Showing posts sorted by relevance for query marginal costs. Sort by date Show all posts
Showing posts sorted by relevance for query marginal costs. Sort by date Show all posts

Wednesday, February 26, 2014

Verizon CEO wrongly compares Internet usage to basic utility consumption

Internet Service Cost: Verizon CEO says heavy broadband users pay more | BGR: Are you constantly streaming high-definition video, downloading tons of Xbox One games and sending massive files to friends and family? You should pay more for Internet access than your neighbor, who only uses a 10-year-old PC in his living room to read email and occasionally browse the Internet for cat GIFs. This is the position of Verizon CEO Lowell McAdam, who said this week that heavy broadband users should have to pay more for home Internet access than those who don’t take full advantage of the service for which they already pay top dollar.

McAdam's logic would make sense if an Internet service was like that of other utilities such as electric power, water or natural gas. These are limited commodities that require some incentive to conserve their use so that they may be available to all who need them. That's why these utility providers use tiered billing schemes that tap into price elasticity -- the tendency to use less of a commodity as its price increases -- and create incentive to conserve via penalties for excessive consumption. There is no similar need to conserve Internet bandwidth. Someone who uses more of it does not impose higher marginal costs on Verizon or any other Internet provider to deliver that higher level of usage.

That said, McAdam is correct to expect that customers of its FiOS fiber to the premise service to help offset the capital and operating costs of the service. But treating bandwidth as a limited commodity when in fact it is not isn't the way to go about it. Instead of creating a false paradigm of bandwidth scarcity, McAdam and other industry leaders should endeavor to foster a mindset of bandwidth plentitude. Big bandwidth promotes more uses and applications of it, making it more valuable to households and businesses. And as those users realize that value, demand for fiber connections will grow, in turn increasing the value of the network under Metcalfe's Law and Verizon's investment in it. When it comes to the Internet, more is better -- not less.  What Verizon and other telecommunications companies should remember is they are not in the business of bundling and selling bandwidth. They are in the communications business.

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.