiest to work with; similar (but more complex calculations) can be done for DataStream and LLU, provided you have details of the non-BT costs; however, LLU and DataStream costs aren't going to be hugely lower; the big gains for providers are in ability to manage the traffic, and in who they pay.
A Home line, or a Max Standard line costs £8.40 pcm (£100.80 per year). An Office line, or a Max Premium line costs £12.40 per calendar month (£140.80 per year). This is just your ADSL. On top of this, your ISP has to pay BT for a Central; this is the ISP end of your ADSL.
Centrals vary in price. Assuming that the ISP runs the Central at full saturation (which means horrible latency and speeds, together with packet loss), they may be able to get a Central for as little as £200 per MBit/s pcm (a 622MBit/s CBC Central run at full saturation). A more realistic figure is the UBC charge for usage, 41p per KBit/s pcm (£410 per MBit/s pcm), plus a minimum of £750 pcm for a 2Mbit/ Central. Note that the speed of the Central is the total peak speed of all the lines aggregated into that Central. Thus, a 622MBit/s Central can handle 311 2MBit/s lines at full speed, or 3110 2MBit/s lines, assuming that the average usage on each line is 1/10th of saturation.
When considering this, bear in mind that the cheapest per-user option on BT Centrals is a 622MBit Central, supporting 32,000 users. The cheapest way to get one of these (UBC) is £160,000 per year. This works out to 41p + VAT per user per month, assuming the users don't actually use it at all. For a CBC 622Mbit Central, you pay £1,496,760 per year, which works out to £3.89 + VAT per user per month, but has no usage charges. Other Centrals have lower user limits.
Putting this into perspective; if you expect to saturate your line 24/7, it costs your ISP an absolute minimum of £200 per MBit/s pcm, plus the line charge. On a top-notch Max Premium line, this adds up to a minimum of £1450 + VAT per month, just for the ADSL line and connection to the ISP's datacentre. Even a lowly 256KBit/s line (Home 250, the slowest option available) costs £58.40 + VAT per month if it's saturated all the time.
So, how do ISPs make a profit at all, if they offer service from as little as £20 pcm, when a line costs them anything from £8.81 + VAT to well over £1450 to provide? Simple. They rely on people not saturating their lines 24/7, and using bursts of transfer, allowing tens or even hundreds of users to contend for a share of the same MBit/s of Central capacity. If your usage is bursty, you will not notice the contention; if your usage is saturation downloads, your choice is between slow speeds to get the costs down (if you're paying £20 pcm, you can expect no more than 50 KBit/s continuous speeds, with higher speeds when the bursty users aren't using the line), or high prices (if you pay £2,000 pcm, you can expect to saturate the line at full speed, no matter how good the line is, or what you're doing).
Contention is an awkward and ill-understood topic; many people confuse contention (the fact that there isn't dedicated room for you) with congestion (when you're seeing slow downs due to too many people trying to use the shared room at once. If your ISP gets contention just right for the customer base, you can use your line in blissful ignorance of the other users on the same Central, as whenever you try to use your line, you get the full speed it supports. If they get contention wrong, you try to use your line, and see congestion, where slowdowns happen as too many users compete for the same Central.
If you're one of those people who like car analogies: contention is when there's other vehicles allowed to use the same road as you. Congestion is when you have to slow down for those other vehicles. Uncontended access is like having a road specially built for your exclusive use, where no-one else is permitted on it. Appropriately managed contention is like being able to overtake slower vehicles whenever you feel like it; this is cheaper than having a road to yourself, but gets you the same speeds.
This does lead to another way to consider the economics of your ADSL package; what contention ratio is needed to make it profitable? The contention ratio is the maximum slowdown you will ever see; unless your ISP has got it badly wrong, you should never see such a severe slowdown. For the £20 pcm case, and assuming a perfect Max line, this works out to a contention ratio of around 150:1. To put this into some perspective, there's several ways this can work out and still be economic for the ISP:
It should be clear by now that making ADSL profitable for an ISP, while charging prices that people can afford to pay is complex. ISPs are stuck trying to find ways to keep their costs under control, without offering unacceptably poor service. Each ISP offers you a different tradeoff, and you should find one that meets your requirements. Caps, off-peak periods, automated traffic shaping (such as provided by companies like Ellacoya, whose systems let an ISP offer different speeds for P2P filesharing, IM, e-mail, web browsing and other usage), are all just techniques used by an ISP to try and find a tradeoff that is economic for both them and their customers.
Created by Simon Farnsworth, last updated 2006-09-07 15:30Z. Permission is granted to copy this document and its contents freely, provided that credit is given in the form of a reference to the original page.