[inforoots] Re: Network infrastructure [2 of 2]

[John C Green Jr]

At 03:41 PM 3/9/06, Baltrunas <carl at reststop.com> wrote:

Carl,

Development and maintenance goes into the fixed costs, not
the variable costs.  There's no additional maintenance cost
for use.  Maintenance schedules in the days of relays was
by the calendar, not by the number of make and break
contacts made.  And the equipment almost never failed
requiring unscheduled maintenance.

Profit comes from both investment income on the network
infrastructure and the incremental revenue of the use of
the network infrastructure.  And an 80% margin on an
incremental call isn't unreasonable.  However with a phone
call if the accounting for the micro transaction is ten
times the cost.

Today competition is causing it to be difficult to
impossible to charge for a call which takes all the margin
out of the incremental call.  The base plan, be it $30 or
$50 or whatever provides all the revenue. and must cover
fixed costs, variable costa, development, profit, whatever.

Your example of cost of acquiring a customer is valid.  But
it's a one time charge.  AOL claimed to be profitable for
years when it hadn't turned the corner.  They amortized the
marketing cost of acquiring a customer over more months
than the typical customer kept his service.

In your example the customer could either be billed a huge
installation fee or be billed a higher monthly fixed fee
for connectivity so that the costs are recovered over a
period of time.  Again the incremental cost for use is
negligable.

Regards,
John Green

>Hi John,
>
>Interesting figures on actual cost.
>
>What is missing is the development and maintenance costs of building 
>and running the infrastructure.  Without that development of 
>technology, the training of engineers on installation, maintenance, 
>and refurbishing, and the manufacturing costs of the wires, 
>switchers, terminals (aka phones), and
>other parts, that incremental cost of just one phone call would not 
>be possible.
>
>I worked at Tymshare/Tymnet and it's associated companies from 
>1980-2004.  Prior to the internet, it was the world's largest 
>privately owned data network.  (I was told that the German 
>Bundestpost was larger, but it was a public/state-owned 
>company).  There were real costs involved with connecting each 
>customer from  manufacturing the equipment, having lines run, having 
>telco lines leased, provisioning and planning for expected bandwidth 
>from a particular customer (sometimes after the fact, when they 
>found specific circuits were overloaded), maintenance personnel to 
>install and maintain equipment, even if it lay idle part or all of a 
>day, week or month.  Interestingly enough, one of the services we 
>offered to AT&T was called COEES (Central Office Equipment 
>Evaluation System (or Service)) where they used our timesharing 
>service to plan and order their own hardware for the telephone 
>infrastructure, and each and every local telephone company continued 
>to use after the Bell breakup.  That service was mandated by judge 
>Green to remain available until the end of 1988 or 1989, and I went 
>onsite to AT&T HQ in NJ in '89 to assist them on migrating part of 
>that service to a different platform on their own equipment which 
>was co-located at one of our data centers at the time.
>
>Yes, I agree, that once the equipment was connected and running, the 
>cost of a call (network data call), was negligible, just as it was 
>for the phone company.  However, they need to recoup the actual 
>costs somewhere, and I'm not sure if any of these companies know how 
>much the true cost is or was.  The simple answer is that any profit 
>they made was over and above the true cost, but some costs are 
>amortized and the real life of a component was likely NOT taken into 
>account, but was taken at a particular cost for accounting (tax) 
>purposes.  Thus, when an asset had a book value of $0.00, they made 
>more of a profit, since they typically didn't lower the prices just 
>because some assets were completely depreciated.  I'd easily say 
>that the real costs were for personnel, and not for infrastructure 
>resources used (except when lines/circuits were overloaded).
>
>I recall a $20 fee for a magnetic tape mount, because the operations 
>center decided that that was how much they needed to pay a full-time 
>operator for the number of requested tape mounts over some averaged 
>time period.  I doubt that it really cost $20, and if for some 
>reason the operators had twice as many tape mount requests, that 
>they would charge a lower amount.
>
>Anyway... interesting numbers.  I'd love to see the real cost for a 
>lot of things played out, including the development costs.  Of 
>course, many companies, telco's especially, like to recoup their 
>costs again and again, once an asset is fully depreciated.  They 
>also don't want to lose money on assets they put in place, but never 
>needed to use.  Good example, is all the physical wires and fiber in 
>this country, and yet, we are worse than some third world countries 
>as far as our cell phone technology.  Go figure :-)
>
>-Carl