Thursday, April 02, 2015

Tiered rates for Internet service cannot be justified and demand attention from utility regulators

Homeowners and business operators are familiar with tiered rates in which a premise pays more for using higher amounts of water, electricity or natural gas. These are consumptive utilities that impose greater costs on utilities to provide them in larger quantities, thus justifying higher rates. At the same time, tiered rates encourage conservation of these finite resources by tapping into the economic principle of price elasticity. The principle holds that as price increases, demand declines and vice versa.

Encouraging conservation by making consumers pay more to use more – and hence reducing demand via price elasticity – makes sense in the case of water, for example, in the severe drought being experienced in California and other parts of the western United States. But it doesn’t make sense for America’s latest utility as recently declared by the U.S. Federal Communications Commission: Internet telecommunications service.

Internet service providers inappropriately price the utility as if it were a consumptive, resource-based one like water, electricity or natural gas. For example, this week Frontier Communications announced it is offering fiber-delivered Internet service with speed tiers of 30/30, 50/50, 75/75, 100/100 and 150/150 Mbps in Beaverton, Oregon. The higher the speed, the higher the monthly price.

It makes no sense to slice and dice Internet bandwidth like this on a fiber circuit with huge carrying capacity. Nor can it be rationally argued that providing higher speed tiers to a customer premise imposes higher marginal costs to deliver them and they therefore should be priced above lower speed tiers. This market practice cannot be economically justified. Moreover, it is exploitative of and unfair to consumers and demands attention by telecommunications regulators.

2 comments:

InfoStack said...

Fred,

Have you found any source that goes into the actual cost differences in tiered service offerings? Surely they can't vary by more than a few cents/month.

Michael

Phillip Dampier said...

I think we've seen other providers like Google, Charter, and even AT&T start simplifying tiers into 1-3 options. The argument for tiers is that faster users use more data, which is probably true, but the incremental costs are minuscule on the order of a few pennies per gigabyte maximum. So this kind of pricing is testament to the Wonderful World of Marketing.

Frontier sent me a wonderful announcement yesterday telling me that after $9 million in local investments, they were offering a free speed boost:

From 3Mbps to... 3.1Mbps.

Pick me up off the floor.

Frontier's idea of marketing was questionable from the day they chose a bison (Frank the Buffalo) as the company's mascot and branding tool.

The good news is CEO Maggie Wilderotter is leaving this month and maybe Dan McCarthy -- the former COO -- will be more enlightened.

With Frontier, it's always best to keep your expectations as low as their DSL speeds.

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