Usage-based pricing (UBP), today most commonly encountered in the form of data caps, is rapidly becoming part of the Internet access landscape.
The paper considers economic and historical perspectives and raises some concerns, both in regards to competition and to national priorities such as broadband adoption, education, employment, and innovation more generally.
Unfortunately, not too long ago the FCC gave UBP an unequivocal green light (at the request of industry stakeholders) to expressly allow “bandwidth- or consumption-based” billing to address network congestion (whether or not it exists!). The FCC adopted the reasoning that UBP (which includes data caps) can be an effective mechanism to ensure that consumers pay for what they use.
This argument alludes to many falsehoods, including that Internet bandwidth is being eaten up by Bandwidth Hogs. Here’s what the report says:
Before considering the existence of Bandwidth hogs, we should examine the nature of Internet access as a service. For starters, bits are not physical goods, and therefore cannot be consumed in any meaningful sense. Absent network congestion, one persons use of bandwidth does not interfere with anothers. This is because the Internet is largely a non-rivalrous technology: ones use or consumption of the Internet does not impede or deprive anyone else from enjoying it as well. Furthermore unlike, for example, vehicular traffic, bits do not wear out the road. Maintenance costs for networking equipment are not directly related to the volume of traffic they process. The rhetoric behind the cost-recovery rationale for data caps is heavily charged with notions of equity, scarcity, and unjust subsidization. It begins with the intuitively appealing notion that users of a resource should pay for what they use.
The Internet is based on a technical concept called statistical multiplexing where multiple users can share the same bandwidth that previously would be consumed by one user making a single phone call. In theory, with statistical multiplexing there is no limit on how many users can share the bandwidth represented by the circuit for a single phone call. Unlike other utilities such as water, electricity, gas or oil, where the product is actually consumed by end users, network bandwidth is never truly consumed: bandwidth is infinitely reusable and therefore only temporarily in use (or consumed) at any given time.
Although our major ISPs make the claim that UBP is needed to counter network congestion, there is no data available to support their claim. Network congestion apparently does occasionally occur, almost exclusively during the evening hours (after work) when people are getting their Netflix or Hulu fixes. But UBP will do ABSOLUTELY NOTHING to alleviate this congestion — when & if it occurs. More often than not, it’s due to the ISP’s practice of “oversubscription” (i.e., selling more bandwidth than it can actually provide at any given time). This usually happens at the endpoints, i.e., neighborhood Customer Aggregation Equipment (CAE). Fortunately, this is easily (& inexpensively) resolved by the ISPs.
Bottom line? For both cable (coax) & wired (tele company) broadband, there is little evidence that “bandwidth hogs” are imposing costs that are either unpaid or borne by other users.
All data coming from Canada (& other countries) that have imposed data caps indicate that competition (as in lack of), rather than congestion, determines whether a service provider feels entitled to impose UBP on its customers — which is particularly troubling in the U.S. given the lack of competition in the broadband market.
The communications industry in the U.S. is moving rapidly towards UBP, and is stigmatizing flat rate pricing as unjust and unsustainable. However, much of the rest of the world (except Canada) is moving in the other direction.
The conclusion of the paper begins with:
Flat pricing schemes should be regarded as an ideal goal, supporting innovation and social and economic welfare, and not as irrational aberrations that promote inefficiency and waste. However, sometimes temporary resource constraints may make flat rates infeasible. Currently, in the wired Internet, that does not appear to be a real concern, as the rate of progress in technology appears to be comparable to the rate at which traffic demand is rising, so that should be possible to support the growth in traffic without increases in the level of investment. On the wireless side, traffic is growing faster than carriers are investing in capacity improvements, so the case for UBP appears far stronger.
My concern is with wired broadband, not wireless. With more ISPs (i.e., Comcast, Time Warner, etc.) offering their own content, which does not count against their data caps, it’s going to get increasingly difficult (& definitely more expensive) for users to obtain content from 3rd-party providers like Netflix, Hulu, YouTube, Amazon Instant Video, etc.. In addition, it will hasten the downfall of any 3rd-party competition. The sad fact of the matter is that American ISPs have a monopoly. By allowing them to also sell their own content, they’re now in a position to eliminate any outside competition. This will make it even more difficult to ‘cut the cord’ from cable content.
Don’t ya just love how monopolies rule in America?
- Hulu announced yesterday (4/30/12) that they are going to require users to have a pay TV subscription before they can stream video online. As I mentioned in previous posts (here & here), the major Hollywood/TV studios are doing everything they can to destroy alternative video services and to keep people from “cutting the cord.” Don’t pay for cable, telco, or satellite TV? No streaming video for you! More on this from Techdirt.
- Sony announced Monday (5/1/12) that they are putting their Internet video on hold due to Comcast’s data cap. Netflix CEO Reed Hastings accused Comcast of violating net neutrality a couple weeks ago.