Tuesday, May 12, 2009 - The Progress & Freedom Foundation Blog

A Slam Dunk on Tiered Bandwidth Pricing

The Wall Street Journal reports that growth in downloading and web browsing by iPhone subscribers will strain AT&T's wireless network, resulting in need for more infrastructure investment by the carrier. Already, the article notes, AT&T and Verizon Wireless, the two largest wireless providers, each were spending more than $9 billion last year on new wireless spectrum, as well as $6 billion annually on overall capacity. These yearly expenditures dwarf the $7.2 billion in Recovery Act funds devoted to extending our national broadband footprint and encouraging broadband adoption.

Although the new 4-G networks the carriers are building are reportedly more efficient at delivering data applications than the old, Sanford C. Bernstein analyst Craig Moffett argues that returns on invested capital related to these new services will be lower than on older services. The WSJ article continues:

In the short term, carriers should abandon unlimited data pricing plans. Both AT&T and Verizon Wireless already charge extra for heavy users with wirelessly connected laptops. They will have to contemplate similar strategies for smartphone users. Setting the right price won't be easy. With competition, the temptation to discount will be hard to avoid. And there's no guarantee that customers will pay as much for entertainment as for voice-calling and e-mail. Whatever they do, the carriers may be caught between a rock and a hard place.

The market realities for "smartphone" data services seem tough enough according to this report. The last thing providers need added to this mix is regulatory intervention prohibiting or limiting the move to tiered bandwidth pricing. Fortunately, early signals from at least one of our antitrust agencies, the Federal Trade Commission, indicate an acceptance of carriers charging more for higher speeds or heavy usage. Broadcasting & Cable reports that FTC Chairman Jon Leibowitz appearing on C-Span's Communicators series, stated that he has no problem with tiered bandwidth pricing by broadband providers, so long as consumers are adequately informed in advance of the charging structure. According to a similar account in PCWorld, Chairman Leibowitz maintains that as long as providers give consumers advance notice, it is fair for broadband providers to charge customers more for higher speeds or charge more for high-bandwidth users. Similarly, broadband providers need to inform consumers about the types of network management practices they're deploying. Chairman Leibowitz observed:

In a perfect market marketplace where you had more competitors, you wouldn't need the government necessarily to be terribly involved . . . Particularly in the consumer protection area, we have a big roll to play. Broadband is a deregulated product. That's good, we like deregulation generally. But when you have deregulation, you also [need] law enforcement to make sure people do the right thing.

Chairman Leibowitz's endorsement of the deregulation, or one might say, non-regulation of broadband Internet access services is noteworthy. It stands as an important endorsement of the overall approach to this area taken by the Federal Communications Commission since 2001. Significant also is the FTC Chairman's implicit recognition that consumers can be adequately protected if broadband Internet access service is treated just like any other service where providers are held to the terms of their service agreements under general consumer protection, fair trade practices and competition laws.

The upshot is that, like many of the stars in the net neutrality constellation - for example, blocking access to content for anticompetitive purposes - the consumer protection issues raised by tiered bandwidth pricing may be more appropriately handled by the FTC under the Federal Trade Commission Act rather than by the FCC under the Communications Act. Let's hope that incoming FCC Chairman-designate Julius Genachowski, a reported basketball buddy of Chairman Leibowitz's, also sees this issue as a "slam dunk."

posted by Barbara Esbin @ 1:04 PM | Broadband , Communications