NCTA — The Internet & Television Association

Connecting the Dots on Usage Based Pricing

Connecting the Dots on Usage Based Pricing

This morning, we hosted the first event of a new briefing series called NCTA Connects,   which will regularly showcase national thought leaders discussing issues that are impacting the media and communications industries. This morning’s discussion, titled The Evolving Internet: Patterns in Usage and Pricing, featured a deep dive into how consumer broadband usage is changing, which is leading some Internet Service Providers (ISPs) to experiment with new pricing models. Steven Wildman, Michigan State University Professor of Information Studies, discussed the key findings in his study released at the event, “The Economics of Usage-Based Pricing in Local Broadband Markets”.   Also joining Professor Wildman was Professor Daniel M. Lyons of Boston College Law School – who recently published “The Impact of Data Caps and Other Forms of Usage-Based Pricing for Broadband Access” – and Sandvine President and CEO Dave Caputo who highlighted the findings of his company’s recent Internet research. Through the lens of an economist, Wildman’s new study (co-authored by Professor Johannes Bauer) debunks some of the common myths about Internet usage-based pricing (UBP) models: “[U]sage-based pricing of broadband service is likely to affect consumer welfare – but not in the harmful manner suggested by its critics.  To the contrary, as we show in this report, the substantial research literature on the subject of differential pricing based on usage and quality suggests that the effects of well-designed UBP plans on consumers are likely to be beneficial, as are the effects of UBP on investments in the broadband infrastructure.”  While price discrimination based on some measure of either quality or quantity for a product or service is standard commercial practice in many industries and generally is not a matter of policy concern, its recent application to high-speed broadband Internet service has been the subject of some controversy.” Wildman demonstrates that UBP models do not harm consumers.  In fact, in many cases, they help consumers. Wildman pointed out that when broadband customers pay the same rate for broadband regardless of how much they consume, ISPs find few incentives to invest in better service, to access small markets, or to offer lower prices. When customers pay for what they use, Wildman says in his paper, “...it gives suppliers an incentive to offer lower priced options they otherwise would not find profitable”. As it stands now, ISPs consider all of their users when deciding the price of broadband Internet access. They have to come up with a single usage fee that all customers pay. This fee is inevitably unfair to light and moderate users. According to Lyons it “means that light users pay a higher effective rate for broadband service, cross-subsidizing the activities of those who spend more time online. With usage-based pricing, those who use more bandwidth contribute more toward the cost of building and maintaining broadband networks.” Similarly, Wildman points out the benefits of tiered pricing models. One fee for usage up to a certain level, 50 gigabytes per month for example, and an additional fee for the next level, perhaps 150 gigabytes, and so forth.  That way, all broadband customers get the same high-speed Internet but light users aren’t saddled with paying high bills just to subsidize the heavy users. The bottom line is that Wildman’s paper points to ongoing experiments with usage based pricing as a pro-consumer model that can promote investment and help more people in more places receive better, faster, more advanced broadband Internet access. Below is  a clip from this morning's presentation: