Friday, September 7, 2007 - The Progress & Freedom Foundation Blog

Once Again, Why Not Meter Broadband Pipes?

Well I apologize if I'm starting to sound like a broken record by asking this question yet again, but what would be wrong with metered pricing for broadband pipes? I have asked that question several times before, most recently in my post earlier this week on wi-fi piggybacking. I pose it again today in light of another article about a handful of customers apparently having their broadband connection cut-off because of excessive downloading.

According to a front-page article in today's Washington Post entitled "Shutting Down Big Downloaders":

As Internet service providers try to keep up with the demand for increasingly sophisticated online entertainment such as high-definition movies, streaming TV shows and interactive games, such caps could become more common, some analysts said. It's unclear how many customers have lost Internet service because of overuse. So far, only Comcast customers have reported being affected. Comcast said only a small fraction of its customers use enough bandwidth to warrant pulling the plug on their service.

And as the article points out, there certainly are legitimate strains that can be placed on the system by excessive bandwidth usage:

As Internet users make more demands of the network, cable companies in particular could soon end up with a critically short supply of bandwidth, according to a report released this month by ABI Research, a New York market-research firm. This could lead to a bigger crackdown on heavy bandwidth users, said the report's author, Stan Schatt. "These new applications require huge amounts of bandwidth," he said. Cable "used to have the upper hand because they basically enjoyed monopolies, but there are more competitive pressures now."

These problems are only going to grow more serious in the future as the number of subscribers rises, bandwidth demand grows, and applications become more sophisticated. (Heck, I'm have a blazing fast Verizon FIOS fiber optic connection into my home but even it gets bogged down at times when I am trying to download massive high-def movie files via the XBox 360 Marketplace. Some of those downloads take hours.)

One thing is certain: In the the future, just sending letters to customers asking them to scale back bandwidth consumption is not going to be an effective strategy for carriers looking to deal with this problem. And terminating service at some arbitrary usage level is just going to enrage a large number of customers, not to mention all those groups that are constantly agitating for more regulation of broadband companies.

So, once again, the solution is metering. But, as I pointed in my last essay on this topic, "Why Not Meter?", the problem with pure metering of the pipe is that it will likely encounter a great deal of resistance--from both consumers and potentially even policymakers. I made this point in this older essay on networking pricing:

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.

I agree with Odlyzko and Gilder, but I do not think that means we need to give up on metered pricing altogether. What I think would be most efficient and pragmatic solution is what economists call a "Ramsey two-part tariff." A two-part tariff (or price) would involve a flat fee for service up to a certain level and then a per-unit / metered fee over a certain level.

I don't know where the demarcation should be in terms of where the flat rate ends and the metering begins; that's for market experimentation to sort out. But the clear advantage of this solution is that it preserves flat-rate, all-you-can-eat pricing for casual to moderate bandwidth users and only resorts to less popular metering pricing strategies when the usage is "excessive," however that is defined.

I'm interested in hearing what others think of this idea. Are there technical reasons it wouldn't work for broadband access? If we can use such pricing schemes for electricity or gas, why not broadband? Finally, where should the cut-off between flat-rate and metered pricing be made?

posted by Adam Thierer @ 9:46 AM | Broadband , Communications