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We should promote broadband pricing innovation

Experimentation with pricing structures will let the broadband providers -- and their customers -- test new business models without regulatory interference

By Daniel A. Lyons
June 18, 2013 08:17 AM ET

Computerworld - Internet providers have invested several hundred billion dollars in the past decade to build America's broadband networks, and analysts expect them to spend an additional $30 billion each year to keep up with growing bandwidth demand. This growth has left providers wrestling with how to price Internet access in order to fairly distribute those costs among their customers.

Some providers have adopted speed-based service plans, in which a customer can purchase faster service at a higher price, while others are exploring usage-based plans, which offer consumers a fixed amount of data each month for a fee. Both of these strategies are forms of what economists call price discrimination: a strategy to charge more to those who are willing to pay more for a service. These pricing trends are evolving, a process that should be encouraged. The Federal Communications Commission should resist pressure to regulate Internet pricing more directly by favoring one pricing model over another. Providers -- and their customers -- are fully capable of feeling out which plan best serves them.

Several commentators have argued that usage-based plans likely benefit most consumers, by allowing providers to recover more of their costs from the customers who use the network the most. In the process, usage-based plans may help make entry-level broadband service more affordable for low-income consumers.

But some consumer groups oppose usage-based pricing. Public Knowledge Vice President Michael Weinberg recently endorsed speed tiers as a superior form of price discrimination. Weinberg argues that charging consumers different prices for different Internet speeds would achieve many of the same benefits as usage-based pricing but would be less harmful to innovation and less susceptible to anti-competitive abuse.

In truth, both approaches have strengths and weaknesses. But it is unclear that speed-based pricing is superior for most consumers, or that the FCC should discourage usage-based pricing as an alternative (as Weinberg suggests). Each is simply a strategy for dividing broadband customers into different segments. Speed-based pricing does so by creating tiers with varying quality of service, whereas usage-based pricing offers tiers with varying quantity of service. This subtle distinction impacts consumers in important ways.

For example, speed-based tiering can help identify those customers who use more advanced Internet applications. Services such as online gaming and videoconferencing often perform less than optimally at low speeds. If a provider uses speed tiers in its pricing, it can charge higher prices to consumers who use such advanced services, and less to consumers like the grandmother who only wants to check her email and browse the Web. But speed tiers leave less room to sample more advanced services before paying. For example, if Grandma wishes to try to video chat with her grandchildren, the connection is likely to be pretty choppy unless she first upgrades to a higher-speed tier.

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