Tiered Broadband Pricing and the Myth of the Internet Flood

Over at Public Knowledge, Robb Topolski has written an inspirational post, ISPs Behaving Badly, which criticizes Time Warner’s trial runs at tiered pricing.

I’m not opposed to tiered pricing in principle, though TW appears to have handled it rather badly, and it still fails to solve the root problem of weak competition in the wireline ISP market. Also, I’m skeptical that it’s necessary–rather than a way for TW to keep maintenance costs down and prices up in a market where consumers have few other options.

I really appreciate Topolski taking on the ever-invoked myth that the internet is about to become so choked up as to become unreliable. This is the threat that the “Internet Tubes” will get full, invoked by then-Senator, now-convict Ted Stevens was threatening all the way back in 2006.

Basically, this threat is still a bogeyman and looks to be so indefinitely. Last year, Telegeography concluded, “Internet traffic is growing fast, but capacity is keeping pace.”

Further, DSL Reports debunks the “exaflood myth” in their typical sharply opinionated style.

For a more detached, scholarly view of internet traffic, see the Minnesota Internet Traffic Studies (MINTS) site. Chief investigator Andrew Odlyzko and company are doing great work here. He also suggests that, if anything, the rate of growth in wireline broadband traffic is decreasing. The most recent MINTS post cites a Cogent estimate of 30% growth in internet traffic in Q4 2008 versus 2007.

Last February, Odlyzko argued that, at least as far as the network industries are concerned internet growth may be too slow. This was even based on higher estimates of growth; Odlyzko’s estimate at the time was that internet traffic grows at about 50% per year.

The key is that the cost of managing a network declines by about one third per year. Even exaflood believer Lawrence G. Roberts adopts the latter estimate, following Moore’s law.

If the cost of managing network traffic next year will be roughly 2/3 of this year’s per-bit price, and total traffic is around 3/2 of this year’s total, network providers spend about the same year-over-year for network maintenance (2/3 * 3/2 = 1) and thus make the same profit per subscriber.

Of course, it’s very un-sexy to tell your stockholders that per-subscriber profits will be the same as last year, especially considering the ever-decreasing potential for new subscribers in a broadband market that is approaching saturation.

Thus, dare I suggest: Maybe the exaflood threat is actually about broadband providers leveraging their way into a new business model–whether the Tony Soprano business model of “Charge Google,” or the wireless carriers’ model of tiered pricing.

To draw a comparison with the wireless industry is instructive; even when wireless data transmission is more than doubling every year, wireless carriers keep charging lower prices for better service and rolling out every more reasonably priced all-you-can-everything plans.

Where there’s even modest (and far from ideal) competition, customers come out far better than in the duopoly-at-best home broadband market.

But then again, maybe “global traffic will exceed the Internet’s capacity as soon as this year.” That is, if you listen to Phil Kerpen’s commentary at Forbes–from January 2007.