In Slate, Eli Dourado has a post in support of Comcast’s move to cap broadband usage at 300GB per month unless you want to pay $10 for a little more or $30 for unlimited. I have played the rational economist explains to consumers why a restriction is good for them card more times than I can count and Dourado has set himself up nicely for a shellacking. While he has a point, I think it is only part of the story and that he is likely on the wrong side of the argument in a historical sense.
Let’s review his argument. Broadband connections cost money and if people use them intensely they cost broadband operators more to run. In terms of which consumers should pay the most for those costs, absent other considerations, sorting based on use is a good idea. One way to do this is to charge people by the MB but you do not have to remember too far into the past what a disaster that was for mobile phones. The mental accounting alone is a problem. For broadband, the way every country other than the US dealt with this was to have tiers — progressively higher prices for higher usage caps. This meant that those who did not want to use the internet much could pay a small amount while those who relied on it would pay more.
Caps aren’t the only way to have tiers. Another approach is to offer different bandwidth. Typically, more intense users also want to get things quicker than others, so this is another way to allocate costs. This is something that Comcast and the like have done for years.
Dourado argues that the change should be something consumers should welcome. If you don’t use the internet much you should expect lower charges; although I am not sure Comcast have actually offered that. If you use it alot, you can expect Comcast to have a vested interest in trying to get you to shell out even more. How will they do that? Dourado expects them to invest in higher bandwidth so that you have more reason to download more. If you want that, then this is apparently a way of “paying it forward.” I should also add that this same effect would mean that Comcast should be much nicer to Netflix because the better is Netflix the more likely consumers are to pay for higher usage limits.
The problem is that this logic rests on there being a competitive market and US broadband does not look that competitive to me. While Dourado’s argument still holds for a monopolist, an ISP with market power is going to find it worthwhile to squeeze consumers more to get them to pay more. Specifically, the function that relates charges to download limits is going to be much steeper than it would be if there was a pure cost-recovery thing going on. This was the finding in a paper by Economides and Hermalin that took into account the features that Dourado focussed on. Yes, the ISP will install more bandwidth but it will also cap usage more stringently than would be efficient in a social sense.
We can get a clue as to whether Comcast is doing this by focussing on the 300GB limit. Here in Canada, ISPs have many tiers but the top (prior to unlimited) is 200GB. On Comcast $80 per month gets you a fast speed plus the 300GB limit or 26.67 cents per GB. In that sense, the $10 extra for 50GB more is a good deal and the $30 would pay for itself if you use more than 100GB or more above the limit. But here in Canada, Rogers limited plan is $75 per month (although it is slower than Comcast’s rated speed) but its unlimited plan is just $10 more per month. (Those latter numbers are in Canadian dollars). But Rogers also offers really cheap plans with 25Gb and 100GB caps.
So if it was all about funding infrastructure, why did Comcast opt for a model that raised prices at the top rather than offered accessible usage at the bottom? Surely, from a cost contribution standpoint that would be the way to do go. That it didn’t tells me that their motives were not the Dourado — you’ll learn to love it — motivation but instead the Economides-Hermalin — how can we extract more from our better customers — motivation.
On a final note, broadband caps are a pain. I have an unlimited plan and am grateful for it as my family usage exceeds 200GB but not by that much. However, my days of scolding the kids for being on YouTube are over. I do not envy my US friends who are about to discover and have to educate their kids on economising on an artifically scarce resource.