The Question at the Core of the Data Caps Debate

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Internet Service Providers (ISPs) regularly insist that data caps are a legitimate tool to ease congestion on their networks and an effective way to signal value to consumers. But, as we have argued, data caps do not resolve congestion, are confusing to consumers, and lend themselves to unfair and anticompetitive behavior.

In light of this disagreement, it is a promising sign that a recent study published by the National Cable & Telecommunications Association (NCTA) and co-authored by Steven S. Wildman, the new Chief Economist of the FCC, moves beyond some of the previous rhetoric and takes a significant step towards focusing the debate on real areas of conflict. 

Unfortunately, it stops short of recognizing a critical distinction in understanding the heart of the disagreement. Let’s take a look:

Congestion is not the Issue

The absence of data hogs in this report is encouraging.
Image created by Vimeo user Nick Cross.

The most refreshing section of the study is the one that is not there.  There is no meaningful discussion of usage-based pricing as a tool to reduce network congestion or a suggestion that monthly data limits are a reasonable way to impact congestion.  There is also no invocation of the mythical “data hog,” a sinful creature that can only be punished with data caps.  Hopefully, the omission is NCTA’s tacit admission of two things: that cable networks are not congested and, if they become so in the future, monthly caps will do little to address that congestion.

Price Discrimination is the Key

Instead, the report focuses on usage-based pricing as a form of price discrimination.  This type of value-neutral economic discrimination (in contrast to other types of discrimination that are morally, politically, and even economically problematic) appears to be one of the key motivating factors behind the imposition of usage-based pricing.  At its core, price discrimination is about making people who value something more pay more for it and allowing people who value something less pay less for it.  This is the way that most of the economy works and there is no reason that price discrimination per se should not be allowed for broadband pricing.

Both types of seats will get you where you are going, but one will cost a lot more.
Images by flickr user Richard Moross and flickr user johnporcaro.

This is the report’s key argument.  Price discrimination happens every day across our economy.  As an economic practice it creates value generally and can do the same in the world of broadband.  Furthermore, price discrimination can make a form of a good or service available to people who might be priced out without it.

All of this is true and all of this is important to understand before having a meaningful discussion about usage-based pricing and data caps.  However it is the beginning, not the end, of that discussion.  But it is also where the report stops.

Price Discrimination is not the Problem, Data Caps are

The key question about usage-based pricing is not if the general practice of price discrimination has a place in the world of broadband.  After all, ISPs have used speed to implement price discrimination since the beginning of broadband.  Instead, the key question is whether using data caps or usage-based pricing to implement price discrimination has a place in the world of broadband.  On that question the report is silent.

That silence is disappointing.  Public Knowledge’s position is that data caps and usage-based pricing is a type of price discrimination that is especially susceptible to anti-consumer manipulation by ISPs and can suppress activities that we generally encourage.  That is why they warrant attention.

At its core, price discrimination relies on sending signals to consumers.  A consumer values X highly and therefore should pay more for it.  That same consumer sees little value in Y and therefore should pay less.  One of the fundamental problems with using data caps and usage-based pricing as part of a price discrimination strategy is that the signal is hard for consumers to receive.  This deficiency becomes clear when usage-based pricing is compared to the existing price discrimination tool: speed.

Speed is a Signal That is Easy to Understand

Imagine a consumer operating in a world where speed is used to implement price discrimination.  She chooses a speed tier and begins using the internet.  Some things she wants to do work well at the speed she selected.  However, other things do not work as well.  Perhaps pages load too slowly for her liking or video buffers and displays at a low resolution.  Every time a page loads slowly or video buffers she gets a clear signal: “your tier does not support the activity that you are doing at this very moment.”  This signal is temporally connected to the activity and easy to understand – slow load times are because of a slow connection. 

At that moment the consumer can consider how valuable the activity is to her, and how often she has gotten that signal in recent days or weeks.  If the activity is sufficiently important or the buffering occurs with annoying regularity, she may decide to upgrade her tier.  Having used the low tier to its fullest capacity and found it wanting for a collection of known activities, that decision is a reasonably informed one.

Data Caps are Much Harder

Contrast that with a consumer operating in a world with a monthly data cap, the most popular implementation of usage-based pricing.  She selects a cap tier and begins using the internet.  Some things she wants to do work well at the tier she selected.  Others do not.  Unfortunately, it can be hard to tell which is which because she does not find out she has run out of data until her cumulative monthly use exceeds her cap. When she receives that alert, or her bill at the end of the month full of overage charges, she gets a muddled signal: “your tier does not support something, or some combination of things, you did in the past month.”

At that moment the consumer likely does not remember everything that she did over the past month online, or how it compares to other months.  Did she watch five videos or six?   Was the website she visited two weeks ago featuring abnormally rich interactive content?  Did she upload photos to share with her friends?  Are any, or any combination, of those things worth paying more for? 

In the face of uncertainty, many consumers will come to a frustrating but reasonable conclusion: the best path is to over pay and under use.  As long as they buy a higher tier than they need and avoid trying anything new online, they should be fine.

Focusing on Policy Differences

When Public Knowledge and others raise concerns about usage-based pricing, those concerns are about usage-based pricing, not price discrimination.  Price discrimination that relies on usage-based pricing, especially if it is implemented by an ISP with a pay-video business to protect, raises a number of usage-based pricing concerns. That is why our usage-based pricing whitepaper Know Your Limits ends with a series of usage-based pricing-specific recommendations.  Assertions that price discrimination can help expand access or increase value to consumers may be true, but they are not particularly interesting or relevant to the conversation.

The debate around usage-based pricing can only move forward when people stop talking past each other and start focusing on real policy differences.  By moving past congestion and examining price discrimination, this report marks a significant step towards that goal.  However any argument that focuses on price discrimination alone, or that relies on assertions that are merely true for price discrimination generally, do this issue a disservice.  Hopefully the next report from ISPs will try to explain why usage-based pricing, and not just price discrimination, is a reasonable way forward for the broadband market.

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