Broadband usage caps are probably inefficient

screenshot-238In 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.

7 Replies to “Broadband usage caps are probably inefficient”

  1. Thanks for engaging, Josh. Let me accept for the sake of argument that broadband providers are pure monopolists. If we should use speed tiers instead of data use tiers as a way to allocate fixed costs, wouldn’t the Economides-Hermalin model suggest underprovision of speed?

  2. Let’s agree that the issue is market power and so we are arguing here in the second best which is not something that is easily resolved.

    I grew up with stringent caps and it is not pretty. You don’t want to go there. If you want to limit, limit at the low end to encourage access — that’s my point.

    More critically, the US benefitted from unlimited caps. Streaming services are more advanced there than anywhere else. You don’t want to lose the flow on innovation benefits of an internet where people can optimise their usage.

  3. I think the rationale is:

    1. Even if we want to meter at the low end, customers don’t like that so we phase it in.
    2. Let’s institute metering at something that is higher than almost all customers currently use, 300GB.
    3. Then we’ll adopt gigabit technologies like DOCSIS 3.1 (Comcast will have this rolled out by 2017 at the latest).
    4. The old 300GB tier *will in fact* be the low end plan.

      1. I don’t think it requires much optimism – just an appreciation for the regulatory overlay. The FCC very nearly prohibited usage caps outright in the Open Internet Order, and reserved for itself the right to monitor them closely, and limit or prohibit them if they so choose. Three years ago, when Comcast first started testing usage tiers, Senator Wyden floated a bill that could have nipped them in the bud. Mobile network operators are under constant attack from regulatory advocates for their use of data caps. And so on, and so on. Now, how long do you think Comcast would have been able to offer data tiers that kicked in at a level that would have included, say, 50% of all broadband users? Not very long. By introducing metering at the 300GB level, Comcast keeps access “open” for 98% of users, and can claim (rightly) that instead of casual users subsidizing access by the 2%, it’s the other way around.

        Moreover, Eli is absolutely right, as a practical matter. There’s a reason Netflix was the prime mover behind both the OIO and the killing of the Comcast-TWC merger: It’s all about video. Netflix managed to lock in the regulatory assurance that it wouldn’t have to pay anything for the massive expansion of data usage (and thus infrastructure) that it engenders, especially as 4K video catches on. And with DOCSIS 3.1 and other technological advances to facilitate it, soon 300GB will indeed seem like entry-level. Frankly, the only place I disagree with Eli (or at least his implication) is that Comcast will be able to continue metering at 300GB even when that is “entry level.” The regulatory reality today is that the tiers will have to move up along with usage, because legislators and regulators (and consumer “advocates”) won’t countenance it any other way.

        Finally, Josh – you say “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.” I think Comcast has been *extremely* “nice” to Netflix. Comcast has made massive investments in broadband, steadily increased broadband speeds, and freely licensed its programming, among other things that have served to enhance Netflix’s long-term viability and growth. There wouldn’t *be* a Netflix as we know it if not for Comcast’s massive infrastructure and technological investments. That doesn’t mean there isn’t a point at which their interests diverge — but where we see that now, it is most definitely against a backdrop of Comcast supporting Netflix in almost every way possible.

        BTW – Berin Szoka and I wrote about this three years ago in what is still perhaps my best-titled post, “Tears for Tiers”:

  4. In my opinion the most important phrase is “…an artificially scarce resource.” We do not have transparency into what things actually cost. Comcast would act differently if it did provide such transparency, wouldn’t it?

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