What would a fair Internet payment system look like?

TheGlobeandMail.com – news/technology/businesstech
Published Wednesday, Feb. 09, 2011.   Duncan Stewart

If I had a completely blank page to work with – what would the “perfect” internet access pricing look like? Ignore the legacy structures and rules, and try to come up with what would be best for Canadians, Canadian companies and sustainable over the long term.

This was my editor’s challenge: pretend that I could be Tony, Konrad and George/Nadir/Darren all rolled up into one, and see what happens.

I‘ll start with some basic assumptions: The demand for data will continue to grow for at least the next decade, probably at somewhere around 50 per cent per year. This is being driven by two fundamental architectural shifts.

First, we are seeing a massive growth in the number of devices that connect to the internet… but these devices are not nearly as powerful as most PCs. Individuals are moving from having a few computationally powerful Internet-connected devices in their homes to having tens of devices, most of which require the Internet or the cloud to do most of their computing or storage for them.

Second, the traditional methods of transmitting information – especially entertainment – whether in physical form such as discs or electronically through one-to-many broadcast is changing into a many-to-many Internet distribution method. That new architecture has its advantages for users… but it is hell on the network. The old way of distribution was less flexible, but it was much more efficient in terms of the amount of data being transmitted.

Technology has no magic bullets. Although next-generation satellites and wireless networks will be more advanced than today’s networks, they will not offer unlimited data for $20 per month. The cost per gigabyte of wireless data has a floor of about $3-5 per GB. Land line access through DSL or cable has a floor that is 90 per cent lower, and fibre lower still. But not all Canadians have access to the former, and getting fibre to the whole country would cost tens of billions of dollars.

That’s compounded by the fact that many consumers don’t believe in floors – they are unaware there is a variable cost to transmitting data over and above the cost of connecting the wire. When carriers build a new network, they have made a huge investment and have no customers and so in the early days, they price network access aggressively to get more subscribers. This works like a charm until the network starts getting full, then they start talking about raising prices and moving away from all-you-can-eat and toward usage-based billing. The problem is that once you market an unlimited service, there is enormous resistance to turning the meter back on.

Another assumption is that consumers and carriers will act in highly predictable ways: Consumers will always gravitate toward more service for less money and carriers toward less service for more money. However, in order to avoid “tragedy of the commons,” limits must be in place. While I know that no analogy is perfect, let me throw one out. Lets say water, as a resource, is practically infinite. (Lets not bicker — here in Canada, for 99% of us, it is). Like data, consumers are charged for the deliver of water, not for water itself. However, the infrastructure to deliver water must expand in order to accommodate increases in demand. And it can be, with lots of time and lots of money.

And the final assumption: In a capitalist system, if companies do not feel they will be rewarded for making investments then they’ll stop making them. I am not saying that is good or bad, only that it is what happens.

So, what would ideal Internet payment system look like?

  1. It has to encourage land-line usage. In a world of scarce spectrum and limited future gains in spectral efficiency from technology, we need to move as much traffic as possible off the cellular networks and onto land lines. The last few meters will be wireless most of the time, of course, using Wi-Fi or femtocells. But it should always be cheaper for a consumer to talk or surf over a land-line connection. If it isn’t, then consumers will act in economically rational ways and use wireless spectrum that is needed for truly mobile applications while sitting on their sofas, a few feet from a landline. This is madness and must stop.
  2. There has to be a usage meter. Blanket all-you-can-eat pricing will destroy the network in the long run. Whether that means small ISPs too, with less than 6 per cent of the country’s Internet users, is another matter.
  3. Some more sophisticated metering would be a good idea. Downloading bits during prime time should cost more than at 4 am. Best efforts data back-up should cost less than guaranteed quality of service HD video. In return for charging more for these things, carriers will be able to charge less for other things, like basic access and voice service.
  4. If data costs in urban and rural environments are required to be very similar, then that will make urban prices higher than they would otherwise be. I have my own view, but political realities suggest that some level of rural subsidization will have to occur.
  5. Finally, base rates and overage charges should be reasonable. There should be a plan for people who don’t use the internet much (10GB/month?), one for the average user (200GB/month) and then additional increments that are related to the cost of providing the data, and are not the ISP equivalent of usury.

None of the above is intended to criticize or endorse the regulators, the government or the ISPs. The pricing we have in Canada (or most other countries) does not conform to my ideals for a variety of reasons: regulatory, historical, political, geographic, etc.

However, the kind of Internet access structure that I would like to see (if I had a magic wand), is also what I believe we will see in 10 years. How we get there will involve transitions for all the players, but I suspect at the end of the day, the average Canadian will pay less and get more and our ISPs will be just as profitable. Maybe even more.

I have just spent the last few days talking to European ISPs. And they see this kind of structure as inevitable, too. The recent controversy about UBB is not only a Canadian issue: the global industry is confronting the same challenges, and moving toward the same solutions.

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