34 Comments

Summary:

The usage-based pricing plans being considered by AT&T, Time Warner and others will force us all to wonder about the size of our connectivity bill on a monthly basis. Which means it won’t only be bad for users, but for some of the Internet service providers’ largest customers.

Here’s a horror scenario for everyone on the content side of the Internet: A consumer comes to a web site to download a movie, work presentation, software update or photos, and just before they commit to the download they pause and wonder: Am I over my usage quota this month? How much will downloading this new HD movie from Netflix on my Xbox cost me?

We’ve all been there before — with cell phones, about a decade ago. Usage-based pricing tiers started out with very limited minutes and lots of overage charges. Competition in the market by innovative operators drove plans fairly quickly to a point where only exorbitant usage resulted in overage charges (and now there are flat-rate plans for those consumers, too).

Unfortunately, the usage-based pricing plans (starting at 5 gigabytes) being considered by AT&T, Time Warner and others will force us all to wonder about the size of our connectivity bill on a monthly basis. Further, the lack of last-mile (the infrastructure that connects the consumer to their Internet service provider) competition will not result in these plans changing in the near future. Today, true competition on the Internet last mile requires new copper or fiber to each consumer — a very costly proposition. Cellular competition, on the other hand, required a less costly (on a relative scale) deployment of cellular towers.

While it is true that the consumer can elect who provides services over their last mile, most of us have very limited choices. As an example, a friend of mine recently moved into a building in downtown San Francisco that had exactly one last-mile provider: AT&T. The 700Mhz wireless spectrum provided a hope for an alternative consumer last-mile option, but that dream quickly faded.

Competition and an aggressive last-mile build have resulted in reasonable usage-based pricing models in Japan. OCN, the carrier operated by NTT Communications, is planning for unlimited download bandwidth usage and a 30-gigabyte limit on daily upload usage capacity. By my estimates, that will be more than adequate for all but the largest consumers of Internet bandwidth and does not invoke any horror scenarios for the large content owners.

In fact, large content owners may help us all avoid usage-based pricing horror scenarios. They spend hundreds of thousands of dollars every month (assume $10/month/Mbps using 95th percentile on 10Gbps of traffic) with the same Internet service providers buying connectivity to their networks because they want to be connected directly to the consumers via the last mile.

If the Internet service providers start billing on usage-based pricing, it’s inevitable that large content owners will look for new ways to reach the consumer. It seems unlikely that they’ll be willing to pay the service provider for access to their last mile if at the same time the consumer is being motivated not to access their content. Why would Microsoft and Netflix pay Time Warner for connectivity to their cable Internet infrastructure consumers if those same consumers are being billed on usage and worry about their usage quotas before downloading HD movies onto their Xbox?

Like other large businesses, Internet service providers are looking for ways to extract more value from their customers. As a venture capitalist, I understand and appreciate that perspective. Usage-based pricing, however, at least as currently envisioned by the service providers, will not only change consumer behavior but will work against some of their larger customers.

By Allan Leinwand

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  1. I’ve always had capped broadband.

    But a 5GB cap is ridiculous – I approach my 40GB cap every month at least a week before it resets, and I’m not even a heavy P2P user.

    At least I don’t pay if I go over the cap, but I get rate-limited to 64k if I do.

    Capped broadband isn’t something you want to import from the rest of the world, believe me.

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  2. Two words: free market. The thought of monopoly broadband is a thing of the past for a massive majority of us here in the US. If SPs decide to start capping, this will only INCREASE competition because now providers will choose between caps or no caps and in turn, customers will have a choice of billing plans (no more flat rate only). The free market will allow the customers to decide what works for them and if people move to the non-capped providers in droves, the market will have spoken.

    As always, it’s the SPs taking the risks and with the future of WiMAX and LTE (not to mention HSPA, etc.), choices will only get greater in the future. As much as we all might not like it, it’s the BILLIONS of dollars that the SPs have spent on infrastructure (as well as the BILLIONS more they are continuing to spend) that allow us to use broadband at all. They hold the cards and it’s up to us to vote with our wallets. They’re not foolish. If they start to lose high-value subscribers, they’ll change back. However, if they shed high-cost customers (and better yet, shed them to their flat-rate competition), they’ve won. They’ve won huge.

    I, for one, am looking forward to the changing broadband landscape. Despite the fact that I’m clearly in the minority of GigaOM readers, I think this will be the best thing in the world for competition and eventually me as a consumer. I guess only time will tell?

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  3. That’s the thing though, companies like Comcast don’t care if it stops people from downloading content. In fact, it’s what they want. They primarily provide Cable television services and channels. If everyone downloads their television an movies, it puts their lucrative cables television services out of buisiness.

    The goal here isn’t to solve this “problem” of bandwidth. That problem likely doesn’t even really exist. The goal is to kill online media like Netflix.

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  4. Sadly, these usage-capped plans are now common in the UK, particularly for the cheaper domestic packages – with caps as low as 1 Gb per month. Rather than hitting you with a huge overage charge, though, they tend to throttle your connection down to just above dialup speeds (64kbps) for the remainder of that billing period.

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  5. This would be AWFUL. We have visited South Africa where they pay an arm and a leg for a 1GB cap. But having a cap is all they’ve ever known so to implement this on an economy that is used to getting unlimited internet would cause an uproar – we don’t see it happening.

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  6. wholesale bandwidth is indeed cheap. backhaul bandwidth (from the DSLAM/CO/CMTS) is not, however.

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  7. I wonder whether this will pave the way for Google to drive the cable and phone companies out of the Internet business. I’ve read that Google has bought a great deal of fiber connectivity, possibly more than their own operations warrant. They’re also experimenting with muni-fi. And they have a huge interest in unfettered web access. I’d read with interest a GigaOM post on the prospects for Google-fi.

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  8. bingo!

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  9. Jesse Kopelman Thursday, July 17, 2008

    Doug, what US do you live in? Sure, most people have more than a single choice, but a 2 or 3 choice oligopoly is really not much better. Wireless WAN is not ready to be considered as part of the equation — upload is too slow, latency too high, service is already capped, and price is higher. The vast majority of people in the US have exactly 2 choices and I think you’d be surprised at how large the number of people with 0 choices still is — certainly, in the 10s of millions.

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  10. The main problem with metered access is that you aren’t in control of data throughput like you are with water, gas and electricity. I can’t load up a web page and know what amount of data it will cost me. But, when I get a glass of water or take a shower I’m aware of exactly how much water I’m using. There’s only one kind of water, electricity and gas. I can understand throughput caps to prevent significant abuses, but I doubt they are necessary and if appropriately set would ever be touched by 80% of the public.

    There would be a huge case against heavy Flash ad animations if this ever came to the U.S..

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