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September 2, 2009 10:58 PM

Study On Flexible Pricing Assumes Broadband's Price Only Going Up

Thanks to the Benton Foundation's terrific Headlines newsletter, I found this Ars Technica article that poses the question: "Can 'flexible broadband pricing' fix the digital divide?"

It's primarily a recap of a press conference held on Tuesday announcing the release of this study.

The study's central thesis is that by spreading the costs of network upgrades equally among all users we risk suppressing broadband adoption by raising prices for everyone, whereas if providers can charge more of those who use more we can keep broadband prices for others lower, which should help to bridge the digital divide since cost is the primary reason those who aren't online today don't subscribe to broadband.

While I agree with the notion that the days of all-you-can-eat broadband pricing may be coming to an end and that it makes sense to spread the load equitably so that the heaviest users pay the most, I have a number of significant issues with their assumptions, which also then calls into question their results.

In particular, the fact that they assumed that flexible broadband pricing would only result in more expensive tiers of service being introduced but not any less expensive tiers.

For one, if a core part of their argument is that lower prices enable higher adoption rates as a way of bridging the digital divide naturally, then it would seem to make sense especially if this is an academic report (it was released through the Georgetown Center for Business & Public Policy) to model what would happen if cheaper tiers were introduced just to see how big of an impact that would have.

That kind of data could then lead to a greater emphasis on subsidizing services to low-income households or mandating that services be offered to them at cost so as to overcome any pricing related barriers.

Also troubling about this assumption of evermore-expensive broadband is it implies that market dynamics alone aren't sufficient to keep prices down. In a truly competitive market a provider would not necessarily be able to raise their rates as it would have to take into consideration what their competitors are doing.

Another dangerous assumption of this report is that all operators are investing heavily in their networks and therefore need to be able to charge their customers more to recoup that money. While some operators are investing heavily, many others are not, either because they can't, aren't willing to, or their investments don't cost all that much to make.

The reason I bring this up is that I think we need to be careful about not putting in place a system that encourages providers to suppress what they invest and inflate what they charge. Some of this dynamic is unavoidable given the profit-maximizing nature of a private marketplace, but we shouldn't be rewarding inaction with opportunities to squeeze more money from captive customers. I'd imagine this would likely lead to lower adoption rates over time from decreased customer satisfaction.

What's also troubling about this assumption that broadband's price is only goes up is that the study doesn't reference the fact that there are many entities deploying full fiber networks today that are often offering lower prices than their competitors or are at a minimum delivering a lot more bandwidth for the buck. Put another way, I think it's likely that if the public saw operators delivering less and charging more that that would suppress broadband adoption rates, regardless of how equitably the load was shared.

I say all this not as an argument against the concept of flexible pricing, but instead against the way this study went about trying to prove what good can happen when operators are able to charge whatever they want to whoever they want.

What makes even less sense is that if this study was attempting to frame the benefits of flexible pricing relative to bridging the digital divide, then why not include the theoretical possibility of lower tiers? I can't help but feel like because of their faulty assumption that broadband's only going to get more expensive, they actually missed a huge opportunity to bolster arguments in favor of flexible pricing.

At this point I should say that I do know that price isn't the only hurdle that needs to be overcome in bridging the digital divide, and that it can be easier said than done to dramatically lower broadband prices as there is cost involved in installing a customer, especially for fiber deployers, that there must be sufficient revenue to recoup.

But that being said, I still think we're play a dangerous game with our country's future competitiveness in the global digital economy if we're simply accept the assumption that broadband will only get more expensive.

During this process of building a national broadband plan I'd hope that we're also thinking about what we can be doing to put in place a system that encourages bandwidth that's evermore abundant and affordable.

As bandwidth is the lifeblood of the 21st century economy we can't afford to be stuck in a future where it's getting more expensive and not less.

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Comments (1)

Thanks for the plug!

Posted by Kevin Taglang on September 3, 2009 2:40 PM

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