what things cost (in different countries) and
- User costs – “free” to the user but who pays?
- Telephone access costs
- The availability of different Internet access
- ISP Subscription costs – what the user pays
- ISP Costs – what the provider pays
User costs – “free” to the user but who pays?
The internet appears ‘free’ to the user. If you are using a dial-up
account, once you have paid for a telephone connection to an ISP and the subscription
costs of the account, browsing the internet or transferring emails is essentially
free. But the internet has never been free in the monetary sense. In the beginning,
the US government paid for the infrastructure, first via its military research
programme (AR PA), then through the universities (NFSNet, etc). Now, internet
is big business, and someone has to pay for everything. The ordinary user pays
the ISP to be connected. The ISP may charge a monthly flat rate, or according
to the amount of data that the customer receives/sends, or the number of hours
connected. The ISP in turn has to pay the telecommunications company or another
ISP for its connection to the internet, and perhaps for the rental of computers
or other services, apart from its normal running costs. The customer also has
to pay for the telephone line, with a monthly rental and a fee for each (normally
local) connection. Many telephone companies charge by the minute for local
calls so the longer the user is connected the more expensive the connection.
In fact, even when some ISPs offer ‘free’ connections to the internet,
they usually offer the connection for free, but by arrangement with the telephone
company they earn money from the telephone charges for the call.
When accessing a web page or sending an email, the packets are routed through
the various interconnected networks of the internet to reach their destination,
over links which are paid for by the ISPs. Take the case of browsing a website
in Fiji from the UK. The user establishes a connection to the internet by dialling
up to an ISP’s nearest point of presence (POP). From this point on, the
user does not pay anything else. The ISP provides a leased line from that POP
to its central node, and then to other ISPs where it exchanges traffic with
that network, which in turn does so with another network, and so on. The packet
is routed through the network of networks until it reaches its destination.
The ISP pays the telecommunications company or a larger ISP for its connection,
and they in turn pay a larger carrier. The larger companies enter a variety
of commercial agreements among themselves, to share the huge number of cables,
routers, and computers that make up the global internet infrastructure. In
this way, the distance to the website or POP server is not important to the
end user, because it does not influence the cost of the communication. We pay
for unlimited access to any point on the global network.
The Economic Toolkit for African Policymakers1, published by the World Bank
in 1998, splits the cost of internet access for the user into its component
parts. It found that for 30 hours of internet access in Africa, 15% of the
cost is accounted for by telephone access, 42% by equipment (37% on computer
and 5% on modem), and 43% by ISP subscription. The main upfront cost is computer
equipment, which is subject to import tariffs and other taxes in some countries.
Equipment costs can be reduced massively by public internet access centres,
which lower entry barriers be removing these costs. This is especially so in
developing countries where there is a limited number of computers, which naturally
therefore limits the number of potential internet users.
Taxes on Computer Equipment
At the international level, countries
have entered into World Trade Organisation (WTO) commitments
to open markets to trade by lowering import tariffs during the
Uruguay Round of negotiations. One area of trade is specified
under the ‘basic agreement on telecommunications’ and
another as ‘computer and related services’. In the
first case, countries undertook various standard commitments
during the Uruguay round to liberalise their telecommunications
sector and allow competition by certain deadlines in different
sectors (local, long distance, international, data communications).
During the Doha Development Round in 2002, the World IT and Services
Alliances (WITSA) campaigned for those countries which have not
lowered access in the computer and regulated services to do so2
Telephone access costs
The cost of dialing up to the ISPs POP using a telephone line depends on two
things: first, the amount of time spent online and
second, the tariffs which are charged by the telephone operator. The amount of
time which is a user needs to spent online depends heavily on the bandwidth of
the line, which is measured in the number of kilobits per second, as this determines
how long it takes to download a file. Telephone lines are designed to carry voice
conversations at 64 Kbps, and modems work at either 56 Kbps or 64 Kbps. In practice
however, speeds are usually much lower than this because of congestion, attenuation
of signals, or poor quality analogue lines and switches. Faster lines using ISDN
(integrated services digital network) or DSL (digital subscriber line) technologies
can be obtained where telephone companies have installed them, or wireless technologies.
The availability of different Internet access
The availability of different Internet access lines is one point for policy interventions.
In the UK for example, action groups have been established in many rural areas
to lobby British Telecom to install ADSL in their local
exchanges. This pressure can work. For BT it encourages would-be users to register
their interest in having ADSL, and as this develops the critical mass of users
required to justify the cost of upgrading the exchange can have the effect of
encouraging the company to install the equipment.
For heavy internet users, it frequently becomes more cost efficient to lease
a dedicated line from the telephone company and pay a flat price regardless
of how much time is spent on the line. Leased lines can be bought at 64 Kbps,
128 Kbps, 256 Kbps, 512 Kbps, 1024 Kbps, 2048 Kbps or above. Organisations
or businesses with many computers will connect them together onto an internal
local area network (LAN), and then share one ‘leased line’. At
the point where the costs of dialing-up exceed monthly outlay on a leased line
(for example if there are 10 computers which are used for internet access),
it becomes more cost effective to lease a line. Where ‘broadband’ has
been deployed (DSL), this is also charged at a flat fee in the same way that
leased lines are.
The tariffs charged by the telephone company for lines and leased lines are
the key cost factor for internet access, therefore another area of concern
for policy makers. These tariffs are set by the telephone company, but
in many countries are subject to approval by the regulator. A key lobbying
point is for the telephone company to use local rates for dial-up tariffs.
A telecommunications monopoly in a country means that users have no choice
of a telephone company to use in order to dial up to their POP, and must
accept the tariffs charged. In a competitive environment, users can choose
between a number of local exchange carriers, are free to choose the lowest
tariff and in so doing lower the cost of internet access. A monopoly over
international traffic means that ISPs are not able to establish their own
independent links to foreign ISPs and to the internet backbone, and must
route all traffic and bandwidth through the telephone company, which can
charge whatever price it likes for the international bandwidth.
ISP Subscription costs – what the user pays
All the other costs of the internet are hidden from the user.
The ISP bears the rest of the upstream costs of the internet, but as a business
it must pass these costs back
Tariffs can prove more important than the
speed of connection for determining access prices. The figure of 15%
of the total costs of access, which is spent on telephone calls in
the African Toolkit model, is based on local rates. Where users have
to make a long-distance phone call to the nearest POP, these costs
skyrocket and account on average for 72% of the costs (the rest evenly
split between the cost of ISP subscription and the equipment). In the
1990s, before ISPs were established in many countries, to get access
to the internet users had to make an international call to dial into
the POP of a foreign ISP – which was astronomically expensive.
to the end user through the account subscription fees. The ISP subscription
fees are usually the highest component of the cost of internet access.
Ultimately, unless internet access is subsidised by an organisation
(such as a university or a company), the user pays all the costs. ISP
subscription fees vary widely, and a number of models have been employed
(for example the ‘free ISP’ model).
Using these two variables – telephone charges and the ISP subscription – the
cost of internet access varies widely across the world. Most noticeably,
the internet access costs are very much lower in OECD countries than
in developing countries. In Asia for example the cost of 30 hours internet
access per month in New Zealand is US$11.74 (US$11.74 ISP charges and
free local call charges), which is less than a tenth of the cost in
Kiribati US$142.8 (US$140 ISP charges plus US$2.8 telephone charges).
Monthly Dial-up Internet Acces
Costs (U$S) Asia 2002
Source: Asia Pacific Telecommunication
Indicators 2002, ITU.
ISP Costs – what the provider pays
ISPs, which provide the ‘on-ramp’ onto the internet, are run
either as businesses or in the education or government sector. Either way,
the ISP bears all the upstream costs of the internet. In the case of commercial
ISPs, these costs are passed back to the customer through subscription
charges, plus profit. In the public sector, they are run on a not-for-profit
basis and may to some extent be subsidised.
Internal network infrastructure: Because of the historic growth
of the Internet in US and OECD countries, leased lines are concentrated
in the developed core of the global economy. ‘At the end of 2001, there were around 375,000
permanent leased line connections to the Internet around the world,’ according
to Netcraft’s leased line survey quoted by OECD3. ‘Some
89% of leased line connections to the Internet are in OECD countries. The largest
number of leased line connections is in the United States with one third of all
connections in the world. Japan makes up 12% followed by the United Kingdom (7.1%),
Germany (6.6%) and Canada (3.3%’)
.External network infrastructure: The ISP in turn must establish a
leased line from a telecommunications company in order to connect to the
internet. Again, the cost of leased lines varies greatly between countries,
depending on the cost of providing the line and the degree of competition
which exists. For this reason, it is economically attractive for ISPs in
each tier to connect with each other through formal or informal peering arrangements.
Because communication is cheaper locally, and national long-distance is cheaper
than international traffic, Tier 3 ISPs would avoid, if possible, sending
traffic to a neighbouring ISP through an international link.
Even within OECD countries, ‘local leased line prices remain of concern
where there is currently insufficient competition. For users, in those markets,
this means that incumbents can continue to charge prices that are not disciplined
In developed countries such as the USA, upstream service providers are located
in the same country as Tier 2 and Tier 3 ISPs, and the telecommunication
costs for the latter are lower – they only have to pay local or at
most regional leased line rates (plus the transit charge) to gain access
to the internet backbone. Furthermore, the generally higher level of competition
in developed countries has resulted in lower prices for leased lines.
In many developing countries, where the internet has been introduced relatively
late, ISPs are small and there may only be a handful of them. ISPs must therefore
establish an international private leased line to exchange traffic with a
foreign Tier 1 internet backbone provider (IBP) in order to gain connectivity
to the internet backbone, so that users would be able to access a website
hosted on another network on the other side of the world. These Tier 1 IBPs
are usually based in the USA or Europe. Like local leased lines, this international
private leased line circuit (IPLC) can be provided by the national telephone
company or another data communications operator, or can be gained independently
by the ISP establishing its own satellite connection where they are licensed
to do so. A local 64 Kbps leased line in the USA cost US$80 per month and
twice that (US$190) in Kenya, whilst an IPLC from Kenya was charged at US$1,687
(some 21 times as expensive).
Cost of internet access in developed countries (eg Germany)
Sources: Broadband Access for Business, OECD (2002);
Towards a Knowledge
Based Economy, UNECE (2002).
Cost of internet access in developing countries (eg Ghana)