Slate Informs Its Readers That Confusing, Unnecessary, Anti-Competitive Broadband Usage Caps Are Simply Wonderful

from the in-defense-of-price-gouging dept

For years we've explained that broadband usage caps are a horrible idea. Not only do they hinder innovation and confuse the hell out of customers -- but they simply aren't necessary on modern, intelligently-managed networks. Caps are an inelegant and impractical way to handle congestion, and U.S. broadband consumers already pay some of the highest prices for broadband in the developed world (2015 OECD data), more than covering the cost of running a network (as any incumbent ISP earnings report can attest).

And while the mega-ISPs consistently try to argue that usage caps are about fairness, most people are able to see them for what they really are: aggressive rate hikes imposed on uncompetitive markets to protect TV revenues from Internet video.

But according to a strange article over at Slate by Eli Dourado, we've got it all wrong, and caps are secretly "good for most consumers and for the Internet." Like the countless other usage-cap defending missives I've seen in fifteen years of writing about broadband, Dourado's piece begins with the premise that there's something inherently wrong with the current, flat-rate pricing model most broadband users are comfortable with:
"The “equal dues” approach has a critical flaw: It leaves many households with no Internet access at all. For example, suppose “equal dues” work out to $50 per month, not far from the average cost of broadband today. Some households with limited use for the Internet may only value access—and be able to afford it—at $30 per month. One example is a grandmother on a fixed income who uses email but doesn’t watch online video. Under the equal-dues approach, the grandmother is priced out of the market. She has to go without Internet access altogether."
But broadband service isn't expensive because of the type of pricing the broadband industry employs. It's expensive because of the lack of competition in the last mile. As a result, when companies like Comcast do impose metered billing it's not some kind of Utopian vision where light users pay only a little and heavy users pay more in the name of fairness. It's usually a system where the existing, already expensive flat-rate pricing is layered with entirely new annoying fees and surcharges for all (conveniently just as Internet video spikes and 4K video streaming arrives). In the real world, the end result of usage caps as the industry envisions them is everybody winds up paying more than ever.

Dourado's entire narrative is based upon a fantasy: that without outside incentive (regulators or competition), ISPs want to reduce revenues by charging light users less money. That kind of price competition simply doesn't happen in the broken U.S. broadband market unless you're lucky enough to live in a handful of Google Fiber or municipal broadband markets where incumbent ISPs are spurred to action. Still, Dourado at least provides entertainment value by trying to claim usage caps will be great for the nation's grandmothers:
Grandma will pay less than $30 per month for her light email usage, and her granddaughter who streams movies all weekend will pay more. Metering, therefore, is a way of expanding broadband Internet access to a wider portion of the population.
Except that's simply untrue. Because most people lack the option of more than one or two ISPs (75% of homes lack the choice of more than one ISP at speeds of 25 Mbps or higher), there's no downward pricing pressure for grandma. This fantasy narrative that usage gaps will somehow lower granny's broadband bill is utter nonsense, yet it's an argument ISPs like AT&T have been leaning on for years. Amusingly, it's a missive that has at times even managed to annoy the nation's actual grandmothers who are smart enough to know when they're being ripped off by duopolists.

Dourado only really offers up one other argument in favor of usage caps, and it's equally specious. In short, Dourado tries to claim that flat-rate pricing somehow results in stagnated broadband investment, whereas usage caps, meters and overage fees will somehow encourage and stimulate the necessary upgrades of tomorrow:
Think about it: If everyone paid equal prices for unlimited data plans, cable company revenues would be limited by the number of people willing to pay that equal rate. The only way they could increase profit would be to reduce their costs, for example by neglecting maintenance or delaying upgrades. As a result, we would expect the quality of broadband networks to stagnate."
We'd expect that? We operate under flat-rate pricing now and, despite the desperate sock puppetry of some industry-tied think tanks busy trying to demonize net neutrality, investment has been just fine. That's because companies see very healthy profit margins under flat-rate pricing; if there's a reason they don't put enough of that money back into the network it's not because of the pricing model being used, net neutrality, or the bogeyman. It's because they lack the competitive incentive to do so.

But Dourado fails to acknowledge the lack of competition in the market as the primary culprit behind pricing and investment inequality (in fact the word competition isn't used once in the entire story). And his only "evidence" of the purported investment benefit of caps is the totally unsupported claim that upcoming DOCSIS 3.1 cable industry upgrades will slow if the cable industry isn't allowed to price gouge:
Again, this isn’t theoretical. The DOCSIS 3.1 cable modem standard, just now being finalized, will allow downloads over the existing cable network up to 10 Gbps (10 times faster than Google Fiber). Cable companies are now facing a choice as to how fast to roll out support for DOCSIS 3.1. As the theory predicts, Comcast, now experimenting with metering, is planning an aggressive rollout of the new multi-gigabit standard.
Here's the thing though: nearly every cable operator will be upgrading to DOCSIS 3.1 starting next year because it's relatively inexpensive way to obtain huge performance improvements. It's an upgrade that, thanks to its efficiency benefits and low cost, will likely occur even in uncompetitive markets, and usage caps have nothing to do with that. Comcast's currently promising to upgrade 18 million homes with fiber to the home by the end of this year. Only about a dozen or so Comcast markets are capped. How is it logically consistent to thank usage caps for this investment?

There's certainly an argument to be made for more creative, flexible usage-based pricing options where the lion's share of users potentially pay less -- if they use less. But that kind of model is simply not happening in a broadband market without real competition. To suggest that we can somehow leapfrog this competitive logjam, build better networks and help the nation's grannies -- all by letting ISPs charge users more than ever -- is aggressively and obnoxiously misleading.
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Filed Under: broadband caps, competition, data caps, differential pricing, innovation


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  • identicon
    Anonymous Coward, 23 Oct 2015 @ 8:32am

    $30 is Mr. Ivory Tower's idea of Internet For the Poor?

    $30 is a weeks groceries, a "good faith payment" to keep the electricity on for another month.

    Add on fees of $10 for modem rental, $100 "activation" and $8 "let's see if they notice this," plus 10% annual rate hikes, and what do you have?

    Everybody's paying even more for Internet. Cable CEOs buy another house in Tuscany, and "Grandma" is still priced out of the online world.

    reply to this | link to this | view in chronology ]

  • icon
    Sneeje (profile), 23 Oct 2015 @ 8:44am

    Love to see the citations...

    I would be overjoyed to see ANY example of comparable industries where some big event happened and they lowered prices. You certainly couldn't use "deregulation" of [insert industry here], as to my knowledge and despite promises to the contrary, no significant price drops have ever occurred.

    reply to this | link to this | view in chronology ]

  • icon
    DannyB (profile), 23 Oct 2015 @ 8:45am

    Do they think people are that stupid?

    China's Ministry of Culture really needs to figure out that people in the internet age don't believe a word they are saying.

    Ooops. I meant Slate.

    reply to this | link to this | view in chronology ]

  • icon
    sorrykb (profile), 23 Oct 2015 @ 8:54am

    Per the Slate article, Eli Dourado is a research fellow at the Mercatus Center at George Mason University and director of its technology policy program.

    [boggles]
    How could the a person in such a position be so misinformed?

    [googles]
    "The Mercatus Center was founded and is funded by the Koch Family Foundations."

    Oh. Never mind.

    reply to this | link to this | view in chronology ]

    • icon
      sorrykb (profile), 23 Oct 2015 @ 9:36am

      Re:

      (I really need to work on my copyediting skills. All those words that other people leave out seem to be reappearing in my comments.)

      reply to this | link to this | view in chronology ]

    • icon
      Mike Masnick (profile), 23 Oct 2015 @ 10:31am

      Re:

      FWIW, I actually think Eli and Mercatus do some really good work on a variety of issues, especially around copyright and patent law. But on this I think he's wrong.

      Amusingly, I'm working on another post about something Eli wrote that I think is really good, concerning software patents. But just because you're right in one area, doesn't make you right in all areas.

      reply to this | link to this | view in chronology ]

  • icon
    John Fenderson (profile), 23 Oct 2015 @ 8:55am

    If the pro-cap arguments were actually valid

    If the pro-cap arguments were actually valid, then the broadband providers would do something a bit different because it would better accomplish the aims the arguments state:

    They'd start charging a per-MB rate on the amount of bandwidth you actually use. That they don't do this and instead opt for inherently obnoxious usage caps tells me that even they don't believe these arguments.

    Also, speaking personally, billing based on straight-up metering is not evil (even though I prefer flat-rate pricing in all things, not just internet service) and I could live with that. However, usage caps are evil.

    reply to this | link to this | view in chronology ]

    • icon
      DannyB (profile), 23 Oct 2015 @ 10:07am

      Re: If the pro-cap arguments were actually valid

      There is a reason electricity isn't priced flat rate. What you pay is primarily two components:
      1. cost to build and maintain the connection to your house
      2. cost to generate electricity

      There is a reason why internet SHOULD be priced flat rate. What you psy is primarily one component:
      1. cost to build and maintain the connection to your house
      (2. is there some substantial cost to route packets I am unaware of?)

      The cost of packets traversing the network is a very minor cost. There is no huge 'generation' cost. Just cost to keep all the equipment working and upgraded. Routers. Wiring. Powering that equipment (unaffected by how many packets).

      As for my question above, I am unaware that there is any major cost (like electricity generation) for merely routing packets to/from a backbone. There may be a cost. But I suspect it is vastly less than the cost of keeping the local connection to everyone's home built and maintained.

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 23 Oct 2015 @ 9:32am

    This is innovation in reverse and we actually have history to back this one up.

    When we had an influx of dial-up internet providers all competing with one another for the same customers because there were no exclusive markets, you saw your minutes go up gradually and consistently until minutes were replaced by download caps which also contributed to rise gradually and consistently until everyone was offering unlimited minutes with unlimited data. Then the prices started to go down.

    Instead now we have limited exclusive markets and are watching prices go up and unlimited data being replaced by data caps. If the trend continues we'll start to see minutes being reintroduced in a few years, all done in the name of the customer of course.

    I can see the pitch now...
    "Why tie yourself down in hard data caps when you only spend a couple of minutes checking your email or updating your Facebook status? You don't need 30gigs when all you need is 30 minutes. This is perfect for those who have a limited amount of time and just want to spend a couple of minutes on the internet."

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 23 Oct 2015 @ 11:45am

      Re:

      What private companies that wish to enter a market need to do is to find ways to inform the public (ie: through political ads) of what's preventing them from entering the market. A political ad can go something like this (and would depend on the specific circumstance).

      "We would like to provide broadband service to your community but such and such laws (or politicians or regulators) are preventing us from doing so. These laws are designed to keep competitors out of the market and to keep your broadband bill high. Tell your (local, county, state, federal, or whatever) politicians to repeal such and such laws. This bill was voted for by (list of politicians that voted for the bill). By allowing competitors to enter the market your community will receive the benefits of better broadband for cheaper prices.

      This political add was sponsored by (name of company wanting to enter the market)".

      The thing about this political ad is that it's honest. Yes, the company is putting out the ad in their own interests (to provide broadband and make a profit, it's a for profit company and not a charity) but, at the same time, the ad explains how the community also benefits (more competition = better service and better prices). Both are true. Companies who wish to enter an entrenched and artificially limited market should put out honest political ads explaining the situation to the public so that the public can be aware of the situation and respond accordingly. Make no mistake that the companies putting out these adds should not pretend that they are doing so to be altruistic (I think Uber is actually a good example of how the ads should be put out and Uber makes it very clear in how they present themselves that they are a for profit business and not a charity nor do they have some altruistic motive, sometimes even to the point of getting people upset), doing so would make the company look dishonest, just that allowing this company to compete would be mutually beneficial to both the company (which is why they're doing it) and the community (which is why the community should allow it).

      One of the issues that arises is that broadband providers often agree to monopolize different communities. For instance one provider will agree to monopolize one community in exchange for not attempting to enter into another market. By working together to take different communities it makes it less likely that there will be a provider that serves one market that will wish to enter another market because then they face the threat of having the provider that serves the other market try to enter into their market.

      reply to this | link to this | view in chronology ]

  • icon
    DannyB (profile), 23 Oct 2015 @ 10:08am

    Hey TechDirt . . . clicking Preview is broken

    It seems that clicking Preview to see your comment before posting is is broken. Tried it in two browsers.

    But clicking Submit works if you don't need to preview.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 23 Oct 2015 @ 10:18am

    Everything about this op-ed is overblown

    As sorrykb pointed out:

    "Per the Slate article, Eli Dourado is a research fellow at the Mercatus Center at George Mason University and director of its technology policy program."

    Reworded:

    "Per the Slate article, Eli Dourado is a Mercatus Center research fellow and director of its technology policy program at George Mason University."

    Which is much like saying:

    "This Anonymous Coward is the director of technology at his house at in a major US city."

    Eli Dourado lives in an educational fantasy world. In the real world, any rate hikes regardless of where they come, from directly affect me and my family and I find it offensive.

    reply to this | link to this | view in chronology ]

  • identicon
    PRMan, 23 Oct 2015 @ 10:19am

    We already have price tiers

    Time Warner has tiers from 1.5 mbps to 300 mbps and the prices range from $19.99 to $109.99.

    No data caps required to meet all ranges.

    reply to this | link to this | view in chronology ]

  • identicon
    Mark Wing, 23 Oct 2015 @ 10:36am

    Wow, you called him a moron without calling him a moron. Personally, I think the entire site has been dumbing itself down for a while now.

    reply to this | link to this | view in chronology ]

  • icon
    Mason Wheeler (profile), 23 Oct 2015 @ 10:57am

    One example is a grandmother on a fixed income who uses email but doesn’t watch online video.

    I've never understood that term, "fixed income."

    As a professional computer programmer, I'm on a fixed income too: no matter what hours I work, I make the same amount. (When you're not retired, they call it a salary instead.) Except that if I wanted to, I could change my fixed income by finding other employment... exactly as our hypothetical grandma could. In fact, one of the hallmarks of the current generation of grandparents (the Baby Boomers) is that statistically they're working a lot later in life than expected and not retiring when they're "supposed to." (Which is putting a real squeeze on Millennials, but that's a whole other topic.)

    So what exactly is this "fixed income" people are always talking about that holds grandparents back financially?

    reply to this | link to this | view in chronology ]

    • identicon
      Miles, 23 Oct 2015 @ 3:57pm

      Re: Fixed income

      It's not the best name, but it does make sense. It refers to people on Social Security or other retirement (or disability), who are not really able to work to make [much] more. Their income is pretty much fixed. Or broken, depending on how you parse things.
      Not everyone retires early and could easily find another job or start a business or freelance. Or maybe she's taking care of some grandkids (or greats) because of a death in the family, or a deadbeat who abandoned their kids, or whatever.
      It's a legit phrase about legit situations. Yes, technically a salary is a fixed income, but you and I have a lot more options than some people.

      reply to this | link to this | view in chronology ]

  • identicon
    IP Lawyer, 23 Oct 2015 @ 11:13am

    Flabbergasting Why Slate would allow this

    This guy is a 'research' fellow at the Mercatus Center - a Koch based libertarian economic 'think tank.'

    It's safe to dismiss this as nonsense.

    reply to this | link to this | view in chronology ]

  • identicon
    Glenn, 23 Oct 2015 @ 3:24pm

    How much of their connection a customer uses has little to no effect on what it costs the ISP to provide service. If we paid the ISP what it costs them each month to provide the service, it would be much less than $10/mo.--regardless of the speed you're getting.

    reply to this | link to this | view in chronology ]

  • identicon
    Justme, 23 Oct 2015 @ 5:01pm

    Never enough. . .

    The thing is the same 8 megabit i pay for is also sold multiple time's over, not sure of the industry average but i have heard 10-12 times. So its not enough to get payed multiple times for the same bandwidth. . They also want to charge me extra if i manage to use my connection to my full 1/10 share!!

    Greed, Greed, Greed. . . .

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous, 23 Oct 2015 @ 7:13pm

    Eli Dourado

    Tell me he's not applying for a job as an ISP industry spokesperson.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 24 Oct 2015 @ 5:56am

    Caps on the phone? No phone here, especially after one of the kids made a 100 dollar local call. My cell phone will be history three years this spring. Want to put caps on broadband internet? No internet here either. And the way cable TV prices rise and channel availability goes down you can just cut that out too. My ISP/Cable TV provider owns Universal. Enough said.

    reply to this | link to this | view in chronology ]


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