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Summary:

If broadband pricing plans are no longer “unlimited,” but increasingly granular and usage-sensitive, one can predict massive disruptions in the current ecosystem. As with all such shifts, this will create new opportunities and drive new technology breakthroughs. Here are some thoughts

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Ed.: This is the second of a two-part post. The first post ran on Saturday.

In yesterday’s post, I outlined arguments from a much lengthier analysis (PDF) regarding recent carrier announcements concerning tiered pricing for broadband services. Not only is such pay-per-use a clear trend, but arguably the natural outcome of rational consumer decision-making, as light users actively choose not to subsidize heavy ones by paying for more capital-intensive resources than they use. However, if pricing plans are no longer “unlimited,” but increasingly granular and usage-sensitive, one can predict massive disruptions in the current ecosystem and reversal of some trends of the last few years. However, as with all such shifts, this will create new opportunities and drive new technology breakthroughs. Here are some thoughts on such a future:

  • Fewer Ambient Applications. There will be less live streaming video from coffee pots. In other words, less passive push, more active pull.
  • Truth in Labeling. Foods and beverages need to disclose calories from protein, fat, and carbohydrates. Apps and content may need to disclose total data transferred or peak data rates. Drugs need to disclose potential side effects (may cause congestive heart failure), apps and content may need to do the same (may cause congestive network failure).
  • Certifications and Guarantees. It’s easy to blame a network provider for high charges, but you don’t blame the electric company when your kids leave the lights on or the water company because a broken faucet ran up your bill. Similar to Energy Star labeling for appliances, programs may be developed to certify “bandwidth-efficient” endpoints. Or, guarantees: “This app will never transfer more than 50 MB per month or double your money back.”
  • Real-time and Projected Monitoring and Billing. Taxis provide visibility into the amount owed in real-time. You have electricity, gas, and water meters at your house. Providing ubiquitous access to your current data consumption, rated to provide visibility into your projected bill, is next. You may be calling from the airport to tell the kids to turn down the resolution on their web video.
  • Price Caps. The EU has already been active in capping roaming fees and monthly bandwidth charges.
  • Network Enhancements and Trade-Offs. The same way that increased gas prices drive fuel efficiency, usage-sensitive pricing will drive enhancements in compression algorithms, less chatty protocols, and less predictive caching. Drivers pay thousands more for hybrids to save on gas, similarly, it may be worth spending processing resources to save on network resources.
  • Application Design Changes. Rather than dumping a voluminous amount of data, expect more, well, more buttons, such as at the top of this article, requiring continuous positive acknowledgement. Higher interactivity demands lower latency, therefore greater application dispersion.
  • Increased Caching and Premises Appliance Sharing. No matter how many times my kids stream the same movie, our players fetch all of the content anew. Expect more caching, subject to laws and DRM. And, expect players from various manufacturers to query each other.
  • Congestion Pricing. A number of cities have instituted dynamic congestion-based pricing for tolls and roads, and it has been proposed to do the same for the Internet. Simplified congestion pricing might mean free nights and weekends. They knew to wait until after 9:00 p.m. to call Aunt Martha, and may learn to have an immersive multi-screen 3-D, high-definition video call with her after 9:00 p.m. as well.
  • Security. Letting your neighbor tap into your wireless access point may not seem like such a good idea anymore. Expect more users to turn security on, and more access point vendors to focus on simplicity and usability of security administration.
  • Peer-to-peer. If letting your neighbor uncontrollably increase your monthly data bill is unwise, perhaps neither is letting everyone on the planet using your peer-to-peer client do the same. Some telcos are implementing edge optimization for content delivery, using peer-to-peer in the set-top box. Usage-sensitive plans will drive a need to differentiate traffic which a user generates vs. traffic that the provider generates.
  • Intelligent, Policy-Based Optimization. Better to cache that movie now or download it tonight, when the forecast is for a twenty percent chance of lower data transfer rates? A predictive optimizer that believes rates will drop but knows you won’t stay awake long enough to watch the movie anyway may make the decision for you.
  • End-to-End Open Interoperability and Integration. Some TVs can talk to media players via “HDMI Consumer Electronics Control,” others can’t. Expect device manufacturers to increasingly support interoperable control so that a streaming media player doesn’t rack up charges when no one is watching.
  • Conservation Culture. People have learned to turn their thermostats down in the winter, and to wait for sales on Black Friday and Cyber Monday. Lack of concern for usage under flat-rate plans is sometimes referred to as “moral hazard,” but I would just describe it as “rational indifference to consumption at zero marginal cost.” Reduced consumption is a well-known effect of metered pricing.
  • Cost-Based Adaptivity. Technologies such as Scalable Video Coding degrade gracefully to smaller screens and lower frame rates and quality due to network congestion. Future technologies may do the same based on real-time network data pricing.
  • Return to Ownership. Recent trends have favored on-demand rental over ownership. Shifting breakeven points may cause these trends to moderate or even reverse. Don’t toss that DVD shelving unit yet. If you can rent a house with an option to buy, perhaps similar models will emerge where streaming a movie will entitle you to a discount on purchasing it on physical media.
  • Shifting Business Models and Ecosystems. People who drive to the video store for a DVD (as some still do) expect to pay for the data transport costs (e.g., fuel, car wear and tear). People who rent by mail expect that the cost of delivery and return postage is borne by the video service. Expect a variety of customer-pays, provider-pays (i.e., bundled pricing), and advertiser or other third-party supported models to vie to become accepted industry practice, although in any event, the consumer ultimately pays with either eyeballs or hard dollars. Creative partnerships between content providers and network service providers will also materialize. “With connection charges, this movie will cost $1.57 to view. This offer expires in five minutes and prices are not guaranteed until you press ‘Watch Now.’”

The counter-argument to this whole chain of thought is that the cost per bit (stored or transferred) is approaching zero. That sounds compelling, but the inverse of that argument is that the amount of bandwidth per user is approaching infinity, so the real question is which trend outweighs the other. The answer can be found in the fact that carriers’ annual capital expenditures are well north of a hundred billion dollars globally on network infrastructure and they’d like to see a return on that investment.

Many industries have providers offering pay-per-use and/or flat-rate plans. Other industries seem to gravitate to unlimited pricing, and then swing back to usage-based models. The evolution of pricing models for fixed and mobile bandwidth will offer challenges to some businesses, but opportunities for others to differentiate themselves with greater transparency or by developing new features and products that implement some of the ideas above.

Joe Weinman leads Communications, Media, and Entertainment Industry Solutions for Hewlett-Packard. The views expressed herein are his own.

Image courtesy Flickr user mugley.

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  1. These are all great ideas to save you money when tiered data takes effect. Too bad it’s going to happen long before any of them are around.

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  2. Nathan D. Ryan Sunday, December 12, 2010

    It would also mean a de-emphasis of XML and other “syntactically heavy” forms of data transfer.

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  3. ” the cost per bit (stored or transferred) is approaching zero” – while I agree the rate structures currently in place and proposed do not directly relate to the actual cost, the cost for capacity will never be zero or even really that close to zero.

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  4. Aaron, well the cost is certainly declining monotonically due to continued new technology, e.g., 2.5G, then 10G, then 40G, and now 100Gbps ultra-long haul facilities, but presumably will never be less than zero.

    However, my point in bringing it up is that even if it is true that costs per bit are declining, that is probably not the right useful metric in terms of determining whether pay-per-use trends will take hold, because bandwidth demands per user (or endpoint, given M2M) appear to be increasing faster than costs are declining.

    As an example of discussions on cost-per-bit, see: http://continuations.com/post/132871055/the-continuing-confusion-about-free

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    1. “bandwidth demands per user (or endpoint, given M2M) appear to be increasing faster than costs are declining.”

      Curious if you have a source for that based on actual ISP costs rather than cost to end-users.

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      1. Faolan,

        I just heard a major global telco a week ago indicate that cost per bit was declining at 20% per year. Most of the traffic studies I’ve seen such as Telegeography, Cisco Visual Networking Index, and the Discovery Institute/George Gilder/Bret Swanson Exaflood analysis all show total traffic at 50-60% CAGR for the foreseeable future. Mobile traffic is also growing quickly, accelerated by smart phones, now video capable, plus LTE deployments. The Mary Meeker / Morgan Stanley Internet Trends reports let you pick any metric you want: GPS chipsets, Wi-Fi chipsets, 3G, bluetooth, subs, users, all show huge ramps. There are very large numbers being thrown around on M2M…just search on trillion AND M2M.

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      2. Juniper’s recent white paper “The Internet Breaking Point: Why Economics Threaten Everything” goes into this as well, based on predictive models for BW costs and demand. Here’s their conclusion:

        “The insatiable demand for increasing traffic places immense pressure on the Internet. Predictive models examining industry cost structure makes it readily apparent that service provider profitability is under assault by this demand.

        “Internet traffic is expected to grow seventeen times from today’s traffic levels, representing a 27% CAGR, to a startling 160,910 petabytes per month by 2020. Economic analysis suggests worldwide aggregate service provider revenue derived from Internet services will climb by a meager 5% CAGR over the same period. Yet, the network investment required by service providers to sustain the onslaught of new traffic is staggering. Presuming historical levels of innovation continue into the foreseeable future, capital equipment costs still grow at a robust 21% CAGR to $268 billion and operating expenses will increase to $644 billion by 2020. Service providers with aggregate revenue
        of only $425 billion will be unable to justify the nearly $1 trillion of required investment.

        “The Internet breaking point – the point at which the industry’s total revenue is entirely offset by the total investment in capital equipment and operating expenses – may occur by 2014. In sharing this study’s findings with customers, multiple providers noted their Internet businesses were already unprofitable.

        “An entirely new approach is required to address the economic breaking point. Perhaps the greatest opportunity to overcome this economic challenge and create a new network lies with the original driver itself – innovation.”

        That’s scenario A. Scenario B is that we keep on using the Internet primarily for viewing pictures of cute kittens, in which case nothing needs to change.

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  5. I very much doubt your rationale for this to happen. Almost every point you mentioned is a step back i.e. smaller screens and lower frame rates and lower resolution video. There will always be a unlimited bandwidth option for consumers who are prepared to pay today’s prices and that ties in with the cost per bit approaching zero.

    A metered model might be appropriate to grow the market to people who don’t use the Internet from home at the moment and who can be cost effectively reached through existing infrastructure or wireless. The broadband market is plateauing after all.

    ‘the amount of bandwidth per user is approaching infinity’, very much not true. If you flatline your 8MB(for arguments sake) home connection day in and day out I want to see you consume all that media. A person working regular hours with some sort of social life can not watch that much HD video in a month and I doubt someone with nothing else to all day can even manage to do that.

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    1. HC, as I pointed out in Part I, I am referring to broadband wireline and wireless services, and in Part I, pointed out that under conditions where usage varies widely among users, they are active, rational, self-selectors, and investment is not trivial, pay-per-use tends to become prevalent. These conditions are now occurring in both wireline and wireless. I assume you mean an 8 Mbps connection…that is roughly one HD unicast channel. To elaborate on my comments yesterday, households often have more than one user, “family TV” is increasingly rare, but you also will have ambient flows such as video surveillance. On the wireless side, a quick look at rate plans shows, for example, a marginal price of $10 per Gigabyte, so downloading a 4.7 GB DVD over 3G would cost a few times buying it at the store, including gas to drive there. A 50 or 100 GB Blu-Ray would be $500 to $1,000. The bottom line is that dispersion in usage and limited resources relative to the apparently insatiable demand for b/w are causing wireline and wireless operators to consider or introduce non-flat-rate plans. This post is a thought experiment regarding potential implications.

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  6. I’m a bit worried about this whole notion of Congestion Charges and pay per bit. I know that you need to keep people in check but I also think that limiting people to when they can access the Web is a step backwards and shouldn’t be done under any circumstance. I feel that maybe tiers with different pricing structures might work, but I’m still wary of even that.

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  7. this article is poisonous

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  8. Did the author actually look at places such as Australia or New Zealand where pay-per-use has been in place for years?

    Obviously not since almost none of his predictions occur in either of those countries. Note that both countries are English speaking and people look at the same websites as we does.

    For one thing quotas will be at least 50GB/month (probably a lot more than that) which is more than enough for a few TV shows or half hour video calls to grandma each day. 90% of customers won’t go anywhere near their quota.

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  9. Very interesting read, and also somewhat scary. While I can see advantages in data consumption limitations (many of the efficiency improvements you list, for example), I cringe at the thought of having to keep an eye on my data consumption. What worries me, although it may be outside the scope of this article, is the implication I get from this that the industry is looking at ways to fit the increasing data use into the current network, rather than (or more than) investing resources into improving network efficiency so these limitations will not be neecessary to begin with.

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  10. light users will continue to be screwed in pricing… think you’re going to save money here? “think” again

    and heavy users… you know.. the people who actually use the internets and not merely the interweb… will get extra screwed

    a new way to screw more money out of people by offering them less

    hooray?

    I only download from usenet those shows to which I ‘subscribe’ via my isp as all of the dvr “options” suck. My $8/mo for astraweb is waaaay less annoying than the much more than that fios wants for HD DVR, or the hassle of PVR

    When I pay for content I expect no commercials.
    Want to run commercials? then stop charging

    I won’t tolerate both.

    .. with the new pricing model expect higher prices, more ads of every flavor, and less user control

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