August 18, 2010

Flat rate vs. Metered and Net Neutrality

At a high level, consumers are at ease when services are offered at a flat rate. Flat rate allows consumers to budget expenses. They do not have to constantly monitor usage lest they are faced with a large bill at the end of the month. Service providers can also benefit as well. There are no billing disputes and the related cost to resolve the dispute. Historically some industries have offered flat rate pricing and been financially viable. At the same time many other services continue to charge their customers based on usage.So it is worthwhile to try to categorize which services are amenable for flat rate pricing and which ones should be metered. With this characterization at hand I will argue that it is preferable that internet access be metered. I will further suggest that consumers will be in a stronger position to demand Net Neutrality.

I wrote an earlier version of this post as part of private discussion with JP Rangaswami.

Telehpny services:
For a long time, Bell Operating Companies have offered phone service with a flat rate option for local calls. Under regulated monopoly regime flat rate pricing is a viable option. The rates were approved by utility commissions and the RBOCs were assured a guaranteed rate of return. Since telephone use increased within the projected levels, RBOCs can safely predict the flat rate they need to collect from their customers. But more importantly, the usage pattern was more or less uniform among the residential customer base. As a contrast, inter state and overseas calls were billed based on usage. At least initially only a small fraction of residential customers made use of them. Even among them the usage pattern differ vastly. So there is no way one can come up with a common, equitable flat rate.

Public Transportation:
In many communities, commuters pay a flat rate for use of public transportation. Here again the usage is pretty much uniform among all commuters. Nominally commuters use the transportation system two times per day. Occasionally some may use it a few times more per month. But that is noise. So it is easy to stipulate a common, equitable flat rate.

Cable television charges a flat rate even though they have a stratified group of channels and different rates for different groups. This again reflects a stratified interest groups among their viewers and the need to reflect the need to be equitable.

Contrast these services to utilities like electricity or natural gas. Given the vast difference among the size of the residences and the machines that consume these energy sources it is safe to assume that usage patterns also will be widely disparate. Indeed it is very likely that the right tail will be so long and thick, it may not be feasible to come up with an equitable flat rate. Since high usage adds an extra cost to electric distribution infrastructure, many of them have progressively increasing rate structure.

So this brings us to the case of internet access. I think my dear friend and virtual mentor Tom Evslin popularized flat rate service when he was operating AT&T Worldnet Service. In one of his posts he has described his rationale for introducing flat rate price and the difficulties he encountered in making it happen. Being an analytic person, he also kept track of usage pattern. What he observed was that people didn’t dramatically increase their use, but clearly they liked the fact that the monthly bill was a predictable amount. He is a strong believer of flat rate billing system. I am not sure whether he still is given the change in usage pattern.

At that time most used desktops. This means they had to sit in front of a desk. So people logged on, stayed for a while and logged off. So only occasionally people used the connection for a long period of time. So there was a natural gap. Also most people used for email and browsing. So even the use case was uniform across the customer base. But now each household has multiple devices connected to the Internet on an always on basis. Some of them are laptops and tablets; and some them are devices that download media. Usage patterns change dramatically quickly as new applications are introduced. Since adoption of these new services is unevenly distributed, there is a wide disparity in usage as well. In an attempt to cut the heavy right tail, service provider try to throttle heavy users.

Net Neutrality:
Metered regime for internet access will naturally force ISPs to adhere to Net Neutrality principles. After all, ISPs can equitably recover the cost involved is carrying their customers’ traffic within their “subnetwork”. Additionally, the existing Bill and Keep regime with other “subnetworks” ensures that ISPs will not be further burdened when their customers increase their usage. Since the metered charge can reflect the true cost of operating the “subnetwork”, there is no need to distinguish between wired and wireless access networks.

As a netizen, I prefer we have symmetric access pipes to the Internet with unfettered access upstream and downstream, to run our own servers. I don’t think all these wishes are compatible to a flat rate pricing regime. I am willing to pay metered rate, whether ii is tiered or flat is a secondary question.

Posted by aswath at 04:02 PM | Comments (0)

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