My article in The Age on broadband caps got a bit more attention than I had bargained for. There are several themes that I wanted to follow up on. My starting point was high bandwidth costs in Australia. I suggested based on my reading of those in the known (for instance, this great piece by Ben Edelman in the Journal of Economic Perspectives) that bandwidth costs are now low — of the order of 15 cents per GB. If the Australian broadband market is working like a competitive industry then usage charges would reflect those costs. Instead they are 1000 times higher at 15 cents per MB.
First, what is the cause of high bandwidth costs? Are they really that high for Australian ISPs? Some suggested it was about international capacity. But if that was true, we know that capacity has been growing (click here). Why has the 15 cents per MB charge stuck? Others suggested that the wholesale providers (Telstra, Optus and some others) were keeping wholesale prices at that level. That could well be true but again, why are the wholesale providers doing that? Surely they want to compete for wholesale market share too. The final issue — that I hinted about — was congestion. But at these ridiculous prices surely more than just a few smaller ISPs would offer plans that shaped that congestion. Why can’t Telstra or Optus do that? It just doesn’t make sense that they are facing those constraints. They don’t even have congestion pricing for businesses.
My point was that something else is going on. To explain Telstra, Foxtel looks like the elephant in the room. To explain the others, it is a harder task. To me, the idea that these are real costs of 15 cents per MB just doesn’t add up.
Second, shouldn’t an economist be in favour of usage pricing? This came up over at catallaxy and in the comments there. To which I respond. Absolutely, and I have favoured usage pricing in all manner of circumstances especially where people are taking actions that are imposing costs but they aren’t paying a price for it.
In my article, I was not suggesting that broadband use be free — just that it reflect true costs. 15 cents a MB is not usage pricing. It is non-usage pricing. There is no-one who (knowingly) pays that charge for use. The highest ‘free’ allowance on BigPond is 60MB per month. They may be users who want consume more than that and pay the cost (more like 15 cents per GB or even $1.50 per GB — 10 times more) for the privilege. They are not served by this. The 15 cents a MB charge is Telstra’s way of saying we don’t want to sell you any more bandwidth this month. Come on. Could it really be that they don’t want to do that in a normal business? Can’t imagine.
So to those who think 15 cents a MB is reasonable, produce ONE PERSON who knowingly purchases say, 100MB, or 0.167% of the top Telstra allowed monthly usage of this. If there isn’t anyone, you can’t claim this is usage pricing. To do so, gives the whole concept we fight everyday for a bad name.