Old New Telco Thinking

Mar 06, 2006 | Inside: Business Strategies

Ahh, so the telecom incumbents have come up with a “new” idea for the Internet—usage-based pricing. That’s right, more usage (for things like VOIP and video especially) means more costs to operate the network, so users should pay by the bit, or some similar metric. It’s all so logical!

But wait a minute. I thought what sparked the consumer Internet revolution was the fact that ISPs didn’t charge by the minute, but offered flat-rate monthly fees. And what catalyzed the boom in cellular usage here in the US was the shift from heavily usage-based pricing to the largely flat rates we see today. This “new idea” is actually the oldest one in the telecom book. Even with respect to the Internet, the debate over flat vs. usage pricing is a decade old. It was at the heart of the “modem tax” debate back when I was at the FCC. At that point, the telcos were complaining about dial-up Internet access, not broadband video, yet the argument was the same. They lost that battle, but really they (and users) won, because usage and innovation skyrocketed.

Experimenting with new pricing and business models is all well and good; there’s nothing written in stone about the current fee structure for broadband access, for example. But be wary any time you hear that “economics” dictates an “efficient” consumer pricing model. Sure, as a fundamental rule, prices in competitive markets are related to marginal cost. However, local access is still not truly a competitive free market, and cost numbers in telecom are inherently fuzzy and manipulable.

Given the option, users tend to vote with their dollars. If the pricing model doesn’t reflect the value they get from the application or service, they use it less. With the kind of rhetoric we’re hearing today we should be wary about pricing decisions by network owners choking off future growth and development of Internet-based services.

This has been a featured post from Kevin Werbach. To visit the weblog maintained by Kevin Werbach click here.


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