Why is Business Internet More Expensive than Residential?

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Why is business quality internet so much more expensive than home internet?

I can’t help but notice that discussions on the price of internet seem to be popping up all over: blogs, tech discussion boards and with my own Bandwidth Pool customers. I think a lot of it has to do with the recent attention to broadband given by Google Fiber as well as states’ attempts to change legislation with the goal of improving internet infrastructure across the United States. Regardless of the source of the chatter, I continue to notice that a lot of people don’t seem to fully understand the core differences between residential, small business and enterprise internet service and the reason why there is a difference in price for each type.

I’ve been lucky enough to have a front row seat on this topic: having built a wireless and wireline ISP myself. Here’s a little background on why certain services are more expensive in the hopes this can help you make the best internet decision for your needs.

Let’s start by highlighting the three major types of internet access: residential, small business and dedicated access (DIA).

Residential (pricing between $10 and $100 per month) – Commonly referred to as cable internet or DSL, these services are primarily offered by the local cable or phone company. The service is considered shared and ‘best-effort’ in terms of speed and reliability.

Small Business (pricing between $50 and $400 per month) – Also commonly referred to as cable internet or DSL and offered by the local cable or phone company, these services are essentially the same as residential. The largest difference comes in the fact that it’s a step above ‘best-effort’ speed and reliability and includes services like a static IP, service level agreement and less oversubscribed nature of its availability. We’ll discuss these in more detail below.

Dedicated Internet Access (DIA) (pricing at $400 and above; most often in the thousands of dollars per month) – One of the purest forms of internet access, DIA is a direct connection to the Internet Service Provider (ISP) you purchase from. Your internet access is not oversubscribed like Residential or Small Business services and comes with a 99.99%+ reliability and a suite of sophisticated features to improve business efficiency.

Now back to the question at hand… Why is business internet so much more expensive than what I purchase at home?

No Oversubscription

Oversubscription is a common practice in Internet service business for residential and small business customers. ISPs make a gamble that not all of their customers will be using the internet at the same time. It is not uncommon for an ISP to oversubscribe their residential or small business customer base 5x or 10x, although the oversubscription rate has decreased in recent years due to the increase in streaming media through platforms like Netflix.
ISPs are effectively able to manage oversubscription because of the differing daily usage patterns of residential and small business users. While you’re at work, you aren’t using the internet at home and vice versa. Here’s a chart that breaks down data transfer during peak hours:

 

traffic peaks

 

Because Residential and Small Business services are oversubscribed, you end up sharing the internet access with the people in your general vicinity. That means that as more people in your vicinity start to use the internet, you many notice your speeds decrease. In this scenario, the users have ultimately ‘called the bluff’ of the ISP. ISPs are constantly tweaking their oversubscription rates to try and provide the best service possible, but as many people have experienced first-hand, it’s not always perfect.

When you purchase dedicated internet, your connection is ‘pure’ in the sense that it comes with no oversubscription. If you pay for 100Mbps / 100Mbps, you receive it, guaranteed. You pay a premium because the entire amount of bandwidth is exclusively yours to use as you’d like. DIA also comes with a Service Level Agreement (SLA) that ensures if the ISP doesn’t meet its end of the bargain, you benefit in service discounts, credits or the ability to exit your contract early, no questions asked.

Service Level Agreements (SLAs)

Another large factor in the increased price of dedicated internet access versus residential or small business internet is the Service Level Agreement (SLA). SLAs not only provide a guarantee of uptime, reliability and speed, but they also address what happens if that guarantee of reliability is not met.

No one likes it when their internet goes down, but unfortunately for residential and small business service, customer SLAs are often not included. These services are often called ‘best effort’. The primary reason is related to the quality of infrastructure and hardware used to deliver the service. In order to keep costs low for cable internet and DSL subscribers, the quality of hardware used is designed with a shorter life span. Since the overall configuration of old infrastructure and lower quality hardware is one that is more susceptible to failure, service interruption or speed fluctuations are common. The ISP is generally not willing to guarantee the service for cable internet and DSL customers in the same way they guarantee DIA services.

Depending on the service type, dedicated access is generally delivered over fiber optics. As a result, even the smallest blips in service need to be addressed and compensated for. This includes commitments for reliability, ping times, speed and expedited technician dispatches, where required. In the SLA example below, any outage over 26 seconds is eligible for a service credit.

Service Level Agreement Example

We’ll pick up next week with two additional factors in the overall cost of internet access. Stay tuned!



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About Ben Anderson

Ben Anderson is a graduate of the University in Iowa. While attending school, Anderson and a team of fellow students wrote a business plan for X-Wires, an Internet service provider focused on providing wireless Internet services to businesses and residences. Anderson and his team launched and grew the business to incorporate multi-family residential locations including colleges and university campuses, student housing, apartments, hotels and retirement communities. In 2010, portions of X-Wires were sold to publicly traded Keyon Communications of Las Vegas, Nevada and Campus Televideo of Stamford, Connecticut. Bandwidth Pool continues Anderson’s mission to bring low-priced, high-quality Internet access to an even larger segment of the population.


  • aggieben

    My biggest problem with all this is the total lack of transparency – I recently had “Small Business” service with Time Warner, and I felt like I was being ripped off. It cost me nearly $200/mo (with a 3-year contract!), and the service had sub-broadband throughput (only 15/2Mbps – the FCC has rightly changed the threshold for “broadband to 25/3), and there was no kind of SLA at all. There was no step-up from “best effort” at all. The only discernable difference between the “small business” and residential service was the allotment of a static IP – hardly worth the difference in price. At the same speeds, the residential service is $35/mo.

    I would have far rather paid $35/mo without a contract for the same service. Why won’t the ISPs let me decide for myself if the “business class” service actually provides $165/mo of value?

    • Roallin

      Generally speaking, the ISPs do not expect the average commercial user to use as much bandwidth as a commercial customer, and thus, I would imagine the ISP “oversells” the residential services more. This is the reason why they do not allow residential customers to run servers. And despite being sold as “unlimited,” there is a usage-cap where the ISP will terminate residential service and require business service. The business service cost more because it is “oversold” less, has a higher up-time in the SLA, has 24-7 support hours, and will receive priority in outages.

      • aggieben

        Firstly, there was no SLA or additional level of service: not one iota different than I residential service. I read all my contracts carefully. Secondly, assuming that residential users don’t use as much capacity makes no sense to me: people stream big movies and games at home, not at work. The only presumptive difference between the two that might make sense to me is that residential service is more “peaky”, but that doesn’t come anywhere close to justifying the absurd charges – and in fact, commercial usage of a residential service would actually help smooth out that peakiness.

        They charge the extortion fees because they can, and I’m pretty convinced that’s all there is to it.

        • UnityRF, LLC

          It may or may not be true that residential users stream more video than commercial users. I think you missed roallins point regarding internet-connected servers being okay for business class users, not okay for residential. A busy business website can generate A LOT of IP traffic in a month – bidirectional at that, whereas the traffic model for residential is heavily weighted to downloads from the Internet. Add video conferencing, VoIP services, streaming training videos, etc. – and the need for more balanced traffic (download:upload) and SLA’s becomes very clear. My home-office based e-commerce servers require near-24×7 uptime, and low latency. Even a momentary outage or service degredation could be very costly to my business.
          Your mileage may vary, of course. Though I fail to understand why you would sign up for business class service without an SLA, or more balanced throughput.

          • aggieben

            I completely agree with you – but my complaint is this: the “business class services” available to me provide none of those features you just identified, they just cost more.

            To the question of why I would sign up for such a thing, maybe the central fact I’m leaving out is that no ISP will provide a residential-class service at a business address. That leaves me no options at all – a fact that the ISPs exploit shamelessly.

  • Socius

    Sounds like a scam. Oversubscribing…and the ISP gambling. What gamble? They lose nothing. They just win. The customer is gambling by paying them. Also not all ISPs operate this way. Where I am, the cable internet provider treats residental and commercial the same with regard to oversubscription/etc. However the ADSL provider sells guaranteed internet speeds and never oversells.

    Anyone that lies to customers, or “gambles” with their quality of service as you call it, should be fined heavily.

  • Pinterest

    In my area resident can get 1Gbps for $500 but it costs $4000 for 100Mbps business internet connection, WTF?

  • Harry

    You should check out https://stealth.net. They have a small business gigabit service for $250/mo and they actually advertise the oversubscription!! They also have a separate Dedicated Gigabit offer for $850 a month.

  • http://www.keelstech.com/ Lee Keels

    The article above is absolute bullshit. So-called business class internet is nothing but gouging, plain and simple.

    • klaasman

      You obviously have no clue what you are talking about. 100 people share 50 MBPS or 1 customer has exclusive access to 50 MBPS. It is the same as letting several hundred people share a 747 or giving 1 person exclusive access to the 747. It costs the same to purchase and operate the 747, so either 1 person has to cover the nut or several hundred cover the nut. It’s pretty simple logic (coming from an individual who has spent 15 years in the industry.)

      • Michael Russell

        You actually dont know what YOU are talking about. SMB internet is served on the SAME SLAM and CO of an area that all the residential is. I have had Rogers business internet and Bell business internet because i thought something magical would happen. It was EXACTLY the same shit but at twice the price. Only way to get off it is Enterprise class DIA. I am on DIA now and i pay a considerable amount but i literally have no downtime, super low latency, no caps and no variance in speeds, ever. They are currently digging in my fiber 100/100. I will never run my business on DSL again. Its all sales lies any where in NA.

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