Thursday, January 17, 2008

Gear: A New Internet Access Pricing Structure

I came across a very interesting article earlier regarding Time Warner's proposed new internet access pricing. They'll begin limited trials later this year on a pricing structure that charges for internet usage rather than bandwidth.

This concept is so logical, I'm not sure why it hasn't been tested yet. Electric companies don't charge you based on voltage (bandwidth), they charge you for the power you use (internet usage). Water companies may charge you partially for the size pipe into your house but they mostly charge you based on the water you consume. I could see internet service providers (ISPs) moving to a pricing model similar to the water company, with a base service charge and then usage fees.

While this will more fairly distribute the cost of internet use, the more profound effect will be on the download of bandwidth-hogging pirated content. Current limitless internet access essentially makes it free to pirate movies, music and TV. Charge people "by the bit" or at set usage tiers and suddenly there's a very real cost associated with that kind of internet use. You better believe that the MPAA and RIAA will be lining up behind this concept.

Additionally, this presents a way for ISPs to charge consumers for piggybacking VoIP services like Vonage and streaming audio/video services like Rhapsody and Yahoo! Music. In particular, ISPs are none too pleased with Vonage for using their networks for "free," particularly when they offer their own competing internet phone services.

I'll be keeping an eye on this concept to see if it goes anywhere.


thundermutt said...

Economically, this makes some sense, and some "nonsense".

As you say, probably some base fee for pipe/meter size like the gas and water companies charge (which maintains the infrastructure) plus a fee for usage makes some sense.

Except...usage is almost free to the network operator, once the network is built. There is no marginal cost for the extra byte moving down the light pipe. No coal to burn, no gas or water to pull out of the ground, no treatment cost, nothing. There's no cost basis for computing a usage price, at least not since the early days of dial-up. That's why all current service plans have simply sold a flat-rate connection.

The other utilities are regulated monopolies because there is such a high capital cost to build a network and push stuff down it, regardless of what the "stuff" costs. So they are granted an average return on their capital invested in the network ("service" or "delivery" charges) plus a marked-up cost for the power, water, or gas.

The idea is interesting, even if it doesn't have support in economic theory. It may simply be a way of dealing with piracy differently from AT&T's proposal (detailed in an article on Slate at ). And, of course, making money from it.

CorrND said...

Excellent points, especially that internet use differs from traditional utilities in that the cost per unit use is essentially zero. However, I think a good case can still be made for "extreme users" paying more for their use.

If you look at an ISPs network, its primary costs are likely maintenance and upgrades. I think in both categories, an argument could be made for high-download users bearing the bulk of both costs.

For upgrades, they clearly drive the bandwidth needs of an ISP and should therefore help pay for upgrades to network bandwidth.

For maintenance, they have a more vested interest in maintaining the reliability, speed and efficiency of the network to ensure their high demands on the network can be met.

I think it's very fair, incremental cost or no, to charge extreme users for their extreme use.

(This topic has really piqued my interest. I'm very curious to hear what people think about this pricing concept.)