A Model-based Study of the Impact on the Internet of Managed Services and the Spawning of User Innovated Applications

Whether to allow a broadband service provider to supplement basic best-effort service by high quality managed service at a premium price has been hotly debated, especially in the context of network neutrality. Offering managed service provides delay-sensitive customers with a better option of guaranteed quality of service, but may allow the service provider to starve the best-effort service of bandwidth so as to force best-effort users to subscribe to more expensive managed service. In our study, the library of applications is key to usage and decisions made by users and service provider, and we analyze how the innovations process leading to new network applications is affected by the service provider’s bandwidth allocation. Potential users weigh utility and cost to decide whether to subscribe to the broadband network, and if so, whether to use best-effort service applications that are free but associated with congestion-dependent delay or to pay a per-use fee to use managed service. The service provider provisions bandwidth for the two services and sets the per-use fee for managed service to maximize its profit. New applications are spawned from use of best-effort service. The service provider is assumed to maximize profit myopically. Our results show that the innovations process serves as a stabilizer that keeps bandwidth allocation in balance. ∗With minor differences, presented at the Workshop on Telecom Economics, Engineering, and Policy at the 24th International Teletraffic Congress, September 2012.