Saturday, April 18, 2009

Usage-Based Internet? Not yet.

Time Warner Cable, my internet service provider, backed down this week from a plan to institute usage-based pricing for residential users in September, 2009. The reaction from heavy users was extremely negative, and even our illustrious Senator Schumer apparently was involved in the roll-back. I have mixed feelings about this, but I lean against Time Warner.

Internet usage varies greatly from home to home, but rates do not change based on usage. Everyone pays the same. However, the top 25% of users consume 100 times the bandwidth of the bottom 25%, and I'd guess that the top 5% use 50% of the total bandwidth. The heavy users download a lot of video (movies, pornography, tv programs), or play on-line video games. The rest of us use email, surf the web, and blog; most of us are not heavy users.

In the parlance of economics, the heavy users are called "free riders" because others subsidize their consumption to a great extent. Time Warner must continually upgrade its hardware and software to keep up with growing demand for services - demand that comes largely from the heavy users. But, when these cost increases flow through to higher rates, everyone pays.

Push-back to Time Warner's proposed plan by heavy users was immediate and loud, since the pricing change would have significantly raised their monthly bills. They say the internet should be like the highway system, open to everyone whether they drive once a year or every day. They also contend that the cable providers need to constantly upgrade services for other reasons, such as higher bandwidth HDTV service. They want, of course, to "free ride" in perpetuity, and they know they have no alternative to cable if they must have very high bandwidth.

Time Warner's position is also suspect. They did not tie their proposal to increase rates with a proposal to reduce rates for low-usage consumers. In other words, Time Warner loves it when many customers pay more than $40 each month for a product they use only infrequently or at a low level. These customers represent a large part of Time Warner's customer base. Consequently, Time Warner did not wish to offer these people a significant rate reduction at the same time they installed higher pricing for heavy users. Time Warner wants to have its cake and eat it, too.

Internet pricing probably needs to be addressed, but it's very complex. Changing the pricing model could have many unintended consequences. For now, it's probably a topic best left on the back burner.

3 comments:

Ron Davison said...

LH,
I think that this issue doesn't get enough attention, but for me the issue needs to be addressed from the other end.
Once we pay a fixed fee (say the $20 or $70 or whatever a month) something like half of that should be stripped off from Time Warner or Cox or ... and parsed out to sites based on what percentage of the traffic they get. This would create revenues for popular sites and help to fund the creation of content.

ThomasLB said...

The ones using the most bandwidth are also the ones pushing technology to the limits and providing the impetus for new innovations. Without them, technology stagnates.

(That seems like an odd argument for a luddite like me to make, but, there you go.)

Dave said...

I've read a couple of articles this week about the cost of improvements to cable infrastructure. One nugget struck me. New technology reduces the carrying cost of bandwith by a factor of four or more, I think. This is coupled with the fact that the capital cost of the technology is something like $7 an outlet (home or business).

Quadruple your capacity by investing a little over 1% of your per customer yearly income (assuming an average of $50 a month)?