Why Not Meter?

by on March 12, 2007 · 18 comments

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.

  • eric

    Why are luncheon buffets so popular? Eat as much as you want for a set price. It is the same psychology with many other products and services.

    The problem with the “market solution” is that there is not enough broadband choices in most areas to really make a market. Monopoly or duopoly is too often the case. If that changes, then “innovative” pricings schemes might be a good idea. Although honestly, to simply charge according to the meter doesn’t seem like much of an innovation. It is a choice that providers have abandoned, by and large, since the early days of AOL and Compuserve, where you were charged by the hour.

    I’m probably a moderate user — not a hog, but more than average. It remains to be seen which side of the line I’d fall on if the ISP’s made a distinction.

  • eric

    Why are luncheon buffets so popular? Eat as much as you want for a set price. It is the same psychology with many other products and services.

    The problem with the “market solution” is that there is not enough broadband choices in most areas to really make a market. Monopoly or duopoly is too often the case. If that changes, then “innovative” pricings schemes might be a good idea. Although honestly, to simply charge according to the meter doesn’t seem like much of an innovation. It is a choice that providers have abandoned, by and large, since the early days of AOL and Compuserve, where you were charged by the hour.

    I’m probably a moderate user — not a hog, but more than average. It remains to be seen which side of the line I’d fall on if the ISP’s made a distinction.

  • http://www.techliberation.com/ Tim Lee

    Adam, I that ISPs have unlimited bandwidth plans for the same reason cable companies sell extended basic cable bundles and cell phone companies give free nights and weekends: most of the time, there’s plenty of extra bandwidth, and so it doesn’t really cost anything to make extra bandwidth available.

    The ISP has to have enough bandwidth so that performance will be reasonable during peak times (which I think are generally in the evenings for residential ISPs, although that’s just a guess). That means that for the rest of the day—probably 20-22 hours—bandwidth is effectively a non-scarce resource.

    In a world with no transaction costs, ISPs follow the lead of cell phone companies and meter during peak hours and have unlimited bandwidth the rest of the time. However, this would greatly increase the complexity of the billing process, and would annoy and confuse consumers.

    I think this point is buttressed by the statistics you cite, that a tiny fraction of Internet users abuse the network. It doesn’t make sense to impose the mental and administrative overhead of metered billing on 99 casual Internet users just to nail the one guy who leaves BitTorrent on 24/7. This is especially true since metering wouldn’t actually generate much additional revenues from these users. My guess is that the vast majority of the people using excessive quantities of bandwidth would not be willing or able to pay for that bandwidth, and would drastically curtail their usage if they were being charged by the bit.

  • http://www.techliberation.com/ Tim Lee

    Adam, I that ISPs have unlimited bandwidth plans for the same reason cable companies sell extended basic cable bundles and cell phone companies give free nights and weekends: most of the time, there’s plenty of extra bandwidth, and so it doesn’t really cost anything to make extra bandwidth available.

    The ISP has to have enough bandwidth so that performance will be reasonable during peak times (which I think are generally in the evenings for residential ISPs, although that’s just a guess). That means that for the rest of the day—probably 20-22 hours—bandwidth is effectively a non-scarce resource.

    In a world with no transaction costs, ISPs follow the lead of cell phone companies and meter during peak hours and have unlimited bandwidth the rest of the time. However, this would greatly increase the complexity of the billing process, and would annoy and confuse consumers.

    I think this point is buttressed by the statistics you cite, that a tiny fraction of Internet users abuse the network. It doesn’t make sense to impose the mental and administrative overhead of metered billing on 99 casual Internet users just to nail the one guy who leaves BitTorrent on 24/7. This is especially true since metering wouldn’t actually generate much additional revenues from these users. My guess is that the vast majority of the people using excessive quantities of bandwidth would not be willing or able to pay for that bandwidth, and would drastically curtail their usage if they were being charged by the bit.

  • http://www.claytonnash.com/org/ Clayton Nash

    The minority of users are not abusing the network. They’ve bought an unlimited service and are using it as such. The ISPs made an assumption about how much they could oversell their network and got it wrong. At the same time there was a rush for market share and prices fell. Now that the situation they created isn’t working for them the ISPs are complaining and maligning their customers.
    I get confused by the nonclamenture used in these discussions. These are not community networks run by friends for the benefit of all. They are commercial networks for which we pay. Saying “some users use 90% of the bandwidth” is really the ISP saying “We’ve underprovisioned network bandwidth”. If prices need to rise to cover the services we buy then so be it and that probably means some ISPs need to go out of business.
    This same argument played out during the days of dial up. Phone companies companies complained that everyones phone calls were too long for the network to support – they’d oversold it and now it was a commercial problem for them.

  • http://www.techliberation.com/ Tim Lee

    Clayton,

    I’ll retract my use of the term “abuse.” Perhaps “use more heavily than expected” would be a more accurate way to describe it. In either case, I don’t think it changes the substance of the issue.

  • http://www.claytonnash.com/org/ Clayton Nash

    The minority of users are not abusing the network. They’ve bought an unlimited service and are using it as such. The ISPs made an assumption about how much they could oversell their network and got it wrong. At the same time there was a rush for market share and prices fell. Now that the situation they created isn’t working for them the ISPs are complaining and maligning their customers.
    I get confused by the nonclamenture used in these discussions. These are not community networks run by friends for the benefit of all. They are commercial networks for which we pay. Saying “some users use 90% of the bandwidth” is really the ISP saying “We’ve underprovisioned network bandwidth”. If prices need to rise to cover the services we buy then so be it and that probably means some ISPs need to go out of business.
    This same argument played out during the days of dial up. Phone companies companies complained that everyones phone calls were too long for the network to support – they’d oversold it and now it was a commercial problem for them.

  • http://www.techliberation.com/ Tim Lee

    Clayton,

    I’ll retract my use of the term “abuse.” Perhaps “use more heavily than expected” would be a more accurate way to describe it. In either case, I don’t think it changes the substance of the issue.

  • http://www.davidmcelroy.org/ David McElroy

    This seems like an extremely easy problem to fix. Simply sell accounts with a certain amount of transfer (whatever the very high number is that the ISPs currently allow) and have those wishing to get more capacity to buy business accounts or something similar. It seems that much of the problem stems from the fact that the broadband providers won’t just come out and tell what the limits are. Pretending that this is “abuse” is absurd, because customers are merely using the allegedly unlimited service they think they’re buying. Of course, the mental midgets at the providers are likely to use something like this as an excuse to introduce another layer of tiered pricing to confuse everyone, but if they could simply name a limit for a consumer account, that should solve the issue for both them and the customers.

  • http://www.withoutbound.net/blog/ Amanda

    I don’t understand why ISPs don’t do what many web hosts do, and charge a flat rate for some high amount of bandwidth, then meter over that. It seems like they could set the limit high enough that 90% of users wouldn’t be affected, just as most websites don’t go over bandwidth allotments.

  • Adam Thierer

    Amanda… That’s exactly what I was trying to get at in my essay, but you said much more concisely than I did!

    I just think the idea of threatening high-bandwidth users with service termination seems silly when alternative pricing solutions are available.

  • http://www.davidmcelroy.org/ David McElroy

    This seems like an extremely easy problem to fix. Simply sell accounts with a certain amount of transfer (whatever the very high number is that the ISPs currently allow) and have those wishing to get more capacity to buy business accounts or something similar. It seems that much of the problem stems from the fact that the broadband providers won’t just come out and tell what the limits are. Pretending that this is “abuse” is absurd, because customers are merely using the allegedly unlimited service they think they’re buying. Of course, the mental midgets at the providers are likely to use something like this as an excuse to introduce another layer of tiered pricing to confuse everyone, but if they could simply name a limit for a consumer account, that should solve the issue for both them and the customers.

  • http://bennett.com/blog Richard Bennett

    There’s a better solution, Adam, one that’s easy to implement with the technology we have today and doesn’t involve a lot of confusing language in user agreements.

    I don’t want to go into to it here because I’m going to patent it, but take comfort in knowing that there’s a cool technical solution to the bandwidth hog problem just around the corner.

  • http://www.withoutbound.net/blog/ Amanda

    I don’t understand why ISPs don’t do what many web hosts do, and charge a flat rate for some high amount of bandwidth, then meter over that. It seems like they could set the limit high enough that 90% of users wouldn’t be affected, just as most websites don’t go over bandwidth allotments.

  • Adam Thierer

    Amanda… That’s exactly what I was trying to get at in my essay, but you said much more concisely than I did!

    I just think the idea of threatening high-bandwidth users with service termination seems silly when alternative pricing solutions are available.

  • http://bennett.com/blog Richard Bennett

    There’s a better solution, Adam, one that’s easy to implement with the technology we have today and doesn’t involve a lot of confusing language in user agreements.

    I don’t want to go into to it here because I’m going to patent it, but take comfort in knowing that there’s a cool technical solution to the bandwidth hog problem just around the corner.

  • http://www.withoutbound.net/blog/ Amanda

    Adam – my mistake. I didn’t read very closely and thought you were talking about strict metering. So I guess we agree!

  • http://www.withoutbound.net/blog/ Amanda

    Adam – my mistake. I didn’t read very closely and thought you were talking about strict metering. So I guess we agree!

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