Well, it’s happened. AT&T announced this week that it will abandon its wireless unlimited-data pricing plan in favor of usage-based model. I have been opining about this particular issue for many years — any kind of “all you can eat” pricing model has always struck me as sub-optimal, and my reaction to the growing popularity of flat rate Internet connection pricing based on connection speed is the same as my reaction when Pets.com offered free shipping on 50-pound bags of dog food back in the day: buy all you can, ’cause this deal can’t last.
Internet customers (at least in the US) seem to have figured this out. Their usage of bandwidth continues to grow at very high rates while flat rate pricing is the norm. This is rational producer and consumer behavior – there is no disincentive to produce “fat” content or applications, nor is there any disincentive to consume them. This has been a lurking but invisible problem in the wired world, where bandwidth is relatively cheap. But the problem has become visible recently in the wireless world, where bandwidth is more expensive (because it is more scarce). We have all seen reports of wireless carriers struggling to keep up with network demand created by the latest smartphone or media application.
It costs real money to upgrade networks to keep pace with this demand, and those costs are ultimately borne by the subscriber. So, in the US, we have carriers trying to raise their rates to offset increases in capital and operating expenses, to the point where consumers are beginning to push back and the shoving has come to the attention of the FCC, which has raised the possibility of treating Internet network providers as common communications carriers subject to regulation.
I believe that flat rate pricing is a major source of problems for network carriers and consumers. In the carrier world, the economics are known but ignored because marketers believe that flat rates are the only plans consumers will accept. But in the consumer world, flat rates are rising to incomprehensible levels for indecipherable reasons, with little recourse except disconnection. Consumer dissatisfaction is rising, in part because consumers feel they have no control over the price they have to pay. It is driven by their sense of pricing inequity that is hard to visualize, but comes from implicit subsidies in the current environment. The irony is that pay-per-use pricing solves the problem for carriers and consumers.
A pricing strategy like this might lower the monthly bill for an average customer, and allow for some increased consumption without breaking the bank. It would provide the consumer a way to lower their costs just by reducing consumption. There would be a substantial disincentive for order-of-magnitude increases in consumption – if the data were really that valuable, this would prove it. Otherwise, consumers would have to think of options:
- Do without
- Find a way to make the data more efficient
- Find a cheaper substitute
- Get someone else to pay
All of these options are used by producers and consumers today, and form the basis of advertiser and business-supported messaging. There is no reason to suspect that a motivated advertiser wouldn’t pay to transmit its car ad to a serious prospect. Web site and content creators would be obliged to consider data transmission costs and build more efficient products – or offset their higher costs with direct payments, advertising or some other explicit subsidy. Carriers could use variable pricing per packet to adapt consumer usage to network capacity variances and expansion.
In short, rational economic behavior would prevail in a pricing environment free of implicit subsidies. This would prove beneficial to content producers, content consumers, and the infrastructure providers who move the bits around. When I look at the problems created and looming by current flat rate pricing, and consider the advantages of usage pricing, I consider it only a matter of time before usage pricing becomes the standard.
Meanwhile, use all the bandwidth and transfer all the bits you possibly can. This deal is too good to last.