Do ISPs Pay Their Internet Providers by Data GB Transferred or Bandwidth Gbps?

Internet Service Providers (ISPs) typically pay for internet connectivity based on a combination of factors, including both the amount of data transferred in gigabytes (GB) and the bandwidth in gigabits per second (Gbps) they purchase. This payment model can vary widely depending on the specific agreements between ISPs and their upstream providers, as well as the current market conditions and regulatory environment.

Bandwidth

ISPs usually pay for a certain amount of bandwidth, which determines the maximum data transfer rate they can provide to their customers. This is often a fixed monthly fee based on the capacity they need.

Data Transfer

In some cases, ISPs may also incur charges based on the amount of data they transfer, especially if they exceed a certain threshold. This is more common in peering agreements or transit arrangements where data transfer limits may apply.

Ultimately, the specific arrangement can vary based on the agreements between the ISP and the upstream providers. However, it is more standard for ISPs to pay according to the bandwidth they anticipate using rather than data transferred. This is because ISPs have little control over the bandwidth demanded by their customers.

Complexity in Payment Models

The payment model for ISPs can be quite complex. One commonly used approach is a billing formula called '95th percentile billing.' With this method, the ISP finds the 95th usage level and bills at that rate, both in and out, based on the highest point.

Example of 95th Percentile Billing

For example, if an ISP has a 10GigE circuit and their 95th percentile usage is 6Gbps, they would be billed at the negotiated Mbps rate multiplied by 6000 (6 gigabits per second).

Conclusion

While ISPs can control the bandwidth on their networks, they cannot control the demand for aggregate bandwidth by their customers. Therefore, it is more practical for ISPs to pay for bandwidth rather than data transferred. This ensures a direct relationship between their costs and revenue.

Further Reading

For more in-depth information on the payment models of ISPs, you can refer to the following resources:

Technical Overview of ISP Payment Models Market Analysis of Bandwidth Proposals Regulatory Impact on ISP Payments