Pricing a Broadband Bit

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April 6, 2010 | Editor

In 2008, Comcast, my internet service provider, instituted broadband caps, setting a  250 Giga byte monthly limit. Time Warner started a trial program that year as well, which has since become standard practice in more cities (Rochester, Greensboro, San Antonio).

Well, how do I do know how much I’m using, so I don’t go over the cap and face the consequences?

Comcast solved that problem (at least in my area)  last week with a usage meter. I now know that I consumed 10 Gigabits last month, which works out in my situation to over $6/Gb.

Some (me included) would say that’s a lot of money. Sure those aren’t ordinary bits: they’re the stuff of  movie  and TV show entrees, YouTube appetizers, and favorite blog sweets.

Playing devil’s ( incumbent’s )  advocate (K street attorney): You’re receiving a lot of news, entertainment, and information for a mere $6/month.

A casual reader of this blog knows I think that broadband prices are way too high in the US.  I’d prefer to see pricing more like what they have in Japan, where you pay around $60 for 160 Mbps. And from what can I determine, no broadband limits!  At those speeds, I certainly would be downloading more movies.

As it stands, my average bit costs are pretty high for my all-you-can-eat deal.

The industry has been aware of the consumption patterns of their light-eating customers  While they don’t want to meter us on a per-bit basis (there would be a justified uproar), their compromise solution was to to create pricing tiers (see, for example, Time-Warner’s broadband schedules).

In tiered billing, an ISP charges one price for usage up to, say 20 Gigabits of downloads(the basic level), another for 50G with perhaps access to an on-demand movie service (the family plan), and then a platinum level with higher limits, greater peak bandwidth, and more services.

One reason the broadband industry is moving to tiers is that there’s more revenue when  segmenting the market this way. Or as the economists would say, broadband providers are price discriminating, based on quantity—more bits, lower per bit price—and pulling out consumer surplus.

They’re finding power-user customers who are willing to pay more for greater bandwidth and extras.

What makes tiered pricing a good deal for the ISP is that the marginal costs of these tempting add-ons are vanishingly small.

The New York Times reported how cable companies are upgrading their network to Docsis 3, which supports download speeds of up to 50 Mbps.

The cost per household to the cable players? Probably under $100—roughly the price of a new modem that will need to be installed.

The Times’ article said the cable companies are now asking up to $140/month for higher bandwidth. A pretty good ROI on a $100!

As was noted in the piece, lack of competition is the reason why you see these expensive priced premium broadband services.  And an economist would also add that the aggressively priced tiers are another signal of  companies having to much pricing power.

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Tags: ComcastDOCSISprice discriminationtiersTime Warner 

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