Is Usage-Based Internet Access Inherently Unfair?

Though understandable, given the “no incremental cost” nature of much Internet content, information and applications, one might argue the way many think about the Internet is out of sync with the way they think about most other products they buy and use. 

Most of the criticism about usage-based pricing is that it somehow is "unfair." Much of the criticism takes the form of complaints about ISPs somehow taking advantage of consumers. It is argued there is no need for metering, for example.

In other cases, some critics imply or allege that metered pricing is simply a way for ISPs to make more money from their customers.

Are usage-based charging mechanisms inherently unfair and detrimental to continued development of the Internet? Some think so. And there is Internet precedent for such thinking, to be sure. AOL found usage exploded when it, and other dial-up access providers, shifted from metered usage to flat fee pricing.

One might object that this encouraged use of the Internet but at the “expense” of increased direct costs for Internet access providers. So there is good reason to argue that directly metered use of Internet access might actually discourage people from using the Internet.

But that isn’t generally the way usage is rated, these days. Consumers generally understand and seem comfortable with “buckets of usage” that provide cost predictability, but also allow users to buy less or more access in line with their needs.
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Usage based pricing might actually be a good thing for the overwhelming number of consumers, to the extent that lighter users pay less, heavier users pay more, and suppliers have accurate information about how much more capacity to add, where and when, which in turn ensures that investment is adequate to support anticipated growth of demand.

In fact, one might argue, the worse scenario is where usage and pricing are not related in some relatively direct way, as that distorts both demand and supply.

One frequently hears warnings about outsized growth of broadband access demand, the implication being that a crisis might develop if “something is not done.” Some predict that 1,000 times more mobile bandwidth will be needed by 2020, for example.

But both suppliers and consumers are rational about their bandwidth choices, when there is a clear link between consumption and out of pocket costs, and when consumers can act on that information.

Even if future supply were not an issue, it would still make sense to allow consumers to make choices about how much “Internet access” they really want to purchase, as that would send clear signals to suppliers about how much to invest in new capacity..

The problem with “unlimited” plans is that such retail pricing does not automatically send accurate supply and demand signals, and does not trigger the normal decision-making consumers always make when considering how much of any product to buy.

Nor do we often remember that demand for Internet access is dynamic, not static. Raise the price, and consumers will buy less, lower the price and they will buy more.
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To an extent, changes in device profiles also make a difference, as typical bandwidth consumption on a PC is far higher than on a smart phone or a tablet.

And users clearly are shifting Internet activities to smart phones and tablets. At some point, that could slow data consumption growth rates, even if, over time, bandwidth consumption grows.

Demand will grow, but probably less robustly than many forecasts predict. Mobile data consumption, even among smart phone users, is well below 1 Gbyte a month, according to Sandvine.


An analysis by the U.S. Federal Communications Commission suggested that, in the first half of 2009, the median fixed network (half used more, half used less) broadband user consumed almost two gigabytes of data per month. Mobile users consumed only hundreds of megabytes.

The 2009 study suggested that, overall, per-person usage is growing 30 percent to 35 percent per year. That doesn’t necessarily directly suggest how much an “account” or “home” might consumer, though.

The FCC study does not directly correlate a single person’s usage with the account details, as it is a “per-capita” measure. Such “per-person” measures are useful, but not entirely accurate if services are purchased “by location,” instead of “by person.”

n other words, a single user might have one access account, while a family might have three to five people sharing a single account.

As a rough metric, a typical 2.5-person household, sharing one account, might have consumed about six gigabytes a month, based on the 2009 data.

If the 30 percent annual growth rate remained intact through the end of 2012, that might imply 2014 median usage of about seven gigabytes per person, or 17.5 Gbytes per household account, using the 2.5 persons per home assumption.

Other 2010 estimates for current consumption were roughly in the same range as the 2009 FCC figures, adjusted for annual growth.  Comcast said in December 2010 that a typical user consumed about two to four gigabytes a month, far below the 250 gigabyte cap for a Comcast residential account.

That would be right in line with the FCC’s base of two gigabytes, and a growth rate of 30 percent annually.

Actual data consumption for most users of fixed network broadband is not all that high, in other words. True, demand will grow. But so long as price signals can be sent, supply should satisfy demand.

Why "Nobody" Worries About Phone Costs, Anymore

As recently as 2001, it was still possible to say, with a straight face, that “corporate phone bills are a budget buster.” A decade later, can it honestly be said that phone bills are a significant enterprise cost of doing business?

Possibly. Mobile calling now represents two thirds of all business calling minutes in the United Kingdom, for example. So one might argue that it is not voice calling costs, but possibly the cost of mobile subscriptions which are a significant issue for enterprises.

Mobile data charges might be said to be the big current issue, but even there, costs per megabyte have dropped from about 46 cents per megabyte in 2008 to about three cents per megabyte by 2012. That’s an order of magnitude drop in just four to five years.

But at least in developed markets, it is harder than ever to argue that communications costs, for landline voice, mobile voice, fixed network data or mobile data are a “big” cost item for most businesses or individuals. That doesn’t mean there are no problem areas, or that people will not complain.

Overall, as a percentage of total costs of doing business, or as a percent of consumer discretionary spending, mobile or other communications are not a big driver of personal or business spending, on a percentage of total spending.

There are some problem areas, in particular the cost of trans-border mobile calls and trans-border mobile data cost. But high costs always create an incentive for over the top alternatives, spur regulatory action to force lower costs and hence also will eventually become less an issue. In most other cases, communication costs simply are falling.

Whether for consumers or businesses, communication costs tend to be low single digits kinds of operating cost or personal spending categories.

People still gripe, of course. People still complain about the cost of mobile phone service or broadband access. One rarely hears much about the cost of consumer fixed network phone service, in part because the incremental cost, in a triple play bundle, is relatively slight.

Without a doubt, people and organizations will continue to benefit from better features and lower prices. People still will gripe. But communication costs, for the most part, just aren’t a big cost driver for most businesses or a burdensome expense for most consumers in developed economies.

FCC's "Gigabit City Challenge"

Federal Communications Commission Chairman Julius Genachowski has called for at least one gigabit  community in all 50 U.S. states by 2015, and suggests that broadband providers,  state and municipal community leaders figure out a way to make that happen, to create a critical mass of communities.

The FCC also plans to create a new online clearinghouse of best practices "to collect and disseminate information about how to lower the costs and increase the speed of broadband deployment nationwide, including to create gigabit communities."

The Gigabit City Challenge will of course face some obstacles. Some will say local governments, state governments and the FCC itself, which never have had the political appetite or power to compel massive "municipal broadband infrastructure" projects, will face tougher obstacles over the next couple of decades.

If a municipality really wants to build its own infrastructure, on a wide scale, in markets where strong cable and telco operations already exist, mobile service providers and satellite providers, there will be an obvious business model problem, namely that the market probably cannot support a new provider. 

"Overbuilding" generally has proven to be a difficult business proposition, historically. 

One might suppose that someday, one dominant provider in many markets might decide it makes sense to build and operate a wholesale network of this sort. That likely would not be a cable operator, given that industry's historic resistance to such notions.

Telcos have been no more willing, historically to trade away their right to use scarce infrastructure, either. Whether thinking might change some decades hence is hard to predict or foresee. 

The other problem would seem to be that, even if the political will and political power could be amalgamated, it is not so clear that a large municipality, or even a state, could afford the indebtedness required to underwrite a large gigabit network. 

That might have been feasible some decades ago. It certainly will not be a reasonable option over the next couple of decades, and maybe never again. 

Orange Says Google Pays Orange for Carriage

Orange CEO Stephane Richard says Google now pays an unspecified fee to Orange for essentially terminating Google traffic on Orange end points. That might be true, but might not mean much of anything.

The agreement appears to be a voluntary business-to-business agreement between Google and Orange that should be not be properly characterized as a case of Google "paying Orange for access."  

It appears to be more like a standard IP transit arrangement between two networks with unequal traffic volume. 

Separately, European content firms have been arguing for mandatory payment of fees of some sort for use of their content in Google's search results displays.

Both of those issues--new Internet forms of intercarrier compensation and participation in Google's advertising revenues--illustrate the difficulties regulators will face in crafting appropriate regulatory frameworks for IP-delivered content and usage of IP network resources.

Traditional regulatory models do not work so well in an IP context. Application or media providers do not have traditional intercarrier compensation obligations. But there is little question today's new IP network traffic generators--video, media and content apps--impose "use of network" cost issues very similar to traditional intercarrier termination issues.

Nor does the traditional media model work so well. Traditionally, media have used their owned networks to deliver their content. TV broadcasters, radio broadcasters, newspapers and magazines provide the key examples in a classic sense.

Cable networks long ago became a new model, though. To be sure, local TV and radio broadcasters have commercial relationships with their content suppliers. But cable operators have taken the model much further, essentially signing up whole programming networks and then packaging those networks for delivery to cable customers.

There is no intercarrier compensation analogy there, since cable operators own their own networks. The problem with IP content is precisely that the ownership of the networks and ownership of content are separated, by design.

Current regulatory frameworks were not designed for such business arrangements. For media and cable TV style business models, there is a well-understood framework for sharing revenue created by the services, but those arrangements do not require intercarrier compensation mechanisms.

The problem is that all networks are becoming IP networks, which, by design, separate the network access from the content people use on those networks. And there is, by design, no reason for actual bilateral business relationships between the providers of network access and the providers of content.

It's a growing and important issue, and app providers will have to make business decisions the way communications carriers sometimes must: make voluntary business arrangements that solve a problem or wait for regulators and legislators to "do it for them."

The reported deal between Orange and Google is something more akin to a cable TV network carriage agreement than anything else. Some won't like that.

AT&T Warns of Lower Long-Term Rates of Return on Investments

AT&T has lowered its expected long-term rate of return for pension obligations due to the continued uncertainty in the securities markets and the U.S. economy in 2013. AT&T will book at $10 billion charge in the fourth quarter to compensate. 

Verizon is taking a $7 billion charge in the fourth quarter, to cover pension obligations of its own. 

AT&T said the changes will not affect It said the pension loss will not affect its operating results or margins.

Still, the shortfall in pension obligations, which largely reflect assumptions about interest rates, will strike some as unsettling. 

What Makes Messaging Different?

Line, the Asia-based instant messaging app, says it has reached 100 million downloads in 18 months.  That sort of raises the issue of how over the top instant messaging apps are different from text messaging. 

In many cases, instant messaging is a relatively straight forward substitute for text messaging, the value being that users do not incur incremental costs. WhatsApp and Kik might be examples of that use case. 

But Line seems more akin to chat (broadcast messaging), than text messaging (person to person communications). In other ways, Line seems like a gaming portal, and less like a simple substitute for text messaging. 

But Line also is a bit like a social network as well. 

Line also has become an over-the-top voice calling app. The point is that it isn't so easy these days to describe how "instant messaging" is different from "text messaging."

Text messaging and IM are in many ways substitute products. But sometimes even that distinction is inadequate. Messaging seems to be evolving. 

Subscriber Growth Dwindles in U.S. Market: What Will Carriers Do?

There are basically two major ways mobile service providers or fixed network service providers can grow revenues: they can add more units (subscribers) or grow revenue per unit (average revenue per user).

And it is starting to look as though even mobile services, which have been the growth driver for the U.S. telecommunications industry, is facing a new era, when subscriber growth in the internal market can be propped up, near term, mostly by acquiring other firms. In other words, the internal U.S. market is approaching a zero-sum game, where one carrier can gain only by taking share from another supplier.

That is one primary reason why U.S. suppliers are so interested in machine-to-machine services, as that could add unit growth from telemetry services sold to other enterprises, rather than “humans.”

Average revenue per unit is a contest at the moment. Service providers face potential erosion of voice and text messaging revenues, though that has for the most part been a muted trend in the U.S. market, as real as it has become in some other markets, particularly in Europe.

But average revenue per unit is now driven by mobile broadband, which can grow for some time, though not indefinitely. Right now, it is unit growth that is the biggest issue.

Retail net additions (postpay and prepaid net additions) for the  three largest U.S. wireless service providers declined 23 percent on a year-over-year basis during third quarter 2012 to approximately 1.6 million, according to Fitch Ratings.

The decline is largely attributable to a 62 percent  year-over-year drop in prepaid net additions. In other words, not even a consumer shift of demand from postpaid to prepaid now is sufficient to propel revenues for some suppliers who specialize in prepaid services.

Wireless revenue growth will be driven more by usage based data pricing plans and increasing capabilities of smartphones as opposed to expanding the wireless subscriber base, Fitch Ratings says.

The leading U.S. mobile providers added 1.1 million revenue generating units during the thrid quarter of 2012, compared with approximately 3.3 million RGUs during the same period of 2011.

Smart phone penetration has reached 59.3 percent, an important figure because smart phone accounts drive mobile data revenue.

High speed data growth remains flat. Fitch estimates that approximately 542,000 new HSD subscribers were added by all large broadband service providers during third-quarter 2012, 3.1 percent  lower than the same quarter of 2011.

Perhaps surprisingly, video now seems to be driving growth for AT&T and Verizon in the fixed network segment of their businesses.

Fitch researchers also note that the largest incumbent  local-exchange carriers are successfully transforming their consumer businesses into broadband- and video-focused models, largely compensating for saturation or decline of the legacy revenue streams.

“The increasing scale of AT&T’s U-verse and Verizon’s FiOS service platforms is sufficiently
mitigating the ongoing secular and competitive pressures of their respective consumer landline
businesses and has strengthened their relative competitive position,” says Fitch.

AT&T U-verse revenues increased 38.3 percent during  third-quarter 2012 when compared with the same period last year. The revenue growth is driven by higher service penetration rates along with  higher levels of customers taking triple or quad play service plans.

AT&T estimates that three fourths of its U-verse TV subscribers have triple or quad play service with the company. U-verse triple play subscribers generate $170 of ARPU.

Verizon’s  FiOS  service accounts for 66 percent of wireline consumer revenues. Verizon’s consumer ARPU accelerated to 10.3 percent over the same quarter of 2011. Triple play customer ARPU is  $150 a month.

Still, even Verizon and AT&T have to now be looking at how to sustain revenue growth when the underlying fundamentals are shifting. Subscriber growth has become a zero-sum game, though revenue growth can continue for some time, lead by mobile broadband growth.

What to do after that revenue segment slows is the current issue. As a practical matter, none of the developing new lines of business are going to contribute sizable immediate revenue. That suggests a wave of acquisitions is going to happen, as that is the most tangible way of growing subscribers.

ARPU, in that sense, will be a secondary growth driver, once mobile broadband becomes ubiquitous.