Pricing Broadband

Digital technology for the production of media content has a crucial logic of costs: the original content has large fixed costs and practically zero marginal costs of reproduction. How are the fixed costs of original production going to be covered? There are three revenue models that prevail. One is the advertiser-supported model, the second is the subscription- based model, where users pay either a fixed fee per time period or a per- usage fee and the third is some mixture of these two.15 The mixed model is the standard one followed by most Internet Service Providers (ISP). For example, Comcast will charge a user fee plus a subscription to various individual services such as Netflix and HBO.

Internet services have two components: data usage and the speed with which this data is accessed. When access to a product can be priced separately from usage of the product, as in amusement parks, credit card services and shopping clubs, we have a pricing structure called two-part tariffs. There is an access fee plus a per unit charge based on metered usage. At Disneyland, for example, you would pay a fixed entrance fee and then pay for each attraction on usage basis. In the case of broadband, we have access to the service and a usage charge levied against data and against speed, so there can be multiple combinations addressing both components of the service.

For data consumption, Internet Service Providers sell a complex menu of options, which effectively amounts to price discrimination. In most US markets, cable and Internet are bundled commodities, marketed by the Internet Service Provider (ISP). Since the cable companies had already incurred the fixed cost of laying the cable, the marginal cost of adding Internet was small. Hence, broadband Internet access is mostly via cable and digital subscriber line or telephone technology. Fiber optic communication is a newer technology, being introduced incrementally in the US. Recent research suggests that the average customer uses 60 GB (gigabytes) of data per month. As users shift to streaming video with more capabilities, they will need more data in their home. With finite capacity, data prices will entail quantity restrictions or data caps, as is the case with wireless mobile devices. Any use in excess of the cap will be priced at higher rates. The large ISP’s are currently setting data caps for streaming content obtained from sources outside the user’s ISP, and “zero rating” (zero data caps) for streaming content packaged with the ISP’s product, as in Comcast’s Stream TV service [70].

There is concern that this pricing structure will increase the digital divide beyond simple access to the Internet. Now the cost of data could further divide the population into those who can take full advantage of high- bandwidth applications like streaming and video conferencing, and those who have to limit their usage for fear of incurring overage charges.

Another form of price discrimination, known as commodity bundling, is the practice of selling multiple distinct channels as a cable package, for a single price. Users might be discouraged from cord cutting, or cancelling their cable TV package, by pricing the a la carte components in a specific configuration so as to induce them to purchase the prix fixe menu, even if many components of the bundle are not consumed. The cable package benefits from direct and indirect network effects when cable and Internet service come from the same provider. For example, if Netflix lowers its prices, more users are attracted to Comcast’s service, benefiting Hulu as well. There is also the direct network effect as when Netflix increases its content library, more users are attracted to the platform, which in turn incentivizes Netflix to add yet more content [71].

How is speed component of Internet service priced? Data usage caps apply to the size of the service consumed, but the speed is sold in discrete increments. For example, in the Princeton, N.J. area, Xfinity cable by Comcast offers a speed of 25 Mbps for $39.99 and 150 Mbps for $82.95 with no data cap. Verizon Fios offers fiber at 100 Mbps for $59.99, 150 Mbps speed for $69.99 but a highest speed of 500 Mbps for $269.99/ month.

What about high-speed broadband connections? The technology is available, but implementation costs are the bottleneck. To replace existing broadband connection, that is cable or DSL, with fiber involves enormous fixed costs. The OTTs are now entering the delivery business with Google Fiber already available in Kansas City, Austin, Provo, and Atlanta. Google is developing an innovative strategy by adding high-speed fiber to existing infrastructure. This obviates the more intensive infrastructural investment while simultaneously delivering the speed. For example, Google has partnered with the company Webpass, which already beams the Internet to a fixed antenna on the building. Google then runs data cables into each unit, offering speeds of 1 Gbps [72].

Net neutrality requires all content to be treated equally by the ISPs but access to this content is still subject to differential pricing, and as mentioned above, increases the digital divide. Broadband pricing comprises a price for bytes of data transferred and an associated speed of data transfer. Even if the price per byte is constant, the speed can be throttled or slowed down, effectively compromising the service. If, for example, Comcast throttles the data transfer in some parts of its network, then there is unequal access to content. Since information and entertainment are frequently joint products, unequal access to information can this move the needle on knowledge-generated social and economic inequality.

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