My colleague Scott Wallsten, PFF’s Director of Communications Policy Studies, has just released an excellent short essay on one of my favorite pet issues: Metered pricing as a solution to broadband congestion / traffic management issues. This is very relevant right now, of course, because of the Comcast kerfuffle regarding how the company have gone about managing BitTorrent traffic.
In his essay, entitled “Managing the Network? Rethink Prices, not Net Neutrality,” Scott points out that:
Comcast should have been more forthcoming in its response and should be more transparent about its actions. Even so, Comcast isn’t the culprit and net neutrality regulations aren’t the answer. Instead, network congestion problems caused by some people’s excessive use are a direct and predictable result of the all-you-can-eat pricing that nearly every ISP charges for broadband service.
We know that this kind of pricing gives people little incentive to pay attention to how much of the service they use. People whose electricity is included in their rent rather than metered, for example, may as well leave the lights on all day and keep their homes frigid in the summer and toasty in the winter. To be sure, some people conserve simply because they care about the environment, but most won’t since they don’t see any savings from using energy more efficiently.
It is often complicated to determine prices in network industries that have high fixed costs and low marginal costs–like broadband. As long as the cost of sending an extra bit down the pipe is close to nothing, a flat rate for unlimited use is probably efficient. In that case, the operator must cover the fixed cost of the infrastructure, but it might not be worthwhile to monitor usage. If usage costs begin to increase, however, flat rate pricing may become inefficient.
Scott goes on to highlight several examples of metered pricing schemes in action and illustrates such schemes deserve to be considered to deal with broadband traffic issues, especially since they would be vastly preferable to cumbersome, innovation-killing Net neutrality regulations:
ISPs face several choices to keep their networks running smoothly. They can build bigger pipes. And indeed, ISPs are investing heavily in new infrastructure. They can decide how to prioritize packets, or “manage the network,” as Comcast says. All ISPs likely have to engage in such activities to some extent. Or they could change their pricing models. So far, no large ISPs have taken this approach.
It’s great that ISPs are investing in their networks. Internet traffic is growing, and the infrastructure needs to keep up. But investment should focus on maximizing overall efficiency, not satisfying select (albeit loud) users.
Problems with “managing the network” are practically self-evident. Consumers will rightly demand to know exactly what their ISPs are doing and how those actions affect the Internet. If providers are not transparent about their actions then calls for regulation might grow louder, as we see in the current brouhaha. And since the way networks are managed must change constantly in response to emerging threats, such regulations are likely to be complex and probably not especially effective.
And Scott notes that there are several different models that could be tapped, not just pure metering:
Broadband use could similarly be metered. One could imagine simple metered pricing, in which users pay by the bit. Alternatively, providers could develop hybrid plans in which metered pricing begins only after some very high level of usage. In that case, heavy users would pay for the costs they impose on the network rather than being subject to what might otherwise appear to be arbitrary delays in their Internet traffic or threatening letters in their mailboxes.
ISPs know how much bandwidth their users use, even if they do not know what content is flowing over the pipes. Implementing new pricing schemes presumably would not be a technical challenge.
That’s my preferred model. It’s 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.
Anyway, make sure to read Scott’s excellent summary of how it would all work. This is the path forward, in my opinion, since broadband operators are going to have to find a way to manage traffic through this sort of price discrimination instead of packet discrimination if they hope to avoid Net neutrality regulation.