By Lawrence SpiwakPresident, The Phoenix Center for Advanced Legal and Economic Public Policy Studies
In the classic Barry Levinson movie "Tin Men," a car salesman asks Richard Dreyfuss's character exactly how much he would like to pay for a new vehicle: "Nothing" he replies, "I want to pay nothing." Unfortunately, the same attitude seems to apply when it comes to broadband, particularly if you are a bandwidth hog.
For the last several years, broadband providers have taken a rather egalitarian approach to broadband pricing with generic "all you can eat" broadband plans. While such plans were helpful to promote adoption when broadband was in its infancy, there is no longer a homogenous broadband consumer: some use a little, some use a lot.
Here's the common sense approach: Let carriers develop plans that allow consumers to pick and chose the approach that best suits their needs and, just as important, let consumers be responsible for their choices.
As such, common sense would dictate that consumers should have a range of broadband pricing tier choices to fit their personal needs.
Of course, you could be wrong.
To wit, several liberal consumer advocacy groups have recently asked Congress to investigate these new tiered pricing plans, claiming that these usage-based tiers are priced "well above the marginal cost of providing Internet service" and, as a result, "these price gouging schemes will discourage consumers from using high-bandwidth Internet applications." Oh, please.
Like it or not, constructing broadband networks (wireline and wireless) is extremely expensive and ATT, Verizon, Sprint, Qwest, Comcast, Charter, CableVision collectively invested tens of billions into their networks in 2008 alone. However, the broadband business isn't just about building the networks; you also have to manage an ever increasing amount of traffic over those networks. Internet congestion is becoming a particularly acute problem because, as the Supreme Court recently recognized, the developers of "peer to peer" or "P2P" applications such as BitTorrent and Skype, which consume large amounts of Internet capacity, have absolutely "no incentive to minimize storage or bandwidth consumption, the costs of which are borne by every user of the network." As a result, the needs of the few are now often outweighing the needs of the many.
Economics dictate that when there is a congestion problem, there is actually a pricing problem. However, because these consumer groups view broadband networks not as a business but as some sort of public good, they believe that the congestion problem is not one of pricing, but of altruism. As such, these groups have actually argued before the Federal Communications Commission the naive notion that that carriers should "simply ask their consumers to moderate their usage during certain hours, and provide information on which times and uses should be modified. Internet users often follow norms and could act as good citizens." This is the analytical equivalent of telling the fat guy not to take too much the shrimp at the "all you can eat" raw bar --you hope he refrains on his own accord, but you know it just ain't gonna happen.
So what to do?
I suppose we could move to a model where carriers charge "by the byte" for Internet service, but that would crush broadband demand instantly. Indeed, if the old long distance and dial-up Internet models are any indication, a strict "pay by the byte" pricing scheme would scare many low income and low volume users to overcompensate and change their usage habits, or even to drop their service all together.
Similarly, telling carriers to just "invest their way out" of the congestion problem is also a naive solution. The network is a shared resource, and this approach would cause the price for all users of the network to rise. And, as the price for everyone rises, some households won't be able to afford broadband at all. Publicly available studies show that these costs could potentially reach several hundred dollars per month, which would certainly put broadband out of the reach of many Americans.
The best--and most economically efficient--option is to let carriers develop plans that allow consumers to pick and chose the approach that best suits their needs and, just as important, let consumers be responsible for their choices. As the old saying goes, an educated consumer is the best customer.
In the end, these consumer groups' efforts to prevent carriers from experimenting with different pricing plans for multi-product offerings is nothing more than a thinly veiled attempt to tax the many to subsidize the few who spend their lives online. However, in this case, the "few" are not the poor and disenfranchised who work hard to just to pay for their own broadband, but the Internet glutton next door.
Lawrence J. Spiwak is president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, a non-profit research institute based in Washington, D.C. The views expressed in this article do not represent the views of the Phoenix Center, its Adjunct Fellows or any if its individual Editorial Advisory Board Members.