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Source link: http://archive.mises.org/7163/for-whom-the-bandwidth-tolls/

For Whom the Bandwidth Tolls

September 17, 2007 by

Which is a superior billing method: metered or unlimited bandwidth?

Arguably the billing methods and cycles for a service boils down to a management decision, it is an issue of business models, therefore neither one is a priori “good” or “bad.”

Oddly enough, this issue has surprisingly found itself in the cross-hairs of how network bandwidth should be charged.On one hand Mike Masnick of TechDirt opines that metering bandwidth would be detrimental to innovative new services; that flat-rates create a superior, more conducive environment for spurring innovation.

On the other, Adam Thierer of TechLiberationFront suggests that network operators should experiment with metering data and perhaps end the “unlimited bandwidth” hole that many telecom firms have dug themselves into. And at the very least, should be legally allowed to try out.

While neither billing method is inherently good or bad, the two sides can still be scrutinized.

All you can eat

Flat-rates may be appealing to certain customers that favor seemingly uncomplicated contracts, however the long-term economic problem consumers are faced with is that someone will end up subsidizing someone else (or in the event that the service is a government enforced monopoly, everyone can suffer from rent-seeking behavior).

Under flat-rates, good drivers subsidize bad drivers with insurance premiums (see telematics). At food buffets the satiated subsidize Joey Chestnuts.

In every instance of “unlimited” access to scarce goods, someone must subsidize the activity because the company providing the service cannot survive in the red; otherwise they go bankrupt (see Tragedy of the Commons).

Masnick also suggests that costly transaction costs would be required to implement a metered system, however that metered system already exists. ISPs have to keep a tab on where bandwidth is allocated, because they themselves are charged for its use by an upstream provider. Therefore if an ISP is sending out nastygrams, C&D’s, and termination warnings, they already have implemented this system (which is every ISP).

For instance, when I operated Collectrix.com (a webhosting company), we purchased bandwidth from an upstream provider based in Canada. They in turn purchased it wholesale from a larger tier-level provider, and so on. And while capacity is becoming increasingly cheap and readily available (no thanks to the FCC), every webhost, ISP, and on-ramp to the internet must still utilize a system whose capacity is relatively scarce.

Not quite a series of tubes

Arguably the biggest source of confusion is over the fact that this unseen transportation capacity is somehow itself scarce. Unfortunately, even the latest and greatest routers, switches, and optical lines can still only shuffle photons and electrons so fast. Not only is there a speed limit, but also a girth limitation as well (e.g., limits to how much you can send at a time; see latency versus throughput).

And unfortunately for consumers, competition is hindered via regulation.

The Silver Bullet

The most effective, yet most politically unpopular long-term solution for creating more competition and in turn, more capacity, is by deregulating the industry and ending subsidies (i.e., handouts) to incumbents.

In the mean time, the simplest and most streamlined method for telling a service provider how their billing system should work is with your pocket book. Unfortunately, this option can be nonexistent in areas serviced by government protected monopolies.

In the margin

As a side note, one of Masnick’s arguments sounds similar to an increasingly popular meme that was also highlighted by Mark Cuban who recently lamented the fact that

The speed of broadband to your home won’t increase much more in the next five years than it has in the last five years. That is not enough to work as a platform for new levels of applications that will require much, much higher levels of bandwidth.

However, while Cuban does not delve into how a provider should be required to charge for access, he did tell the House Telecom Committee that government policy could

encourage internet providers to make the necessary investment in fiber optics to significantly increase bandwidth to home users, in line with industrialized nations such as Japan, Germany, and South Korea, and that the economic benefits would eventually outweigh the costs.

[Note: see this detailed critique on South Korea's reported "utopia"]

The main problem with the telecom industry is that the government created the monopolistic problems in the first place. In addition, it was the same government that siphoned billions of dollars of taxpayer-financed subsidies to prop up the backwards business models of incumbents — all under the guise of “innovation-fostering encouragement” through criminal endeavors like the National Information Initiative.

They are the one institution that consumers should never turn to for aid and one that should never be allowed to give it.

See also:
Does the DoJ read Mises.org?
Who Owns the Internet?
What to think about Reregulation?
Cowabunga with Copowi?
Does One Price Fit All?
The Spectrum Should Be Private Property


llp September 17, 2007 at 2:44 pm

While I believe that ISPs have property rights to meter bandwidth, I personally would not purchase services from any ISP who engaged in such activities.

A relative of mine actually bought their Internet from a satellite service which engages in that kind of practice. Of course, the limit is about 200 MB a day, which is far too little to do much of anything on a broadband connection (you can’t watch videos or download hardly anything or it will slow the connection to a crawl for 24 hours). This relative’s house is located at a spot where the phone monopoly has been too lazy to provide DSL to and they have satellite TV at their home, so they can’t get Internet from the Cable monopoly. Therefore, they are stuck paying $100 a month to this satellite Internet firm for awful service because the government’s monopolies won’t provide them any service.

Then my relative called this ISP and they denied that they engaged in any such practices, even though they admit it in the small print on their website.

I personally doubt that anybody would purchase metered bandwidth Internet service without government intervention to make that service the only broadband available. If there was landline phone competition and cable competition, which there would be were it not for the State, any ISP that engaged in such practices would probably not stay in business very long.

Andy Stedman September 17, 2007 at 3:46 pm

I would certainly pay for metered internet access if it were available and if I calculated that it would cost me significantly less at my current level of usage. If a lot of low usage customers did that, the price for unmetered users would almost definitely rise as the average usage of those remaining customers would increase.

I have metered local telephone, long distance, and cell phone, even though with all three I could purchase an essentially unmetered plan–at significant extra cost.

nathan September 17, 2007 at 4:26 pm

llp, I just want to say I agree with 100% of your comment. I’ve been in a similar satellite internet situation before, even with the detail of the company denying the 200MB limitation. We probably dealt with the same company.

I further agree with the idea that we can largely blame this problem on state interference in the market, and that in the absence of such interventions we would all likely enjoy better service at lower prices.

My girlfriend once lived in a town where cable television was provided as a (voluntary, fee-based) municipal utility, and it was in competition with Mediacom’s cable TV service. The prices were much lower and service better (Mediacom’s, too), just from having one additional provider in the market. I currently live in a market where Mediacom enjoys a terrestrial cable monopoly, and they are just awful. High prices and poor service. It seems odd that the rescue in my girlfriend’s old town came in the form of peaceful competition from the local government rather than some coercive measure.

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