This post is Part 2 in a series about money and billing. Part 1 talked about the technical system we built, and how users purchase data and transfer credit. In this post, I’m going to talk about the basic economics behind our network, including what our expenses look like, what kind of revenue we need to generate, and some different billing models and their tradeoffs.
What Are Our Operating Expenses?
Our network’s recurring costs are relatively straightforward, and consist of two main components: power and Internet backhaul – both of which are surprisingly flat in our case. With respect to power, this is somewhat obvious: the cost to keep the tower running 24/7 is fixed, and depends only on the wattage of the cell tower and the price per kWh in the community. When it comes to backhaul, I didn’t quite know what to expect, but we ended up finding a 1MB/sec (yep, you read that number right) satellite Internet connection for 300 USD/month (yep, you read that number right, too).
As we covered in Part 1, it’s super easy to figure out how many bytes a user has sent or received, and it’s easy for users to buy and sell packages… but that’s where the easy part stops. This brings us to the real question of “how do we want to charge our users?” Note that I said “how” and not “how much” because even before we talk about rates, there’s a bunch of different ways for us to do this. The two main ways we could do billing is either by the amount of data used, as I described previously, or a flat monthly membership model. However, we could also give users discounts on specific services, provide cheaper rates for larger packages, or bill local traffic differently. There’s a lot of different options here, and they’re super important because billing is our main (only) tool to incentivize and influence user behavior.
Incentivizing Network Behavior
If you’ve ever split the cost of the Internet between roommates, or shared a cell phone family plan, then you’ve faced the exact problem we’re up against. Should we just split the cost evenly, or do we make the heavier users pay more? What if someone wants faster speed than the rest of us – do we make them pay for it on their own, or do we split the additional cost because we all benefit? What if someone can’t afford the full price – do we kick them off the network entirely, or take the money that they can afford? Should we offer discount rates for using the Internet during slow times? What’s the actual cost of adding a user to the network, anyway?
The fact that our Internet cost per month is fixed makes these questions much trickier than they might be. If our backhaul was charged per-MB (as a lot of satellite connections do), we’d simply set our rates accordingly, pass the cost onto our users, and be done with it. However, since we’re paying the same monthly rate whether we use the link or not, every second the network isn’t being fully used can be considered a second of service lost. Under this line of thought, if we’re paying for it anyways, let’s use the network as much as possible – and this makes the case for subscription-based pricing that encourages full network utilization.
Unfortunately, the flip size of full utilization is congestion: if too many people want to use the network at any one given moment in time, network performance suffers and slows down for everyone. Inevitably, the best way to reduce usage is to (1) raise rates per MB and (2) bill based on data usage, rather than a flat subscription – even though both of these approaches contradict what I just wrote in the previous paragraph.
The Minimum Viable Network
First, some basic math: Assuming that we split the cost evenly between all users, a network size of ten users would mean each user pays 300 / 10 = 30 USD/month for the satellite connection. If three users decide that they can’t afford it anymore, the cost would rise to 300 / 7 = 42 USD/month, potentially driving other users off the network and raising prices further in what the insurance markets call a “death spiral.” Conversely, the opposite could also occur: if three new users decided that they could afford Internet (at an advertised price of 30 USD/month) the price would drop to 300 / 13 = 23 USD/month and potentially attract even more signups.
This idea can be reduced to what we call the “Minimum Viable Network,” defined as the minimum number of users we need to avoid that death spiral. As long as we’re above the MVN, life is good, and when more people signup we could choose to either give everyone a discount or build up our cash reserves – but once we drop below the MVN, we’ll start to see more drop-offs and a steep price increase that feeds back on itself. This, more than anything else, is the big problem of a fixed cost connection: in a pay-per-MB world, we’d see our costs naturally decrease as users leave the network, but as it stands we’re on the hook for 300 USD/month no matter how many customers we have.
Alternate Funding Models
So far, I’ve mentioned the pay-per-MB model and the monthy subscription model as our two major ways of creating revenue – but there are countless other approaches to keeping the lights on. More and more national level governments are funding/subsidising programs aimed towards connecting rural populations, such as the Universal Service Fund in the United States. Simultaneously, local governments are using taxes to build out telecom infrastructure, simply because it’s the easiest and best way to fund an infrastructural project that comes with a large range of social benefits, including-but-not-limited to education, medicine, commerce, and financial inclusion.
Wrapping Things Up
By now, hopefully I’ve made it clear that this is a challenging space that we’re working in, and provided a useful overview of the tradeoffs. There are no easy answers, and this is probably going to be a topic we explore and experiment with in-depth over our initial deployment. Stay tuned for Part 3, where I’m going to cover some other techniques and approaches that we can build to reduce congestion and cost by keeping things local when possible.
Update: Part 3 is now available.