I got in one of my — let’s complain about broadband usage cap — moods this weekend. The result is the piece (over the fold) in today’s Age.
[DDET Read the article]
ISPs should pay no mind to the cap
Joshua Gans, The Age, 25th August 2009.
ONE of the great anomalies of the Australian broadband industry is the existence of usage caps, which around the world are virtually non-existent.
In the US, some internet providers have talked of a 250 gigabytes-a-month limit. That has led to consumer outrage that forced those providers to desist lest they lose customers. This is despite the fact only 0.003 per cent of US broadband users exceed that level – just 0.21 per cent exceed 100GB.
To an outsider, the Australian system seems very strange. Telstra boasts a basic package on its BigPond Cable Extreme network that, for $39.95 a month, gives 200 megabytes in usage. At Telstra’s boasted 30MB a second speeds, that amounts to a minute of high-quality video downloads. After that you pay 15¢ a megabyte. It is hard to imagine that being an option for consumers.
But even its Liberty plan, which costs $69.95 and offers 12GB a month – after which the extreme speed is slowed to the speeds of last century – only allows you 20 hours of video watching a month, provided you do nothing else. That’s about 45 minutes a night.
No wonder so many people do their YouTube watching at work.
Had the US and rest of the world had similar practices, requiring users to carefully watch their megabytes, YouTube and similar services would never had been conceived, let alone put into practice. Perhaps the carriers would have hosted content, under the cap, but then we would be in a world where they decided what we saw rather than the demonstrably better one where that choice is truly free.
There are costs to bandwidth. But rather than being 15¢ a megabyte, they are in the order of 15¢ a gigabyte – or 1000 times less. So if you are using 500GB a month, you are costing your carrier $75 a month. It seems reasonable that you pay for it. But, in Australia, if you want to use 50GB a month, you’ll pay $2.60 a gigabyte to Telstra. Paying for bandwidth is fine. Getting gouged for it is another matter.
It is not just Telstra, although it has a special role. No internet provider in Australia offers a plan like they do in the US. The best ones are cheaper than Telstra but offer more by dividing between peak and off-peak use.
They have not tried to grab market share by going for it and freeing people from dreaded usage monitoring.
Why isn’t competition working here? It is difficult to say but consider what would happen if a smaller provider lifted its cap to 250GB and charged 15¢ beyond that. It would attract a disproportionate share of those who would use that much. That may represent a small part of the market but a large part of its customers. Add to that the potential congestion caused by such usage – if concentrated in the evenings – on the equipment installed in Telstra exchanges, and that 15¢ a gigabyte may be something much larger.
This is a problem that Telstra likely does not face. But it does face conflicts that might give it pause when lifting caps.
For instance, a higher cap moves video watching online and out of the living room where Foxtel boxes reside. That is a cost it faces that others do not. But it is a cost borne of choice, the choice to be integrated with Foxtel.
We are told that the new management of Telstra is more open and ready to meet the challenges brought about by the national broadband network. The NBN will have the capacity to break through usage caps. But why wait eight years?
There is an opportunity for Telstra to demonstrate its new responsiveness and get rid of this anachronism. It could lift its Liberty plan to 100GB and likely face few additional costs if it charged 15¢ a gigabyte. It would send a strong signal to markets.
For others, there is a similar route. Smaller providers need not offer high-cap plans widely, but, for example, as an employee deal with businesses they also serve.
Think about it. Employees would be offered plans that gave them incentives to watch YouTube at home rather than at work. Employers would be happy and there would be only a marginal increase in traffic for the service provider as usage moved from work to home.
There is a way out of tight usage caps that stifle appropriate internet use. These will not be costly given international experience, but will open up more services to broadband usage. The NBN will provide this, but Australians shouldn’t have to wait that long.
Joshua Gans is an economics professor at Melbourne Business School. He writes on these issues at economics.com.au
[/DDET]
Core Economics 
The US internet market is simply not comparable to the Australian one. Top tier networks in the US exchange data freely with each other at peering points where bandwidth is effectively unlimited.
Australia, on the other hand, is stuck behind a handful of cables with limited bandwidth. Each top tier provider must lease fixed-bandwidth circuits on these cables, and then faces a similar economic conundrum to the owner of a coal power station – the bandwidth must be sized to accomodate the peak times each day, but the rest of the day the circuit is running far below capacity.
This fixed bandwidth is what passes through the economic chain and ends up as a consumer monthly bandwidth cap. It’s also why providers are able to offer cheaper effective “off-peak” rates.
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Hi, Joshua. Are you going to tell us why competition isn’t working? Is it because, as kme alludes, most Australian ISPs do not peer with each other on a “keep what you bill” basis? I recall there being a big fuss many years ago when Professor Fels was chairman about the ACCC forcing Telstra to peer with Optus and two other ISPs, but not the rest. I understand it was a difficult and controversial decision among economists. Do you have a view?
For me, I’m happy to confine my online activities to low data applications, and spend my free time reading a book rather than watching YouTube ?
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We have a $46 billion solution – the NBN. If you can think of a cheaper solution, then we should look into it. Yet if we laid a cable and charged $0.05/Mb to access it, what would stop Optus and Telstra dropping their prices to $0.04/Mb and putting us out of business. Google took a similar approach and bought a 25% interest in a new cable, so they could pay cost, rather than cost plus monopoly loading. Maybe we should buy some bandwidth off Google.
I was interested to see Australia has the highest price per Mb in the OECD for Mb over caps ($0.103/Mb USD PPP), except for Turkey ($3.25/Mb ouch!). The other 10 countries that have caps are all under $0.02 per Mb. I think it is the Optus/Telstra monopoly on the undersea fibre. Maybe what we need are some alternate routes off the island.
OECD Broadband statistics [oecd.org/sti/ict/broadband]
4i. Average price per additional megabyte after reaching bit/data cap, USD PPP, September 2008
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I agree that the 12Gb limit is unnecessary and I do not actually understand why Telstra does it. They are better placed to offer no limit than their competitors.
But I do not share your sense of outrage. Whay? Because 12Gb is plenty for anyone using their home PC for appropriate activities i.e. email, research, booking, reading the paper.
According to you, the current plans “stifle appropriate internet use”. Yet the only example you can give is Youtube. How important is watching video on computer? How much of it is illegal or pornographic. Youtube is a silly toy for gen Y’s who aren’t “kool enuff” for MSN and not worth an economist’s scrutiny.
What IS unfair is that we are also penalized for uploads. If you install standard file sharing software and leave it running over night (which it does even if you think you have closed it) then you can easily have Gig of uploads per day and reach your 12Gb usage limit in a week.
Again though, usage of BitTorrent and similar is not considered legitimate.
When the NBN is built then perhaps we can talk about completely reconceiving how video is delivered to the masses. But for now it seems premature, and the current usage limits are fine.
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@chris lloyd Bit Torrent is just a transmission protocol. The data on it is a seperate issue. There is valid data on torrents, part of the purpose of which is to alleviate heavily used links (such as the pacific link and the south east asia link) by having the content stored locally in the cloud. Various open source tools exist in torrent space, as do updates and other useful, ethical, completely legitimate objects. Knee jerk. Much like saying that all telephones should be banned, because they are only used for harassment.
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Hi Joshua, I would suggest you contact Simon Hackett. (Owner of Internode – Australia’s 3rd or 4th largest ISP) He can tell you IN GRAPHIC DETAIL exactly why products are priced the way they are in this country. Primarily, the costs boil down to three areas (over and above the cost of actually operating the ISP as a company): 1. Port rental to provide a DSL/Wireless atc access point for the customer 2. Backhaul charges to get the customer’s data to/from the ISP point of presence (POP) 3. Data charges for traffic to/from other ISPs/overseas sites. Cost 3 is decling SHARPLY at the moment with Pipe Networks about to light up PPC-1 and drastically change current Optus/Telstra duality in this market space – see http://www.pipeinternational.com for details. Southern Cross cable have already announced drastic (30%+) drops in their pricing and a major bandwidth upgrade programme in a desperate attempt to hang onto customers. Costs 1 and 2 and controlled primarily by Telstra and a couple of other large telcos – Simon Hackett could, I’m sure, give the a long and extremely painful and detailed explanation of how said telcos are exploiting and distorting this market to their own financial gain. Calvin.
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I notice the wholesale price (??) on the Southern Cross cable is falling (http://www.southerncrosscables.com/public/home/whatsnewdetail.cfm?WhatsNewID=70) from $1.95/Gb US in 2003 to $0.28/Gb US now, with pressure from the Pipe PPC-1 cable, about to come online in Oct 2009. PPC-1 has 1.92 Tb/s, running from Sydney to Guam (Southern Cross 360 Gb). This compares to the partly Google owned Unity cable going from LA to Tokyo, which will have 7.68Tb/s (cost $300M USD).
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@ Chris Lloyd…I don’t think you can make a blanket statement like that on other methods of downloads over the internet. As Veltyen says, Bit Torrent is just the transmission method.
I download large amounts of legitimate data (games) (way over the 25GB that I am allowed on my current Telstra Cable Extreme 25GB plan) via the Steam & Impulse content distribution service. In addition to this, I also download full game clients of games such as World of Warcraft (which are distributed from the US by Blizzard (Developer) using the Bit Torrent protocol) and these downloads are around 6-7GB in size each, not including updates.
With the restrictive data caps that we are forced to endure, it makes things like this very difficult. From what I see, the gaming industry will be looking at more and more digital distribution (already happening on things like XBox Live & the Playstation Network) and the amounts of data that can be downloaded from these sources can quickly add up and blow someone completely over their monthly cap.
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The fault in the off peak and on peak system is the assumption that those that may desire to use the off peak system have an always on connection and/or may actually turn their system off to save electricity and money on their power bill at the time.
The problem I find with caps lately is that some of it comes with unmetered material but updates from Microsoft for eg. are still counted towards the cap and that video (ie. youtube, msn, etc) is almost non-functional on what Australia considers low broadband (256k) and takes up a huge chunk of that data cap .
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There you have it. The whole industry is there to service World of Warcraft. I think other have made my point (that Youtube is a toy and high data usage is mainly for trivial or illegal activities) better than I could have.
By the way – I like games, especilaly Half-life. I was a Doom addict for years. I just don’t think making the NBN a national priority should be based on the needs of gamers.
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Senex: Re: off-peak. Correct me if I’m wrong but it sounds like all you’re saying is that off-peak won’t suit some users. This is true.
But the preference of some users to switch their systems off and power save during off-peak periods and only use their connection during conveneient hours isn’t really an argument against having off-peak periods.
Re: unmetered content: if you unmeter all the popular and data intensive content (M$, YouTube) that is coming into your ISP from the outside world, then what are you going to charge for?
Re: Speeds. The Dec ABS stats show only 21% of household broadband users were still on 256kbps. By contrast, 31% were on plans with a speed of 8Mbps or greater. Can we please move on from this idea that people don’t have access to higher speeds – generally they do, but people aren’t prepared to pay the current price.
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Main prob I see in Oz is the disgustingly small 10 mb email space provided ‘unless you pay more’. Gmail offers 7363 mb – free! It affects Australian businesses, families etc when senders get their messages back ‘account full’.
Is anybody looking after the consumers interests?
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HeathG, I would not have YouTube unmetered but something like M$ for their constant updates would have to be, at least in Australia where data caps are relatively low.
You are correct on the off peak assessment, it wasn’t really an argument against them other than to say it is a useless concept. I can only see it working for shall we say a very niche section of the community.
Personally I find the Bigpond 12GB 256kbps Liberty plan just fine but sometimes I would like it to be faster on the rare occasions I watch media online, for eg. You cannot watch any of Telstra’s unmetered videos online with 256k – its impossible. What I would like them to do is stop counting any upload to the charge.
Other than that I find your assessment correct, the prices for faster speeds are astronomical and unaffordable by the general public.
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Telstra is a privatised monopoly until the Wholesale is seperated. If you want to use more than the quota’s give then that is your right as a user – no product manager should decide on your behalf what is ‘fair use’ and the gouge out massivley inflated prices set by marginal monopoly pricing.
I think Australians are still getting done by Telstra and you don’t know to you either live or travel overseas how bad it really is.
I stayed in Macau recently and the hotel came with free broadband which was faster than my work connection and it has ‘filters’ on it.
I just despair at this countries conservatism and ability to be taken so easily by 800 pound market gorillas.
I applaud Joshua’s effort to get the debate in the right context. By the way peering arguments and the “Australia is so different” discussion just don’t wash in the world we live today, it is so colonial and and smacks of a lack of vision and a running with the flock – easy when it is all you know.
Keep up the dialogue, Joshua and keep the focus on the right areas as you have done, with pricing facts and as we know facts are facts – ignore the dross in between.
The Mainlander.
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It is really ‘what the market will bear’ pricing. Where is the CCC?
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Might I remind everyone that back in the good ol’ days when ADSL first came out, Telstra offered unlimited plans with a fair usage policy. For $90 / month you could have 1500/256 (the best available at the time) with no excess usage fees at all (if you went over 90Gb you might get an email asking to ease up).
The ACCC, in their infinite wisdom, saw this as anti-competitive conduct and took many, many actions against Telstra to have them stop ‘[denying] competitors the ability to differentiate the performance and functionality of their services from the Telstra retail service and to compete fairly with Telstra’s retail prices’.
This eventually forced Telstra to put caps in place to ‘appease the ACCC’. Let’s be absolutely clear: the Australian broadband network is in the schmozzle it’s in not because of Telstra and the other internet providers, but because of the ACCC’s short sighted pro-competition policies.
Sure I can choose from 3.2bn different internet providers, all offering ‘great rates on 2Gb plans’ – but I personally would rather have a limited choice (say Bigpond and Agile) and get a great rate on a 250Gb plan.
Thanks Prof Fells.
Source material:
http://www.accc.gov.au/content/index.phtml/itemId/87832/fromItemId/378012
http://whirlpool.net.au/news/?id=622&show=all
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Dan,
I can’t see how either of those sources back up your arguments. The ACCC argued that Telstra’s wholesale offerings were too expensive (relative to its own retail offerings) and had limited functionality. Is that not anti-competitive? And then what kind of solution is Telstra putting caps on its retail service (i.e. to ‘appease the ACCC’)? Surely the solution was lowering wholesale prices (or increasing retail prices) and offering better functionality (i.e. layer 2 interconnection)?
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