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Why Metered Broadband Slows Internet Innovation
from the how-to-slow-internet-innovation dept

It's been a while since there's been much debate over the issue of metered vs. flat-rate internet access plans, but it's flaring up for a variety of reasons these days. First, Adam Thierer posted a long essay over at the Technology Liberation Front arguing that piggybacking on WiFi has real costs and that metered broadband would solve many of the problems by convincing access point owners to secure their broadband. This seemed like an odd argument -- adding a significant cost as a method of signaling that there was, in a few very specific circumstances, a tiny little marginal cost associated with some WiFi piggybacking. The second thing thing that's given new life to the metered broadband argument is the sudden reappearance of stories about Comcast's unpublished usage caps. This is an old, old story that's been talked about for many years, but pops up every now and again. Basically, Comcast (and some other ISPs) will cut off certain customers who are using too much bandwidth. The real problem, honestly, isn't that Comcast is cutting off these users, but that they're not at all transparent about it. The services are promoted as "unlimited" and then the usage caps are kept a secret... until you've been kicked off.

Anyway, with the latest barrage of stories about these usage caps, it's common for those supporting ISPs to blame the concept of flat-rate pricing, because it only opens up an opportunity for people to abuse the system. That, inevitably, leads to a discussion about bringing back metered broadband offerings (which are found around the world, but rarely in the US). This is a bad idea for a variety of reasons. First of all, most of these problems would go away if the ISPs in question were more open about their caps. However, much more importantly, if you want to encourage innovation online, it's important to leave flat-rate pricing in place. The second you set up metered broadband, it adds significant transaction costs for both the ISPs and anyone trying to do anything or try anything online. For ISPs, they now have to put in place significantly more tracking equipment and then need to manage the various different levels of service, differential billing and more customer service costs in dealing with customer confusion (or anger if a bill seems too high).

However, the bigger problem is the transaction costs it introduces for users. Suddenly, internet surfers really need to see any particular website or service as being worthwhile. Just the act of making them debate whether or not it's worthwhile to pay up to do something represents a mental transaction cost that will slow down adoption of new services. Furthermore, as bandwidth has increased, many of the newer innovative services have come about to make use of that bandwidth -- which only drives further investment in more bandwidth, driving more innovative uses. It's a virtuous circle. Yet, by metering broadband connections, slowing down adoption of these new services, you slow down the innovation and hold people back from trying out or even creating new, innovative and useful services that would require more bandwidth. It's a recipe for slowing innovation online.

While an executive for the CTIA says that flat-rate pricing only made sense when the internet was first getting off the ground, that represents a false belief that innovation on the internet has slowed down and the internet is now somehow "mature." Instead, internet innovation has been increasing as new apps and services are built on top of older apps and services, leading to greater and greater innovation. If the CTIA exec gets his way and convinces providers to move more to metered bandwidth, then his belief that the internet has plateaued may become a self-fulfilling prophecy, as it'll undoubtedly slow the pace of innovation online. Imagine, for example, that metered bandwidth was common when YouTube first hit the scene? It would absolutely have slowed adoption, because video uses quite a bit of bandwidth and people would have been a lot less likely to test it out. In fact, the same could be said for any kind of non-text multimedia. Podcasts? Why waste that bandwidth? Streaming radio? iTunes would also be more expensive, as every download doesn't just cost $0.99, but your metered bandwidth charge. If you look at history of innovative services, you'll see they tend to move more and more towards flat rate offerings, as it encourages usage and encourages innovation. Phone service and mobile phone service have both trended in exactly this direction -- and in both cases it's because it's opened up a much larger overall market, even if it means less per customer. So, why are we suddenly trying to go the other way with broadband?