Tuesday, January 25, 2011

Usage-based billing for Internet service: Only evil if it is out of line with incremental costs and cramps people's style

Most of us pay for electricity, water, and natural gas by usage-based billing (UBB). Yet there is a great outcry against Internet Service Providers applying UBB.

An example of this outcry is this opinion piece by David Beers in today's Globe and Mail. His basic argument is that the increasing tendency for ISPs to use UBB will kill Canada's ability to compete in the global information economy. He feels his Canadians will stop being able to afford to download video.

His argument is valid to the extent that ISPs charge excessively, which to me means well beyond the incremental cost of providing additional Gigabytes. However, that does not invalidate the entire concept of UBB.  I believe that a good argument can be made for metering at a rate of about 5 cents per GB to allow ISPs to recover the incremental costs of extreme volumes of use.

When I was a child in England, phone calls were all paid for using UBB. Even local calls cost money, and long distance was considered an expensive luxury. This definitely had an impact on everybody's life; people avoided using the telephone, and kept calls very short, for fear of raking up huge charges. Over the decades, the incremental cost of providing minutes of phone service, including long-distance, have diminished to almost nil. The main cost to phone companies is the fixed infrastructure, which is why it is common now to pay a flat rate for unlimited calls.

However voice is cheap to transmit digitally. High definition video, on the other hand, requires vastly more network capacity. So the incremental costs have not yet come down to the level where 'unlimited' Internet usage makes sense. This is especially true for wireless services, where spectrum and towers are a limited and expensive resource, but is true also for cable and DSL landline service, where there are limited-capacity lines into neighborhoods that are shared. ISPs used to offer unlimited plans, but they have largely stopped doing this due to the fact that today's heavy Internet usage is largely due to watching video.

In the following I am going to use a round figure of 10GB per hour for good quality video (in practice it can range from 2GB/h to 40GB/h depending on the quality you want). If a two-hour movie costs $5 to rent, then paying $1 to download it would not be unreasonable. But download prices in excess of this would indeed likely start to cramp people's Internet usage style, as Beers suggests, just like telephone usage style was cramped when I was a child. Rough calculations suggest that five cents per GB might be a tolerable metered rate for wired Internet, with even that amount diminishing over time as networking technology gets better and cheaper.

If you look at Rogers' Internet service rates, this is exactly ten times the 50 cents per GB they currently charge. But you only get this rate if you are paying for their 'Ultimate' package, at $99/mo, and exceed the 175GB cap. Unfortunately, people with 'Ultralight' service pay 100 times my suggested 5 cents per GB base rate (for $28/mo and when exceeding the 2GB limit). This to me is clearly excessive, since the incremental cost to Rogers is the same. Rogers defines their service levels based on three factors: a) speed in Mb/s), b) the usage cap, and c) and cost per GB for excess usage. I think that the cost per GB for excess usage should be fixed for all service levels at my suggested rate, so as to not overly cramp people's style. Note that competing Internet services in Canada, such as those from Bell, are roughly comparable in terms of their charge for excess GB..

I think that the ISPs are charging these rates currently for two reasons: Firstly they don't want competition from other video providers (as they provide their own video services), and secondly, they can get away with it since in recent years, most users have only consumed a small amount of video. However if we want proper competition for video, and stimulation of innovation, the cost of obtaining it through cable TV, satellite TV or through Cable, DSL an fibre-based Internet need to be roughly similar.

It should be noted that cable operators are already sending vast volumes of GB/s into each neighborhood by way of digital HD video channels, including on-demand video. They don't charge anywhere near 50 cents per GB for their own on-demand video service, so the argument that this is their incremental cost is facetious.

Consumer awareness and pressure may help to push the rates into  'reasonable' territory. Regulatory action may also be needed. Unfortunately competition in the market is not going to work on its own since Internet service operates as a cable/DSL duopoly.

Unfortunately arguing that UBB is evil and unlimited service should always be provided is disingenuous. It damages the ability to make a sound argument for a reasonable 5 cents per GB metered rate.

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