Google Fi Shows Value of Metered Pricing, Ironically

Google Fi might just have inadvertently managed to add some economic clarity to consumer bandwidth pricing, even if it is not so obvious.

Fi, the new Google mobile service in the U.S. market, provides unlimited domestic texting and voice usage, a rather standard policy now in the U.S. market. The major mobile providers now offer that feature routinely: domestic voice and texting now use “flat rate, all you can eat” retail pricing.

So you might argue there is little innovation on that front, for the moment, even if Google Fiber disrupted U.S. price-value metrics in the fixed network Internet access market.

Fi also charges for Internet access on the basis on usage: $10 per gigabyte consumed in a billing period. Again, that does not seem unusual. Virtually all major data plans are based on similar buckets of usage.

Where Fi is different is that, if a user does not consume it all, a rebate is paid back to the customer. That is the one area where Fi represents an innovation. The concept extends an idea T-Mobile US has put into place, namely allowing users to “roll over” data paid for in one billing period that is not used in that period.

AT&T has a modified plan that allows unused data allowances to roll over for one billing period.

Google Fi is the first to simply give the customer back his or her money when data allowances are not used.

The economic clarity is that a fundamental principle of economics is supply and demand equilibrium. In other words, a “fair price” (some might say the “right price”) for any product is the “market clearing price” where people want to produce as much as people want to consume.

In other words, when prices are at market clearing levels there are no shortages and no surpluses.

When prices are set “artificially” high or low, imbalances develop. In the water-scarce U.S. west, enforced low water prices encourage users to consume more when one would prefer conservation of the resource.

Capping apartment rents leads to lower than optimal production of new housing units, as pro-consumer as “rent ceilings” can appear.

Conversely, setting guaranteed high prices encourages overproduction.

So here’s where Fi might be profoundly important: by essentially operating on a “pay only for what you use” basis, Fi also is operating on a “metered usage” basis: consumption and price are in a linear relationship.

Contrast that with the way voice and text messaging now are handled: non-linear relationships between consumption and price. Why?

Supply and demand.

Voice and texting consume almost no bandwidth on networks, and people are demanding less of those products. There is, in other words, an oversupply of voice and text capacity, at the same time there is falling demand. Under such circumstances, offering “unlimited usage” causes no problems, since customers are self-limiting how much they want to use the resources.

Internet access providers have argued for decades that “unlimited usage” was a “right value-price” relationship when demand was low (early days of the Internet, using dial-up lines), and service providers were attempting to stoke usage (gain subscribers).

All that gets turned on its head after the visual web and high speed access develops. Then the value-price relationship is upset. There is too much demand when prices are set too low.

Metered pricing should lead to a better balance, even if, traditionally, many users and app providers have preferred unlimited usage.

And that is the presently-unique approach taken by Google Fi. Its “pay only for what you use” plans actually create incentives for users and suppliers. Users will pay more attention to their consumption, while suppliers will be able to benefit from additional units of consumption.

Ironically, either metered or unlimited plans can be “good for users and suppliers” under different circumstances. Unlimited plans can help grow demand for a new product, but also work when supply is abundant and demand is falling.

In other words, “unlimited” consumption plans work when new markets must be stimulated or older markets are naturally leading to declining demand.

Metered consumption might be the market clearing mechanism for established and strong markets.

In that respect, Fi might have the best approach.