The often misunderstood usage based billing of broadband services
Usage based billing (UBB) of broadband services, where the user pays for the bandwidth consumed, is a misunderstood child. UBB applies the same principles as other utility services (water, electricity, and gas). UBB represents a very different approach to the established flat rate regime in the telecoms sector, where customers can consume as much bandwidth as possible for a flat rate.
Paying for what you use is often perceived as a fair and reasonable pricing mechanism. Applying a flat rate pricing to for example electricity would in all likelihood increase electricity demand (since there would be no direct connection between the price paid for the service, a flat rate, and the consumption of that service. Households would no dis-incentive to use more air condition, more heating, more lighting, and so on and as a consequence consumption would increase). This has been a problem in old apartment buildings where individual household meter readers have not been installed. Instead, a single bill has been issued to the apartment building, which has been split among the residents. After installing individual household readers there has been a sharp decline in overall consumption. People consume more of services where they only pay a flat rate and no variable cost.
Back to the world of telecoms. UBB has stirred up concerns, which are somewhat misunderstood. Some argue that UBB is just a tool for network operators to make bigger profits. However, there are short-comings to this view.
First of all, there is competition. Competition ensures that pricing is set in the market. If there is little competition then the network operators do not need UBB to increase profits, they can just increase the flat rates accordingly. Therefore, arguing that UBB will only increase prices and profits only applies in markets that lack competition in the telecoms sector. Where there lacks a healthy competition network operators do not need UBB to increase prices and profits; they can do so due to their significant market force.
Secondly, which is related to competition, is market regulation. Telecom regulators in many markets force network operators to create an open market for wholesale broadband access services. Pricing is often regulated as well. Market regulation of wholesale pricing is used amongst other to ensure that telecoms operators get an acceptable rate of return on their network investments while avoiding monopoly rate of returns. Regulators can also include wholesale UBB pricing. The concerns that UBB is a tool from telcos to increase profits can easily be re-assured by telecoms regulators. Competition combined with reasonable wholesale UBB pricing will drive the end user / retail pricing down towards the wholesale pricing set by the regulator.
Thirdly, the flat rate regime offers few, if any at all, solutions on how to manage last mile traffic and congestion. Flat rate regimes, as outlined above with the utility example, typically drives wasteful consumption of services since there are no direct links between consumption and the price of consumption. UBB ensures that customers make more informed choices on how they use the broadband pipeline, just as they do with electricity, gas and water services. Flat rate regimes, however, may lead to over-consumption, which may in fact increase pricing across customer segments.
Fourthly, bandwidth consumption is heavily skewed. According to a Cisco survey in 2009 10% of households represent 60% of bandwidth consumption. In the same survey Cisco pointed out that the top 1% of household consume more than 20% of bandwidth used. However, these households may pay the same flat rate as the remaining 90% (or 99%), meaning the vast majority of customers are subsidising these bandwidth hogs. This would not be acceptable in the electricity markets, and it is difficult to see why it should be acceptable in the broadband markets.
Fifthly, UBB creates a direct link between revenues and consumption. This is an important aspect for network operators as this creates financial incentives to invest in last miles that are congested. If a certain local loop is congested (meaning it is driving significant revenues for the telco) the telco has incentives to defend this customer base. One way of doing so is to improve the quality of service by upgrading the local loop.
This is not to say that UBB cannot be used to increase market pricing (and thus profits for telcos). Canada's telecoms regulator has pushed through a regime that at glance seems very expensive for households. As someone points out, under the new policy regime it is cheaper to fill up hard disks with gigabytes of data and ship the disks with express delivery than it is to download the same data over the Canadian broadband lines. However, this is a regulatory question (how to establish fair, reasonable and transparent pricing mechanisms the provides a reasonable rate of return for the network operator while still avoids monopoly rates of returns), and not a question of the viability of UBB.
Some may also argue that UBB will kill innovation on the Internet. Yes, UBB is likely to reduce some broadband consumption. However, this will be a reduction in consumption of broadband services that holds little value to the end user. New innovative and valuable services will still find their audience on the Internet.
Following this line of arguments one could argue that opponents of UBB should perhaps instead focus their attention on ensuring regulation and market competition in the telecoms sector.
