According to AT&T, Time Warner and others, usage-based pricing is coming to your Internet connection. While the reasons for this change in pricing model are varied, both in terms of technology and politics, it’s clear that consumers used to an “all-you-can-eat” buffet of streaming video, photo-sharing and podcasts are headed for a lean diet of Web 1.0 and email. Unless, of course, you want to pay a lot more for your Internet connectivity.
How much more? While the service providers have not announced their pricing plans, it seems clear that usage-based pricing will be based on the number of bytes you send and/or receive from the Internet on a monthly basis. Time Warner has suggested that usage-based pricing will be tier-based, with tiers at 5, 10, 20 and 40 gigabytes and overage charges applied for bytes that exceed them.
To put those numbers in perspective, here in the Bay Area I subscribe to AT&T DSL for $24.99 per month. I can download at 1.5 megabits per second and upload at 512 kilobits per second, which means I am bit-rate limited to downloading 500.2 gigabytes per month, or about 20 gigabytes per dollar. That same $24.99 per month also allows me to upload 165.9 gigabytes per month, or about 6.6 gigabytes per dollar. But to keep the pricing simple, let’s assume that I’m currently paying 5 cents per gigabyte sent or received. Granted, I may not consume all of these gigabytes every month, but in theory, I could.
I think it’s safe to assume that the service providers will price their usage-based tiers at amounts comparable to today’s monthly fees. They’ll want to lure in customers to the lowest price tier and then gouge them with overage fees. So let’s assume that the lowest priced usage-based tier, 5 gigabytes, costs $10 per month. That equates to an increase in my current fee of 40 times, to $2 per gigabyte. The highest tier, 40 gigabytes, will undoubtedly cost the same or more per gigabyte. If we assume that this tier will be priced at the same cost per gigabyte, then that equates to $80 per month. And again, that’s without overage fees, which will undoubtedly be as hefty as the surcharges on cell-phone plans.
As a rough reference, 5 gigabytes is the equivalent of doing one of these activities over the course of a month:
- downloading about 1,000 songs from iTunes (assuming about 5 megabytes per song)
- downloading five full-length movies from iTunes (assuming a two-hour movie)
- watching about 500 minutes of YouTube video (a quick test I just ran shows that a 2.5-minute video is a 5-megabyte download)
- sharing about 2,500 two-megabyte pictures (as normally produced by today’s typical 8-megapixel camera)
These references are estimates and do not account for other ways we typically use bandwidth during a month, among them file backup and recovery; VPN connections to the office; IP video conferencing; downloading Microsoft software upgrades and patches; use of cloud computing sites such as Google Docs and Amazon’s EC2; and so forth.
Of course, service providers will argue that in reality I do not consume 500.2 gigabytes of data each month, that my effective cost per gigabyte is higher than 5 cents and closer to the usage-based prices. And if I’m only browsing the web, doing email with small attachments and downloading the occasional picture, then my usage should fit in the 5-gigabyte usage tier and my monthly bill could actually go down. But that’s not the point — the point is that the unit economics of the Internet have changed and consumers are going to increasingly pay more for each byte of data delivered to them.
Why have the unit economics of the Internet changed so dramatically? “We built a road that was well-suited for bikes and cars and spent the money to build and maintain that more or less properly,” was the way one service provider executive explained it to me. “Now we have folks landing planes on the road, tearing it to shreds and making it unusable for others. So we need to spend lots more to maintain the road for bikes, cars and planes.”
Infrastructure technology like terabit routers, 60-gigabit backbone connections and multimegabit broadband connections do exist to support bikes, cars and planes — but the service providers have failed to spend the money from your Internet connection fees to invest in that infrastructure. Instead they have spent it supporting their bloated organizations and devising new pricing models to extract more money from consumers for less service delivery.
And therein lies the rub: The Internet has evolved and has enabled new applications such as peer-to-peer and video streaming that are increasingly being used by the consumer. Unfortunately, the infrastructure evolution of service providers like AT&T and Time Warner are working at a significantly slower pace. And that slower evolution costs them money, because their infrastructure cannot handle the new Internet applications, so instead of building efficient organizations that can evolve and deploy infrastructure faster they are looking for more money from the consumer in the form of usage-based pricing.
One day soon, when you get your Internet connection bill and it is much larger than you expected, don’t blame Hulu or Microsoft for offering you funny videos or a new security patch, blame your service provider for not evolving with the Internet.