Late last year, *NBN Co* (the body responsible for rolling out Australia’s National Broadband Network) released more detail on its wholesale products and pricing. You can download their *Product and Pricing Overview* here. The pricing component that I wanted to analyse in this post is NBN Co’s additional charge for “Connectivity Virtual Circuit” (CVC) capacity.

CVC is bandwidth that ISPs will need to purchase from NBN Co, charged at the rate of $20 (ex-GST) per Mbps per month. Note that this CVC is* on top of* the backhaul and international transit required to pipe all those interwebs into your home. And just like backhaul and international transit, if an ISP doesn’t buy enough CVC from NBN Co to cover peak utilisation, its customers will experience a congested service.

The problem with the CVC tax, priced as it is by NBN Co, is that it punishes small players. By my calculations, an ISP of (say) 1000 subscribers will need to spend *proportionally* a lot more on CVC than an ISP of 1,000,000 subscribers if they want to provide a service that delivers the speeds it promises.

Here comes the statistics.

Consider NBN Co’s theoretical 12 megabit service with 10GB of monthly quota example that they use in the document I linked to above. 10GB per month, at 12Mbps gives you 6,827 seconds (a bit under 2 hours) at full speed before you’re throttled off. There’s 2,592,000 seconds in a 30-day month, so if I choose a random moment in time there is a 6827/2592000 = 0.263% chance that I’ll find you downloading at full speed.

That’s on average. The probability would naturally be higher during peak times. But let’s assume in this example that our theoretical ISP has a perfectly balanced network profile (no peak or off-peak periods). It doesn’t affect the point I’ll labour to make.

A mid-sized ISP with (let’s say) 100,000 subscribers can expect, on average, to have 100,000*0.263% = only 263 of those customers downloading at full speed simultaneously at any particular second. However, the Binomial distribution tells us that there’s a relatively small, but still statistically significant (at the alpha=0.05 level) probability that there could be *290 or more* customers downloading at the same time.

So a quality ISP of 100,000 subscribers will plan to buy enough CVC bandwidth to service 263 customers at any one time. But a statistician would advise the ISP to buy enough CVC bandwidth to service *290* subscribers, an *additional* (290-263)/263 = 10% , or find itself with a congested service about one day in every 20.

This additional “burst headroom”, as a percentage, *increases* as the size of the ISP *decreases*. From above, an ISP of 10,000 can expect to have 26 customers downloading simultaneously at any random moment in time. But there’s a statistically significant chance this could be 35+. This requires them to buy an additional (35-26)/26=**33%** in CVC over and above what was expected to cover peak bursts.

The table below summarises, for ISPs of various sizes, how much *additional* CVC would need to be purchased* over and above the expected amount*, to provide an uncontended service 95%+ of the time.

Graphically it looks a bit like this…

As you can see, things only really start to settle down for ISPs larger than 100,000 subscribers. Any smaller than that and your relative cost of CVC per subscriber per month is disproportionally large.

….

Further reading:

Rebalancing NBNCo Pricing Model

NBN Pricing – Background & Examples, Part 1

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Filed under: ISP statistics, probability, research, statistical concepts, statistics Tagged: | cvc, national broadband network, nbn

Andy Saywell, on 3 June 2012 at 11:42 am said:In the early stages of NBN where we only have some suburbs connected then it would seem to me that all ISP’s, even those at the big magnitudes of customer quantities normally will only have small quantities of users. This would infer, that unless NBN is going to allow a “Good end user” experience that the realities of CVC will mean that early adopters are in for a rough ride to start with until customer numbers become significant enough to get down to the lower end of that curve

seven_tech, on 6 June 2012 at 5:34 am said:They would be Andy, except for the fact that, at the industry’s request, NBNCo. have made the first 150Mbps of CVC free, removing that hump. Now the point still stands for later in the build when they remove this, for ISP’s under 10 000. But, if we can expect a more equal market share thanks to Telstras dominance being much reduced, then, looking at current ISP numbers, most reasonable small ISP’S will be over 10000. Not all but most.