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December 20, 2012

Usage-Based Pricing—NCTA Makes Case with Law Professor, Economist

NCTA took on critics of tier- or usage-based pricing Fri, holding a briefing with experts who said it would benefit consumers and incentivize investment in network infrastructure. The event seemed designed to counter groups like Public Knowledge, which have raised questions about usage-based pricing. Comcast joined Time Warner Cable and a handful of other service providers in May in switching to the usage-based pricing model. Earlier this year, DOJ reportedly examined cable ops' data capping practices (Cfax, 6/14).

Steven Wildman,
professor of telecom studies at Michigan State University, said "well-designed UBP (usage-based pricing) plans are likely to beneficial, as are the effects of UBP on investments in the broadband infrastructure." For an economist, usage-based pricing is "an application to broadband of a type of differential pricing strategy that's extremely common, and largely non-controversial," he said. Other consumer benefits include making it easier for providers and consumers to deal with short-term fluctuations in user demand, citing traffic increase during events like March Madness. Wildman also said tier pricing also reduces the risk of trying broadband for new users. "Once people take it, they want more" and as they stay on the service, they are likely to take on higher tiers of service, he said.

According to Wildman's study, "The Economics of Usage-based Pricing in Local Broadband Markets," tier pricing also allows suppliers an incentive to offer lower priced options they otherwise wouldn't find profitable. By contrast, "a government-mandated single-price approach to pricing broadband biases the design and pricing of service toward the interests of subscribers willing to pay the most to the detriment of low volume and low income consumers who are less likely to be offered service packages they are willing to purchase."

Even the FCC seemed to back tiered pricing as the agency's net neutrality order endorses usage-based pricing in theory, said Prof Daniel Lyons of Boston College Law School. He argued that flat-rate pricing is relatively inefficient because users consuming different amounts of data pay the same price. As a result, light users subsidize heavy users. Another concern is the notion that companies use tier pricing to create "artificial scarcity." However, that would be the case only if the provider has market power, Lyons said. "Evidence suggests that the US broadband market is at least workably competitive" as excluding wireless, most of the consumers have 2 or more providers, he said. The takeaway for regulators? They should recognize that tier pricing "isn't consumer enemies," Lyons said. Having said that, regulators should also recognize that there's incentive to use tier pricing in a bad way, he said, urging providers to ensure transparency and clarity in their plans. Consumers need to know how much data they are using, he said.

Meanwhile, some suggested peak pricing as an alternative. However, for that to work, regular peak is needed, Lyons said, adding that technological challenges make peak pricing difficult. Plus network congestion is a bigger problem on wireless network than on fixed network. Shifting usage to off-peak hours reduces operating costs and may make the transition to usage-based pricing easier for some subs, according to Sandvine pres/CEO Dave Caputo. Citing a recent Sandvine Internet traffic research, Caputo said the top 1% of Internet users consume 14% of all bandwidth while the top 5% use more than the bottom 80%. In addition, subs distribution across potential service tiers in North America showed 56.3% of consumers use more than 10 GB a month and a large share of the usage occurs during peak period (8:45-11:30am). Public Knowledge had cautioned that due to the complex nature of communications market, providers should collect and report detailed information about their offerings and how they affect consumers.

ED NOTE: This story originally appeared in CableFAX Daily. Go here to subscribe.







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