Don’t call them data caps: A deep dive on usage-based broadband pricing

Last week, Comcast announced plans to expand its existing usage-based broadband pricing model to northeastern markets, prompting a fresh wave of criticism by some long-time opponents of the practice. But setting aside these critics’ loaded rhetoric and straw-man arguments, a more complex picture emerges. Far from a “costly and pointless” exercise, usage-based pricing reflects a rational strategy for allocating the company’s costs equitably across an increasingly heterogeneous customer base.

via Twenty20

As an initial matter, the term “data caps” is a misnomer. A
cap implies a hard limit on monthly data consumption. But Comcast’s plan may be
more accurately described as a “pay-for-what-you-use” plan. Under the
traditional plan, Comcast customers receive up to 1.2 terabytes (TB) of data
monthly for a fixed fee. The company then charges $10 for each additional 50 gigabytes
(GB) of data, up to $100 monthly. For customers who expect to exceed the 1.2 TB
threshold regularly, the company offers unlimited plans for an additional fee. In
other words, consumers have unlimited broadband use — they simply must pay for
what they consume, just like water, electricity, and virtually every other good
in society other than all-you-can-eat buffets.

This semantic distinction matters because the idea that consumers are “capped” is used to support the straw-man argument that there is no “technical” reason to adopt usage-based pricing. Critics note that “in the early aughts, telecom giants claimed that these surcharges were necessary to handle congestion.” Perhaps. And perhaps that was even true in an era when Michael Jackson’s death almost broke the internet. (It was before my time; I don’t know.) But the observation that fixed networks face no congestion today is both true and irrelevant: Comcast has long made clear that usage-based pricing is not about congestion management — which is precisely why these plans do not “cap” monthly use.

Rather, usage-based pricing reflects
a rational strategy for spreading the company’s costs equitably across its
consumer base. Unlimited flat-rate models work well when customer use does not
vary much from household to household. But today’s user base is far more
diverse in both the quality and quantity of activities they conduct online.

A 2014 Sandvine study showed that the top 1 percent of broadband subscribers account for 12 percent of downstream and a whopping 47 percent of total upstream traffic. By comparison, the bottom half of users account for only 7 percent of total traffic. While these numbers have likely shifted somewhat since the study, and especially since the COVID-19 pandemic, there remains a wide spread between the lightest and heaviest users. As the Federal Communications Commission noted in the original 2010 net neutrality order, “Requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users.” Usage-based pricing avoids this cross-subsidization problem by shifting more of the network’s costs onto its heaviest users.

Comcast’s shift toward usage-based pricing is one most customers are unlikely to feel. As discussed above, the standard Comcast plan includes 1.2 TB of monthly data for a flat rate. This threshold is four times more than the data consumed by the average Comcast household, which clocks in at 308 GB monthly. Comcast estimates that only 5 percent of its accounts would be subject to the overcharge — and these households are always free to switch to an unlimited plan. Notably, these overage thresholds have increased over time as our collective appetite for data has grown: 1.2 TB is far greater than the 250 and 300 GB thresholds that these same companies used just five years ago.

Ultimately, much of the ire at usage-based pricing is misplaced. Critics complain that such plans “exploit consumers stuck in uncompetitive broadband markets.” But customers can only be exploited if the company has market power. And if it has market power, the company need not go through the hassle of changing its pricing plans to exploit that power — it could simply raise prices on its unlimited data plan. The real culprit in this hypothetical is market power. A ban on usage-based pricing would not solve the dilemma — it would simply force the company to overcharge everyone equally, rather than charging more to those users who use the network the most.

None of this is to say that usage-based pricing is inherently superior to unlimited flat-rate plans. They simply represent different ways to recover costs from the company’s consumer base. And while any pricing shift should consider the extraordinary burdens generated by the pandemic, the 1.2 TB threshold seemingly takes these circumstances into account. The real question I’m left with is why activists are so insistent that the rest of us must foot the bill to subsidize the habits of heavy internet users.

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