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.

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