Why Metered Broadband Is Bad for Microsoft, Google & Us

34 Comments

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.

34 Comments

John

This will never happen. 5 Gb is not possible to stay under for 75% of internet users I’m guessing. Then what will we have to do? Go to 20 Gb a month at an insanely high cost?

Just because the major players don’t want to upgrade their hardware they need to charge by the byte? Ridiculous. I already hate my ISP and think they are overpriced for the lackluster service with probably the most outdated hardware known to man, I wouldn’t want to hate them more.

Allan Leinwand

@martin – Have you ever know of anyone to pay overage charge to BT? Do they just get sold the upgraded package?

@Ryan – why won’t you get Skype and Flash on your mobile without a new pricing plan? Last I checked there are lots of VoIP apps for cell phones out there and being developed. Also, Flash is available on some of the pricier cell phones already, I think.

@Alex – I’m waiting for TV to go to usage-based pricing models too. For $x/month you get N hours of TV, I can see it now. But, as we all know that would kill TV viewership. And, as I have been saying, I think this usage-based pricing will have a dramatic impact on Internet usage.

@DMNTD – Agreed. We’re already paying too much. The service providers are bloated and are using this pricing model to extract more money from the consumer instead of trimming their business for profitability.

@Reed (Dave) – MSFT can not like this much at all. I’m hoping that they and the other large content providers stop usage-based pricing in its tracks.

@Alex – I could not agree with your last paragraph more.

Alex Berger

Reed – when that same grandma pays $.50 for her bandwidth consumption and the meter starts at zero we can talk about it being a halfway intelligent option. Your argument doesn’t hold up water when applied downward in the same way you’re ever so willing to apply it upward.

That delusion false-capitalistic perspective on corruption is exactly why our financial system is in the condition it’s in right now. It’s all well and good, but the result is always the same – that “open” market you seem to magically think will happen never does and when the shit hits the fan the ra-ra free market boys who’ve milked the system go running to mommy and daddy for a new car, Christmas money, and warm glass of milk.

Meanwhile establishing a state of the art high bandwidth web infrastructure and getting every American possible online should be our top priority. One on-par with the creation of the rail system and international highways in period following the Industrial revolution.

Reed Hunt (aka Dave Asprey)

@Alex – Um…what’s wrong with politicians taking bribes from telcos? That’s how it’s been for all big industries since 1933. The government exists to extoll the benefits of competition, while protecting corporate interests from too much of it. The only way to know which companies to protect is for politicians to measure bribery levels. It’s just basic economics.

Interesting that nobody objects to paying for cloud services on a usage basis. Many of us pay for web hosting accounts that have usage based bandwidth pricing, with a set rate for a reasonable number of gigs, and a burst rate above that. Why do we object to end user capped pricing but not to web hosting pricing? Because the cap is high enough that it doesn’t matter to most of us with $10/month plans at dreamhost.

And why haven’t we talked about the fact that outside of most larger cities, the majority of 802.11 home installs aren’t even WEP protected? I can’t imagine the headaches an ISP would face when grandma calls to say she only sent 2 emails and surfed a bit, but had 100Gb? Who will do the work to figure out that someone else used the bandwidth?

This kind of pricing would legitimize lame claims that using open wifi is actually theft.

On the positive side, this gives each of us with capped plans the ability to have legal claims against spammers.

Perhaps we could make claims against every auto-updating service on our computer about which we were not legally informed. Imagine the class action lawsuits against iTunes, MSFT, and Symantec as hordes of users who thought they paid $50/year for “free updates” realize that they aren’t free anymore. Did the click-through licensing agreement state that? Some did, some didn’t, I’d imagine. Software players should be screaming about usage based pricing as much as the content providers.

And let’s think, which largest software company is also a major content provider…Microsoft. They have the most to lose from this, and enough money to fix it, if only their software guys spoke to their content guys…

DMNTD

Obviously your in or your out..if I pay to be limited it better be above 100g level. I think its disgusting that this mantra “Like other large businesses, Internet service providers are looking for ways to extract more value from their customers.” is somehow reasonable thinking!

YES profit is a wanting ambition BUT WHEN IS ENOUGH, ENOUGH? Bottom line I will not condone such ignorance…WHY should I get even poorer so THEY can get even richer..nope, not on my watch. I opt out. Face it, no amount of pretty talk ever saves these vultures.

Alex Berger

We are finally – after what, 15 years? Recovering from the royal scam that has been the cell phone industry. This is no different. The arguments for it are the same, the impact will be just as bad.

It’s abusive, and counter to consumer’s rights, and the best interests of the industry as a whole.

Further, it’s similar to the TV model – how on earth can they logically justify charging us for the hardware, then the right to use/amount used, while diluting the service received by spam, advertising and the like. TV is a ripoff and the fact that in this type of structure I have to deal with, sort through and pay for a service where 80% of it is forced.

The only way this looks like a good idea, is if you’re a telco company or a politician taking a bribe.

Ryan

This does suck, but what other way is there to sustain a future economy as everything moves onto the net?

I want Skype and Flash on my iPhone(the complete net in the palm of my hands not a hobbled one), but that wont happen without metered bandwidth plans.

The plans need to be generous though (500GB for 50 bucks).

martin

@Mr. Bill – I agree there is an ethical aspect to this. I’m currently working remotely in the UK and the local provider (BT) implements a DSL usage cap with a hefty overage charge but provides no way to determine your use within a month. Miss one warning email and you are billed, period. It’s quite an unpleasant experience – that iTunes update? Hefty. In their defence, there is an top-tier unlimited plan available but it’s pricey.

from bt.com:

[…]
5. What happens if I exceed my monthly usage allowance?

If you exceed your usage allowance for two months in a row we will charge 60p for each excess GB (gigabyte) you have used (rounded up to the nearest GB). We won’t charge you for the first month’s excess usage, but we will keep charging if you carry on exceeding your allowance in the following months. This charge will appear on your BT bill.

There is no monthly usage allowance for Option 3 customers and you can enjoy unlimited usage for no extra charge subject to the Fair Usage Policy.

6. How do I know if I have exceeded my monthly usage allowance?

We will email to tell you if you exceed your usage allowance and warn you about our charges if you do it again. If you exceed your usage allowance in the next month, we will email you again saying what our charges are (see point 5 above). If you choose to upgrade to a higher usage package after your first usage warning email, we will waive the charges. You can upgrade either online or by calling the number given in the email we send you.

[…]

Doc Doc

@ Ralph.

The problem with the current Google muni wifi stuff is that it isn’t good enough quality to be interesting as a replacement for a real SP.

If they were to build WiMax or LTE network to compete with SPs, they end up with all the infrastructure costs of the incumbents, except for perhaps a reduced last mile cost because of a wireless rather than wired solution. Shortly they become an incumbent, which is not a very good place to be.

The risk to Google is that they will end up with largely the same low margin physical plant business as the SP – only with the “last-mover” advantage of being able to use the latest network gear and technology to reduce costs.

If you were Google, would it make sense to move from a high margin, lightly regulated advertising business to a lower margin, physical plant business that requires a lot more bodies to operate? It only makes sense if they can get enough additional revenue to offset the costs.

We are moving from walled gardens to dumb pipes, both in the wired and wireless worlds. As SPs lose the walled garden revenue, they will need to make it up through increasing the price of dumb pipe. The fairest way to do that is to charge by the byte past some medium level of usage.

Doc

Allan Leinwand

@Jake – I’m not really counting on the FCC to legislate us out of usage-based pricing – it’s not really their place to define business models. I’m pretty sure that any new legislation in this area would also lead to innovation around it (Hmmm – new business that needs funding thinks the VC :)

@Mr. Bill – Agreed.

@Doug – Spot on. For those overseas with usage-based pricing: do you have a bandwidth meter application provided to you by your provider?

@Graham S – Don’t feel too burdened by the mix of issues. The US (and I suspect many other countries to follow) are headed straight into the same boat you’re in. It just means more money for service providers to support their bloated and inefficient organizations.

@Aswath Rao – I am not sure you are in a position of leverage to demand higher speeds, unfortunately. According to the anecdotal data I have from others around the world, get ready for usage-based with limits that *restricts* your bandwidth if you cross the limits.

Aswath Rao

As a consumer I am willing to pay for BW (up and down) consumed IF I am offered higher upload speed, ability to host server and freedom to run any application. I recognize that they are in the network layer business and they should be allowed to charge the network layers resources I consume. Let me also say that uniform limit as implied by unlimited bandwidth does not allow for “long tail” use of the network.

Graham S

As many have already stated, many other countries have had this for years, if not the entire time that broadband has been available. The US is extrememly lucky that they have had so long without metered broadband. Here in Australia metered broadband is normal, unmetered is either rare, or extremely expensive. I pay AU$50 (AU$1 is ~ US$0.95) a month for ADSL2+ speeds (up to 24mbps) and we get 10GB peak (noon to 2am) and 20GB offpeak (2am to noon) from a provider called iiNet. Now compared to US plans this is an absoloute rip-off however here in Aus its one of the best plans you can get for the price, speed and quota. Now whether its the governments fault, location of australia (cost of pipelines to europe and US or whether its Telstra’s fault (main telco, incharge of Broadband infrastructure – who by the way have ridiculously expensive plans)I dont know, probably a mix.

Doug

Two follow-up comments based on the posts since my first one:

Jesse – Geographically, you’re right. A ton of land is yet to be covered by realistic broadband options (although I’d still argue that almost every square inch of this country is covered by something that can be construed as broadband). However, based on population alone, the vast majority of the US is well-covered by at least cable and DSL. These SPs know where to spend their money and they’ve covered the more heavily populated areas quite nicely. Only a small fraction of customers fall outside that footprint.

Allan – In your response back to John, you mention the bandwidth meter on the desktop or a Google gadget of sorts. It’s my contention that the SP cannot justify launching tiers until THEY offer such a meter. How will they deal with dispute resolution if someone is using their Google gadget and it shows X MBs downloaded when they’re billed for Y MBs? It is more than simply the responsibility of the SP to provide such a meter, it’s the only way it makes good business sense. I think they’ll step up with solid mediation and reporting.

Mr. Bill

Establishing Caps and charging for overages is not ethical when a broadband customer cannot tell how much usage is generated by installed software operating in the background accessing the software creators servers for updates, anti piracy purposes and port scans caused by web crawlers, hackers and other sources. Imagine if your cell phone began placing and receiving calls without you knowledge and without your ability to determine how many of you plan minutes it used. I am particularly concerned by random inbound traffic.

Jake

Allan, good question. Although if WiMAX ever gets off the ground and the iPhone continues to expand as a web consumption platform (tablets anyone?), then maybe we can get some IP delivery competition going. Clearly, it’s going to be awhile. Right now, I can only get last mile from Comcast. I just hope they don’t find out as I’m sure they would begin their rate hike regime ASAP…
The other wildcard is whomever gets put into the FCC Chair slot. Hopefully it will be someone who understands that IP access should be made a utility just as highways and water is — low enough prices that our economy can build exponential value on top of it.

Allan Leinwand

@James – have you seen the metered bandwidth and caps work? Do some folks you know actually pay less since they use less bandwidth or did hte pricing model basically raise fees for everyone?

@Doug – I basically agree with you. Usage-based pricing will drive consumers from the service providers. They will have won HUGE but have a shrinking customer base. How will Wall St respond when the number of homes passed for a carrier starts to drop? I want to fund the nextgen service provider using modern technology without the bloated overhead that the current service providers continue to want to support.

@Josh Miller – You may be right on many service providers. Still, I think Comcast gets that they are a media provider and that media can come over various pipes. Hence, their investment alongside us in GridNetworks (www.gridnetworks.com) for over the top video distribution.

@James – Great…I download one movie and I’m back on dialup. Somehow, I think the consumer wil fight that or pay more per month for their Internet service.

@Nick Stamoulis – I hope you are right. I’m afraid you’re wrong and usage-based pricing is (in the words of AT&T) “inevitable.”

@Aaron – I’m willing to bet that you’ll see large content owners build their networks to interconnect to the last mile at the distribution point in the network you’re describing. Remember that dark fiber Google is building?

@Ralph – Agreed. The problem is still the last mile. I’m not sure in the next 3-5 years WiFi/WiMax/LTE/etc are going to help on the scale we need before the consumer changes their Internet usage patterns.

@Jesse – Thanks – great points.

@John – in my previous post on this topic I suggested that all desktops will now need a “bandwidth meter” to show usage. I am sure there will be a Google Gadget for this soon (if not already).

@Naor – their business model is right – be great at connectivity. The problem is their cost overhead and the time it takes them to deploy evolutions of technology. So, my answer is for the service providers to trim down, accelerate technology deployments and focus on customer service. They own the last mile and that is valuable – build the right business and economic models to leverage that asset.

Naor

carriers are playing with such ideas since the late ’90, and for good reasons, the ability to provide bandwidth costs, and costs much (BTW re. WiMax etc. providing the same service level will require extensive investments as well) Telco’s,SP’s & Mobile Ops. always understood that with the flat-rate type of economy they have big problems in answering their investors expectations while staying in the “pipes” business. They’ve tried to find new services etc. but mostly failed and are stuck into the “piping” so from their perspective they have little choice as demand for bandwidth (for the normal residential) grow. I remember talking with carriers world-wide, billing methods and price plans were prepared but no one was willing to be the first, because of competition of course, it looks like things are changing now.
As a consumer, I don’t like it a bit, as a carrier- does anyone here have a better revenue model to offer them?

John

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..

Jesse Kopelman

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.

Ralph Haygood

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.

Aaron Glenn

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

Nick Stamoulis

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.

James

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.

Josh Miller

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.

Doug

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?

James

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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