Price Discrimination and Data Caps Are Not the Same Thing

Published on April 8, 2013
by Michael Weinberg


Image copyright Laralova

In a recent op-ed on this site, Professor Daniel Lyons identified Internet pricing as “the next policy frontier.” He is largely correct on that front. As Internet service providers (ISPs) roll out their attempts to shift consumers toward data-based pricing, they will raise a number of policy questions. But the piece didn’t accurately identify the actual policy questions involved.

Professor Lyons’s fundamental mistake was to conflate opposition to data caps with opposition to price discrimination more generally. Price discrimination in broadband pricing is a positive phenomenon. It allows ISPs to create different pricing packages that appeal to different types of customers — from those heavy gamers to the grandmother who only checks her email. My organization, Public Knowledge, does not oppose the idea of price discrimination, and I am not aware of any of our allies that do either. But price discrimination does not require using data caps. And the alternative to data caps is not one price for everyone.

How can I be so sure? Because ISPs impose price discrimination today using speed tiers. And it turns out that speed tiers have a number of positive attributes that data caps lack.

Most people understand speed. While they may not know how many megabytes are in a gigabyte, even the emailing grandma knows that a page that does not load very quickly or a video that constantly buffers is because of a slow Internet connection.

Furthermore, customers realize that their connection is too slow while they are using the Internet. When the video buffers or the page is slow they can ponder, at that very moment, if the delay is annoying enough to justify paying for a faster tier. With monthly caps, a user gets an alert and then needs to reconstruct days, weeks, or even a month’s worth of usage to try to determine what they were doing to get them close to the cap. Then they need to decide if it is worth paying extra to be able to do it again in the future.

Finally, speed tiers are a “gentle” signal to consumers. If your Internet connection is not fast enough, the worst thing that happens is that things happen a bit too slowly for your liking. Go over your data cap and you could be on the hook for significant overage fees.

The gentle nature of speed-based tiers fuel a virtuous cycle. Exploration leads to discovery, which leads to decisions to purchase faster tiers. These purchases provide capital to invest in the network, which in turn brings faster service for everyone. This increased speed fuels even more exploration, which starts the cycle all over again.

In contrast, data-based tiers incentivize sticking to what you know, avoiding trying new things that could cost you overage fees. This is a recipe for stagnation.

But what about the idea that caps are set so high that only those crazy early adopters would ever hit them? History tells us that today’s early adopters are tomorrow’s average user. There was a time when all sorts of today’s common Internet activities — VOIP phone calls, streaming videos, uploading and sharing images — were on the cutting edge. There is no clear mechanism that would force caps to increase over time. That means that caps that appear high today will become problems tomorrow. Unless, of course, people are so worried about their cap that they never try anything new.

And this avoidance of new things highlights real competitive concerns. A 300GB cap may sound like a lot (assuming you are the type of person who even knows what a GB is, and what you could do with 300 of them) until you think about making use of it. Using Comcast’s own assumptions, we have calculated that switching from Comcast cable to an all-HD online video competitor would require 648GB per month. And that’s before you use your Internet connection for anything else. When viewed in that context, these caps are not just about targeting individual competitors. Instead, they target competition itself.

Of course, antitrust law has a role in instances where incumbents are using data caps on the Internet service they offer in order to protect their cable service. But it is not the only answer. Antitrust law does a great job when there is evidence of collusion and price fixing, but less of a good job when incumbents take steps to exclude new competitors. And antitrust alone does not have tools to address situations where incumbents move to adopt a pricing strategy that confuses consumers and slows innovation in the wider economy.

Forcing us to decide between data caps and a one-price-fits-all, dilapidated broadband network is a false strategy. There are ways to create a sustainable broadband price structure that fuels network investment and larger innovation in our economy without resorting to a model that encourages consumers to over-buy and under-use data. If Internet pricing really is the next policy frontier, our first step should be to make sure we understand what we are actually debating.

Michael Weinberg is the vice president at Public Knowledge. Michael primarily focuses on copyright, issues before the FCC and emerging technologies like 3-D printing.

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