Market-based pricing for bandwidth best reflects consumption

Pricing based on usage also contributes to conservation and fosters innovation

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Marco Navarro-GenieNova Scotia Premier Stephen McNeil recently chastised a local company about the pricing of bandwidth in a rural part of the province, claiming the company should not charge for services based on usage.

Notwithstanding the peculiarities involved, the situation presents an excellent opportunity to discuss the nature and goal of prices in an economy, and how proper pricing determined between provider and consumer contributes to conservation, increases availability, ensures sustainable services and fosters innovation.

Most businesses do not pull prices for their products out of a hat. Prices are signals to the consumer and help to discriminate the products and services we need and want. Pricing helps moderate consumption, conserves resources, fosters innovation and ensures the continuity of delivery of goods and services.

Take a vital commodity such as water, for example. Once upon a time in parts of Canada, water was virtually free to consumers. Households paid a nominal monthly flat fee for the service, regardless of the amount used.

A family with seven children, a big lawn, a penchant for gardening and three or four vehicles being washed weekly on the driveway greatly benefited from a flat fee more than the struggling elderly couple next door who paid the same for a fraction of the usage.

In effect, the elderly couple and many others with smaller consumption habits were subsidizing their neighbours who, even with responsible usage, would take more showers, flush more toilets and wash more clothes.

When water is metered and every gallon priced, there is more responsibility in usage because prices act as signals that we may be consuming too much. By placing limitations on our wants, prices help us set priorities on our needs.

Thus, when Canadians changed from flat rates to metered water, consumption patterns changed. People tempered their usage, paid more attention to leaks and purchased innovative equipment that allowed money savings. Low-flow toilets were the result of higher water prices.

Bandwidth for the Internet works in similar ways.

It requires significant infrastructure to deliver, has flow patterns affected by usage and it has users and abusers. Different households have differing consumption patterns. Bandwidth may have become a necessary commodity, as Premier McNeil suggests, but there are plenty of households paying flat rates that consume indiscriminately.

Today, many individuals in a home each have multiple devices connected to the Internet – phones, tablets and a personal computer or play station – often all at once.

Moreover, television sets are now connected to the web, watching movies, listening to music or playing games that collectively consume gargantuan amounts of bandwidth. Imagine if people opened every water faucet and left it running when they are home.

Much like water, bandwidth can become a luxury when we don’t consume it responsibly. The best way to foster responsible consumption – short of planting government enforcers in our living rooms – isto establish a pricing system that fairly reflects value, delivery and operation costs inside a competitive framework.

The technical ability to measure bandwidth consumption exists just as we measure water and electricity consumption. Bandwidth pricing would allow for fairness in consumption, encourage responsibility in usage (and might prompt parents to pay attention to what their teenagers are doing), conserve bandwidth and reduce waste, reduce slowdowns, spark greater availability and more innovation in delivery and decoding. In many instances, it would reduce Internet bills.

With bandwidth priced by the unit, innovators and entrepreneurs will more quickly move to create finer decoders for equipment to give consumers the same data experience in gaming and video watching with less bandwidth, for example. People will pay for these gadgets like they pay for low-flow devices or energy efficient appliances.

Preventing businesses from pricing things properly can only have adverse consequences leading from the curtailing of services all the way to their demise, in the long run. As we discovered with water infrastructure, if we don’t price a commodity properly, we will encourage waste and waste the opportunity to raise necessary funds to maintain and renew existing infrastructure in the future.

It is time to consider better pricing models for bandwidth that best reflect consumption, independent of political interference. Proper pricing is one of the friendliest mechanisms markets have for consumer participation and to provide goods and services sustainably.

Marco Navarro-Genie is president and CEO of the Haultain Research Institute.

Marco is a Troy Media Thought Leader. Why aren’t you?

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Market-based pricing bandwidth

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