The Perils of Flat-Rate Internet Pricing

The Perils of Flat-Rate Internet Pricing
December 1, 2007

Recently the Associated Press reported cable provider Comcast actively interferes with attempts by some of its high-speed Internet subscribers to share files online. (See story, page 1.)

Comcast responded by saying it uses "the latest technologies to manage our network to provide a quality experience for all Comcast subscribers."

Comcast's actions and ambiguous responses set the blogosphere afire with claims the incident was evidence Internet service providers (ISPs) violate net neutrality principles. In a sense, they're right.

No ISP, backbone operator, or large content company can really treat all traffic as identical bits flowing over a pipe. They have to deal with network congestion, viruses, spam, denial-of-service attacks, and other issues. Only a small number of people place very intense demands on the network, but their actions can degrade performance for millions of others. One study found about 5 percent of users generate more than 40 percent of all Internet traffic.

Comcast should have been more forthcoming in its response and more transparent about its actions. Even so, Comcast isn't the culprit, and net neutrality regulations aren't the answer.



Pricing Mechanism to Blame

Network congestion problems caused by some people's heavy use are a direct and predictable result of the all-you-can-eat pricing that nearly every ISP charges for broadband service.

This kind of pricing gives people little incentive to pay attention to how much of the service they use. People whose electricity is included in their rent instead of metered, for example, may as well leave the lights on all day and keep their homes frigid in the summer and toasty in the winter. Some will conserve because they care about the environment, but most won't since they don't see any savings from using energy more efficiently.

So it is with the Internet. As long as the cost of sending an extra bit down the pipe is close to nothing, a flat rate for unlimited use is probably efficient. A problem with this arrangement, however, is that light users end up subsidizing heavy users. Grandparents keeping in touch with their grandkids are paying for a network that must satisfy addicts of World of Warcraft and file-sharing.



Congestion Pricing Model

Consider highways. If a road is relatively empty, an additional car imposes few additional costs. But as the road becomes congested, each additional car imposes costs on everyone else as traffic moves more and more slowly.

Policymakers have generally tried to deal with congestion by building more roads, which is the equivalent of what ISPs are doing in upgrading their network infrastructure. But a recent study by Clifford Winston of the Brookings Institution found it is not a cost-effective method of reducing congestion. Congestion pricing, in which drivers pay to use roads during periods of high demand, reduces congestion at a much lower cost, the study noted.

Charging drivers for the costs they impose on others (as in London's congestion charging zone) is a more efficient use of resources than building new roads.

Simply "managing the network," as Comcast says it is doing, has limits. Consumers will rightly demand to know what their ISPs are doing and how those actions affect them. If providers are not transparent about their actions, calls for regulation might grow louder.

ISPs have a third choice, however. They could price their services differently.

AOL famously moved from metered to flat-rate pricing for unlimited dial-up use in 1996. This arrangement proved to be so popular that no major ISP has offered any other type of plan since. Nevertheless, some industry observers are beginning to ruminate about a return to metering.



Paying for Use

Returning to some form of metered pricing would be consistent with other network industries, especially utilities. Electricity, for example, is usually metered. Some homes even have "smart meters" that allow prices to change based on the time of day or total demand.

Piped drinking water is also typically metered. Many water systems use "block tariff" pricing, under which users pay some low amount for the first block of water they use, more for the second block, and so on. Families that use little water do not pay much, but those who water enormous lawns every day of the summer face substantial bills.

Broadband use could be metered similarly. One could imagine simple metered pricing, in which users pay by the bit. Alternatively, providers could develop hybrid plans in which metered pricing begins only after some very high level of usage. Heavy users would pay for the costs they impose on the network instead of being subject to what might otherwise appear to be arbitrary delays in their Internet traffic or threatening letters in their mailboxes.

ISPs know how much bandwidth their users use, even if they do not know what content is flowing over the pipes. Implementing new pricing schemes presumably would not be a technical challenge.



Additional Benefits

New pricing models might have some additional benefits beyond allowing people to pay only for the bandwidth they use. Low-income households, for example, may be more likely to sign up for metered service (perhaps even prepaid), just as they have for prepaid cell phone plans that charge by the minute.

As the market and industry change, providers should take a close look at their pricing schemes. Charging users for the bandwidth they consume and thus for the costs they impose on the network could reduce the need for network management, mitigate calls for regulation, and increase efficiency.


Scott Wallsten is a senior fellow and director of communications policy studies at the Progress & Freedom Foundation. This article is adapted from "Managing the Network? Rethink Prices, Not Net Neutrality," available at http://www.pff.org/issues-pubs/ps/2007/ps3.12networkpricing.html.