Q&A: Robert Shapiro talks tiered pricing and the digital divide
One of the chief challenges for ISPs has been how to fund network build-outs to increase broadband speed and capacity without passing too much of the cost onto customers. The problem as many ISPs see it is that the demand for greater bandwidth comes from a relatively small number of users that consume bandwidth at a much higher rate than the typical consumer. Thus, argue the ISPs, the current pricing models that charge flat rates for users regardless of the bandwidth they consume are simply unsustainable. Some ISPs have tried to charge more money to high bandwidth users by placing caps on the amount of bandwidth each consumer can use per month, but these schemes have so far proven unpopular with customers.
Last week, economists Robert Shapiro and Kevin Hassett released a study through the Georgetown Center for Business and Public Policy that provided new suggestions for how ISPs can charge more to high bandwidth consumers and mitigate the potential of higher prices for the majority of their customers. Network World senior writer Brad Reed talked with Shapiro about what the plan entails and how it could help hold down broadband prices to attract more users in rural or low-income areas.
How do current pricing schemes inhibit some consumers’ ability to access broadband?
The spread of broadband is like the spread of any other information technology that came before it, like PCs or dial-up Internet access: It generally proceeds down the income scale as the price of the technology declines and its usefulness increases. This is normal process and it’s how computers spread from high to low income people. We see the same thing happening now in broadband and the critical thing to remember is that the elasticity to price increases for these technologies differs for different income groups.
Right now there’s a small percentage of people who currently account for a large percentage of large bandwidth use, such as gamers and consumers of large amounts of video. And for these large consumers, their demand tends to be relatively inelastic. They really want it and it has greater value to them. Now, as a general property, the lower the income someone has, the more sensitive they are to price. So anything that raises the price will reduce demand for broadband access for low-income users more than it will for high-income users.
So your solution is to relieve the costs for the majority of users by having the high bandwidth users pay more for service?
Essentially, yes. The problem is created by the fact that demand for bandwidth is rising so quickly and that demand is rising so fast that the providers are going to have to make large investments in expanding their infrastructure to avoid congestion. You might think that these investments could simply be financed by attracting more people to get access to the technology, and for the first four or five years of broadband availability the numbers of new people signing up were rising rapidly. But we’re closer to having a mature market now, and that means there are relatively few new people to be attracted and it’s not enough to finance the bandwidth demands of video streaming. That’s why the expectation is that somebody has to pay more to finance the build out of infrastructure.
If we use the standard pricing model that we’ve used in the past, a fixed monthly fee for everybody that only varies by the speed of the connection, then the price increases for the average user are going to be considerable… and could raise average monthly fee for broadband service to about $70. That would significantly reduce uptake rates, particularly among low-income people, but it would also slow down uptake rates among high and middle income people to a lesser extent.
If you think that universal access is an important social good… then you have to try to figure out a different pricing mechanism or model that wouldn’t have this adverse effect. So our solution is to put most of the burden on those people whose unusually high demand for bandwidth necessitates network build outs in the first place.
How is your proposal similar to or different from some of the “bandwidth caps” that companies such as AT&T and Comcast have been trying out?
Bandwidth capping is one model that’s being used and what we’ve said in our findings is that it is consistent with our general approach. However, we also say that flexible pricing does not necessitate that particular model. There are other ways to do this. One way would be to raise the high bandwidth consumers’ monthly fees based on their bandwidth use and to enforce pricing based on consumption. You can also charge content providers that consume bandwidth more than other content providers. So in the case of YouTube, you have an enormous consumer of bandwidth that doesn’t charge consumers anything to watch right now. If you were to charge them extra for their bandwidth consumption, they could develop a system where everybody has free access to five YouTube videos a day. And then if you want to consume more than five you pay a charge. The main goal of the flexible pricing model is to impose the additional costs associated with building out infrastructure on high bandwidth users. If you allow the flexible pricing to handle those costs instead of merely using fixed monthly fees, it will have a much better effect on the digital divide. If you don’t lower the costs for the average user then the digital divide will remain with us.
Let’s get into some specifics. For the sake of simplicity let’s use a market model where you’ve got 100 consumers who are each paying $100 for Internet service and where 20% of the users consume 80% of the bandwidth. Under your scheme, how much more would you charge the largest users and how much would that save the smallest users
So you’ve got 100 consumers paying $100 a month which means that you need $10,000 total a month to keep the system going. But then let’s say you find out that you need an additional $5000 a month because you need to build out new pipes. So now you’ve got to spread $5,000 around to your customers to help pay for the upgrade. Now say the top 20% of users would then get 80% of that increase, or around $40 extra per month for high bandwidth users. The prices for the rest of the users, on the other hand, would remain relatively stable.
- By Brad Reed | NetworkWorld
- Naiomi Solomon
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