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Monday, March 12, 2007

Why Not Meter?
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The Boston Globe reports that some broadband customers are confused by their provider's acceptable use policies, which sometimes place ambiguous limits on customers who are aggressive Net users. The problem that some cable operators are trying to deal with is that a very small handful of users who are heavy downloaders can sometimes impose significant delays on other network users because of the way cable high-speed networks work. According to the story, Comcast estimates that only .01 percent of its 11.5 million users fall into this category, but I've heard other estimates. Mike Lajoie, chief technology officer of Time Warner (TW), told the Wall Street Journal a year ago that fewer than 10 percent of TW subscribers consume more than 75 percent of the network bandwidth. And I've actually heard even more extreme numbers reported by other broadband providers (BSPs), with the ratio being more along the line of 5-10 percent of users eating up closer to 90 percent of bandwidth. To mitigate the problem, some network operators are apparently sending letters to those heavy users requesting that they scale back their downloading activities or else face the possibility of being kicked off the network for violating the firm's acceptable use policies.

Regardless of what the exact number is, it is clear that a small handful customers really do impose more of a burden on the system and potentially degrade the broadband experience for other users. The question then becomes: How should BSP deal with these bandwidth hogs? As I wondered aloud in this old essay on network pricing issues, I think a metered pricing scheme might help solve this problem by fairly allocating costs to customers who use the most bandwidth. And yet, at least so far as I can tell, no BSP seems interested in taking that path. Why is that?

In my previous essay, I suggested two possible explanations:

First, broadband operators are probably concerned that such a move would bring about unwanted regulatory attention. Second, and more importantly, cable and telco firms are keenly aware of the fact that the web-surfing public has come to view "all you can eat" buffet-style, flat-rate pricing as a virtual inalienable right. Internet guru Andrew Odlyzko has correctly argued that "People react extremely negatively to price discrimination. They also dislike the bother of fine-grained pricing, and are willing to pay extra for simple prices, especially flat-rate ones." And George Gilder, another famous Net guru, noted in his book Telecosm that, "Everyone wants to charge different customers differentially for different services. Everyone wants guarantees. Everyone wants to escape simple and flat pricing. Forget it." Gilder basically argues that simple and flat pricing is almost always preferable from a consumer perspective and, therefore, network providers should avoid more complicated pricing schemes.

For these and other reasons, I argued that BSPs probably don't want to rock the boat too soon with more creative broadband pricing schemes, but someday they may have to as bandwidth-intensive users or services start to eat up more and more pipe capacity. While simple and flat pricing seems like the sensible approach, it remains likely that some BSPs will eventually attempt to craft tiered or metered pricing schemes. Optimally, in my opinion, a combination of the two would be established: A flat-rate charge for service up to a certain level followed by metered rates for usage above that level.

While some consumers will cry foul, a number of bandwidth-intensive Internet vendors and website operators will likely be absolutely apoplectic over such a move, and some may even run to regulators seeking redress. And that's where the specter of Net Neutrality regulation enters the picture.

Would Net Neutrality regulations prohibit such innovative pricing schemes from being used? The answer remains uncertain. But clearly if some form of network "non-discrimination" rule is put on the books, some website operators and content providers may push to invoke it against a BSP that suddenly announces a new metered pricing scheme for bandwidth-intensive web offerings. It would be very unfortunate if this scenario came to pass, since such creative pricing schemes may be part of the long-run solution to relieving Internet congestion and allowing carriers to accurately assess user charges for online activities. Supply and demand could be better calibrated under such pricing schemes and broadband operators may be better able to recoup sunk costs and make new investments in future infrastructure capacity or network services.

The bottom line is that it should be left to markets, not regulators, to determine what pricing schemes are utilized in the future to allocate scarce space on broadband pipes. The broadband marketplace is still in an early developmental stage, having only existed for a few years. What business model will prevail or make network activities profitable in the future? No one knows for sure, but policymakers need to allow network operators the freedom to innovate and employ creative pricing and service schemes so that market experimentation can answer that question.

posted by Adam Thierer @ 10:06 AM | Broadband , Net Neutrality

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You are forgetting the variable of technological progress. No matter how much a person wants to download, technological progress in high speed fiber is growing faster than that. So within 5-10 years, we could have a situation of "nobody cares" - because. Storage is already reaching that level, where you have so much damn storage available, practically no one "runs out of space". So tiered pricing is a loser - due to technological reasons. The world has resource constraints, but I don't believe bandwidth is one of them.


Posted by: Sidney at March 12, 2007 8:13 PM

I've never really understood the vehement attachment to flat-rate pricing for Internet access. People understand that if you talk a lot on your cell phone, you pay more; why is the Net different? Okay, for dialup access flat-rate pricing makes some sense, since we already had flat-rate pricing for local POTS calls. But for broadband?

I certainly would encourage carriers to try to keep the per-byte price within reason. But suppose it costs you $1 extra on your BSP bill to download a movie (that's above the price you pay the content provider) -- is that really a barrier, after you've spent thousands on your home theater system? Give me a break! That argument suggests a price of about $.25/GB, which I think is about right, at the moment. (Obviously it should come down over time, so that in a few years we reach the point where you'd pay that same $1 for an HD movie.)

I disagree with Sidney, for this reason: it's always desirable to have much more peak speed per user than total bandwidth per user, because, in fact, most people's usage is quite bursty, and there's no reason to expect this to change. So there will always be a reason to surcharge those people who use more than a certain fraction of their total bandwidth.

Posted by: Scott Burson at March 13, 2007 4:40 PM

I have a hard time sympathizing with an industry that has raised video rates more than 50% in the last 5 years while failing to deliver on their broadband promises made with the 1996 Telecommunications Act. Maybe if they had invested in a fiber-optic network like they promised to (and were paid over $200B to do), they would have such a cheap price-per-GB that this would be a non-issue.

Meanwhile, municipal systems like iProvo and UTOPIA continue to bury the incumbents on both speed and price. (Imagine 15Mbps both ways for $40/month.) You also get a choice of multiple service providers. I hope the Comcasts of the world get buried under their own greed by projects like this.

Posted by: Jesse Harris at March 13, 2007 5:47 PM

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