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Broadband Usage Pricing: Let It Flourish

Are Internet data-usage limits and overage fees a way for service providers to extract more dollars from their heaviest-consuming users -- or are they tools that will increase consumer choice and competition in the market?

The reality is, they’re both. And ultimately, usage-based pricing models will result in healthier competition among ISPs.

Two different policy papers, released within days of each other, reach diametrically opposite conclusions on this issue.

Paper No. 1: Usage-Based Pricing Is Pro-Consumer

Taking a pro-industry stance is “The Economics of Usage-Based Pricing in Local Broadband Markets.” The paper, funded by the NCTA, argues that usage-based broadband pricing gives ISPs incentives to invest in their infrastructure, to access small markets and to offer lower-priced tiers.

“[U]sage-based pricing of broadband service is likely to affect consumer welfare -- but not in the harmful manner suggested by its critics,” Michigan State University professors Johannes Bauer and Steven Wildman wrote. “To the contrary, as we show in this report, the substantial research literature on the subject of differential pricing based on usage and quality suggests that the effects of well-designed UBP plans on consumers are likely to be beneficial, as are the effects of UBP on investments in the broadband infrastructure.”

ISPs can use usage-based pricing to compete more effectively, according to Bauer and Wildman: “[F]or broadband service providers UBP is a critical component of a product differentiation strategy that is similar economically to second-degree price discrimination strategies employed in many other markets without controversy.”

Paper No. 2: Caps Are the Result of Lack of Competition

That’s hogwash, according to the second paper, “Capping the Nation’s Broadband Future?” published Dec. 17 by New America Foundation’s Open Technology Initiative. While the paper doesn’t really present any new ideas, it neatly captures many of the arguments against such policies.

Data caps and usage-based pricing exist precisely because there’s not enough broadband competition in the U.S., according to the paper’s authors. “Data caps may offer an effective means for incumbents to generate more revenue from subscribers and satisfy investors, but making bandwidth an unnecessarily scarce commodity is bad for consumers and innovation,” the OTI paper says.

(Ben Lennett, policy director of the New America Foundation’s Open Technology Initiative and a co-author of the report, declined to disclose the OTI’s sources of funding but said they comprise private foundations, not corporate interests.)

Note that the OTI paper’s authors aren’t calling for regulators to ban caps or usage-based pricing. That would amount to government-mandated price controls, which make markets less efficient. Their complaint is that “policymakers need to promote policies that enable new competitors to enter the market and encourage competition from both the private and public sectors.” In addition, ISPs must be held accountable about their network management and data caps practices: “Without fair mechanisms for consumers to track their data usage, it is impossible for consumers to make informed decisions.”

The paper’s authors also complain that monthly bandwidth limits are a “blunt” instrument that doesn’t actually relieve congestion. In aggregate, though, by providing an incentive for the heaviest users to, say, not leave BitTorrent running 24 hours a day, monthly caps will reduce demand. Time-of-day usage restrictions are technically a better solution but are more complex to implement (and communicate to customers).

Bandwidth: It’s Finite

Broadly speaking, I agree with the OTI authors’ position that public policy should promote competition in the broadband market.

And it also makes sense that the FCC should have standards for ensuring that usage-metering mechanisms are accurate, clear and accountable. Legislation introduced Thursday by Sen. Ron Wyden (D-Ore.) is designed to compel the commission to put those in place, although the bill also vaguely directs the FCC to "evaluate a data cap proposed by an Internet service provider to determine whether the data cap functions to reasonably limit network congestion in a manner that does not unnecessarily discourage use of the Internet."

But the OTI paper veers off the tracks in suggesting that ISPs are trying to “create scarcity” where none exists.

Bandwidth, whether on wireless or wireline networks, is not an unlimited resource. Charging those who use more of a finite resource (electricity, water, cranberry sauce, whatever) is the most economically rational approach.

If Internet providers choose to impose draconian usage limits or pricing schemes -- and kill their golden goose by driving subscribers to competing services -- that’s their business. That’s the way a free market works: Piss off your customers and they go away.

But what if no viable competitive services exist, as the OTI paper suggests?

In fact, usage-based pricing is facilitating the market entry of new competitors.

Consider FreedomPop, a startup that is offering free and low-cost wireless broadband through Clearwire -- with very low usage caps -- aimed at luring away lighter broadband users from MSO and telco services (see FreedomPop Pushes Capped Wireless Broadband at Cable, Telco Subs).

The sub-$10 per month plan is capped at 10 Gigabytes. Usage beyond that is a steep $5 per GB.

“We are going after the fat part of the market -- people who aren’t using [broadband] that much -- not the high end,” FreedomPop CEO Stephen Stokols told me. He added, “It’s a no-brainer for a consumer to pay $8.99 per month for a service that’s better than DSL.”

Meanwhile, both DirecTV and Dish, through partnerships with ViaSat and Hughes Network Systems, are looking to make headway in the market with next-generation satellite broadband services (see DirecTV, ViaSat Push Satellite TV-Broadband Bundles and Dish Pushes Rural Broadband With DishNET Bundles). The satellite broadband services also carry caps at levels far below those of wireline ISPs.

Do the pricing policies of these competitive broadband services gouge their users and inhibit usage -- thereby threatening the future of Internet innovation? Or is usage-based pricing a crucial means of delivering an economically sustainable product that can provide an alternative to cable and telco incumbents? The OTI paper’s authors don’t consider this question.

Critics have cooked up the conspiracy theory that usage-based pricing is a way for cable or telco TV operators to protect their TV businesses (by making watching online video less attractive). But FreedomPop and ViaSat don’t have TV businesses. They have finite bandwidth resources that they’re trying to monetize in the best possible way.

It’s certainly nice to believe, as the OTI paper’s authors say, that “Broadband and bandwidth must continue to be thought of as an abundant resource, not a rationed commodity.” But as overall Internet usage continues to climb -- Cisco forecasts 29% CAGR in traffic for fixed-line IP networks from 2011 to 2016 -- that sentiment doesn’t square with reality.

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