Category: Economics

Money Matters (Part 3)

This post is the third in a three-part series about the financial side of things. In Part 1, talked about the systems we built for us to monitor network usage and for our users to buy and sell credit. In Part 2, we covered our operating expenses, and discussed some of the different considerations and models of how to bill users. In this part, I’m going to wrap things up by sharing some of the tricks and approaches that we can use to improve network performance and service for our users, and then providing some alternate funding models.

Local Services

In our network, a huge difference exists (in terms of network performance and congestion as well as cost) between traffic that stays local and traffic that goes out over the satellite link to connect to the Internet. Though our backhaul connection from our tower to the Internet is only 1 Mbps, the fronthaul connection from phones to the tower is much higher – we’ve seen speeds of 75 Mpbs for an individual user, and LTE offers theoretical speeds of up to 150 Mbps. Local communication, like sending a file from one person to another, doesn’t actually use the satellite link at all, and works even if we get cut off from the Internet. This brings up the question of “should we offer a local-only option?”

If we do decide to provide the option of local-only service to users, we also have to figure out what it should cost. There’s one argument that says we should charge them only for power, because that’s the really the only cost service they’re using. On the other hand, there are very good reasons for us to charge them more, and put that money towards the cost of the backhaul connection. Not only does everyone in the community benefit from Internet connectivity (non-paying users often request paying users to perform services for them), but we could potentially offer “lower priority” Internet connectivity when available. Remember – because the backhaul cost is fixed per month, every second we’re not using the Internet is a second that we paid for and simply didn’t use. Moreover, putting more money towards the backhaul could result in cheaper Internet access per user, which in turn incentivizes more users to join the network and creates one of those positive cycles I talked about in Part 2.

At the same time, we’re also actively working to improve what services are “local” by hosting them within the community on our server. If Gmail struggles behind a slow satellite connection, that’s a great reason for us to host a local email server. The exact same thing could be said for higher-bandwidth services, like streaming video with our own media server, or caching web content. I’ll save this discussion for another post, but we packaged CoLTE with many such services, including OpenStreetMaps and a chat server. Going further, improving Internet/Web performance at the network edge is one of my primary research interests, and I hope to pursue this topic at a painful level of detail before too long.

Limited Services

In addition to a local services option, we’ve also considered a “limited services” package that provides Internet access only to a select set of websites/services at a reduced (or free) cost. This package would likely be focused around calling and texting services (e.g. WhatsApp and Skype), but could also include other select websites such as Wikipedia.

The “limited services” idea stems primarily from the observation that many of the most socially useful services are also very low-bandwidth. For example, a standard-quality VoIP call requires only 20 kbps of bandwidth, potentially less under certain conditions, and WhatsApp text messages barely any bandwidth at all (Though these conclusions are intuitive and based largely on observed experience, we’re hoping to formally quantify this traffic soon!) These characteristics stand in stark contrast to other Internet services that provide a relatively low social benefit at a much larger cost of bandwidth, such as video streaming or online gaming. This dichotomy naturally led us to discussions around the idea of “we’re not making any money off of WhatsApp anyways, so why not just give it away for free?” Going even further, I’m almost certain that we could strongly prioritize VoIP traffic such as Skype and WhatsApp, and dramatically improve the social utility of our network, without our general Internet users even noticing the difference.

Thanks For Reading!

A fascinating theme that’s emerged in this series of posts is the intersection of technical engineering, socio-economic engineering, and what’s best for the individual community. One of the major takeaways of this entire series should be that the options are literally endless – especially since when the community is it’s own ISP, their interests are perfectly aligned. As we deploy additional networks in different areas, we’re hoping to build and research literally all of these topics, with the end goal being something as close to a set of “best practices” as possible. As always, thanks for reading, and please comment or reach out if you’ve got any thoughts or questions.

Money Matters (Part 2)

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).

Billing Models

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.

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