More on broadband caps

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.

8 thoughts on “More on broadband caps”

  1. Are internet charges as bad as mobile phone costs?
    Most ISP’s charge $1 per gb on contract, or according to your 15 c gb cost, some 7 times the cost.  Most now don’t have excess usage costs, your bandwidth is restricted instead.
    Mobile phone companies on the other hand regularly charge 20 times their contract cost ($300 plan for $20, onto $300 costs when usage used) and use what I call rip-off advertising (when has capped ever meant your kids use all they want and you cannot cap it no matter what you try!) .
    If anyone has actually seen the sucker monies mobile companies make, from people going over their plan “cap”, I am sure many people would be interested in sharing them!

    Like

  2. Disclaimer.

    15c per MB is usage pricing. You pay more as you use more beyond your plan allowance.

    Just because you think the price is too high doesn’t stop it from being usage based pricing. What you’re calling out is that the per MB rate once you exceed your plan allowance seems to be very high compared to the incremental cost to the provider of that MB of usage.

    BTW – 15c per MB is not the highest per MB rate in the market either. Dodo currently offers plans with 18c per MB excess. but the excess capped at a maximum amount)

    As for knowingly paying 15c / MB. I think I have on one occasion done that on my BigPond wireless broadband card. $15 for 100MB of extra usage is cheaper than $30 to upgrade to the next highest plan.

    Like

  3. How can usage pricing be limited under monopoly conditions?
    Our household has bigpond ADSL2 on which my partner watches streamed ABC TV shows and occassionally youtube HBO shows. This results in us getting to the end of the month with a ‘shaped’ service, which means the connection slows right down so even ordinary web browsing becomes excruciatingly slow. My partner regards this as mysterious, then becomes outraged that Telstra could do such a thing to her. She gets on the phone to tech support, which takes a very long time, and demands that the company repairs the connection. From her perspective, Telstra has clearly broken something, and done so deliberately. Eventually, after much arguing about what is possible and what is impossible (apparently you can’t just ‘top up’ your download capacity for the last few days of the month, you have to change plans, which doesn’t commence for several days – unless you complain like mad and it mysteriously becomes possible), Telstra agrees to un-shape our connection, for an additional fee. My partner knowingly and willingly agrees to this, even though on a per MB basis it’s clearly extortionate. The precise details of this arrangement may be wrong, but this is certainly how it appears to an ordinary customer just wanting to watch a bit of TV on the internet.
    Why does this happen? Simple really: Telstra has an effective monopoly of ADSL2 at our telephone exchange (it’s a village 50km from Sydney CBD, and overlooked by Optus or anyone other than Telstra), so there is absolutely no competition. It’s a choice between pay up or lose out, and my partner simply isn’t prepared to lose out. As far as I can tell, this monopoly has been created by federal government legislation, and their answer to our woes would, presumably be the repost: ‘Shut up, if it wasn’t for this wonderful system, you wouldn’t get broadband at all.’
    In theory, I could stop worrying about this, set myself up as a micro-ISP company, purchase broadband capacity wholesale from Telstra direct from the telephone exchange, and bundle it out to all my neighbours cheaper than Bigpond currently does. But unsurprisingly the pricing of wholesale seems to preclude this in practice. Further, it seems uneconomic for an alternative telecom company to set up its equipment in our exchange, and I’m hardly about to even contemplate doing that (never mind that it’s a really inefficient use of resources).
    I would have thought the regulatory requirement on a government-maintained monopoly should be for there to be an independent pricing commission that would prevent the kind of pricing arrangement you have described and we have experienced. Why isn’t this happening? Or is there something I’ve missed? Surely we know how to deal with monololies by now.

    Like

  4. Joshua, your article was excellent and way overdue!  I think you should extend you’re analysis to mobile phone plans too.  Keep up the great work!

    Like

  5. Much like those dreadful overdraft fees, the cost borne by the customer outweighs the cost borne by the bank to service the overdraft by several orders of magnitude, which kind of happens without sufficient competition in the market.

    Like

  6. as a heavy user who actually gets close and sometimes goes over his 60G limit. I have a ‘simple’ solution. I have a 3G modem with a prepaid card that I use for those occasions. it ends up cheaper than 15c/m

    Like

  7. You might like to compare the Telecom NZ plans here: https://www.telecom.co.nz/broadband/select/1,10627,205836-204473,00.html. Telecom NZ shares the same Optus Southern Cross Cable from Auckland to Hawaii, and they own a I think 25% share, Verizon 15% and Optus, the rest. The prices are comparable to Australia: entry price $30, 20GB for $60. What is different is the excess prices: $0.02 per Mb. This applies on the smallet plan, then you have to upgrade to the next plan $40 (3Gb), $50 (10Gb), or all you can eat for $60. Now there is an argument that Australia size makes the local cost more expensive in the country and the city needs to subsidise the country, and that may be true. Though Canada has cheap internet, since it is close to the US, even with a large rural area. So Australia has the worst case scenario – far, and wide. Either way, I think the $0.15/Mb is about delaying universal broadband, so we stop making local calls on the local loop, and every year of delay is $8b revenue to Telstra – a strong incentive to delay. Of course we are substituting 3G mobile, and other mobile for local phones. What Telstra misses in this economically rational decision, to maximise revenue, is that consumers reflect this in negative attitudes towards Telstra, which down the line might come back and bite them…. one day…. Competition between Telstra and Optus doesn’t solve the problem because they are cosy with $0.15/Mb. What is needed is a disruptive innovator, a viable alternate third player to shift the cosy club. The new Pipe cable (Sydney-Guam) might help. But time will tell… Disclaimer: I am writing my PhD on broadband(3G) pricing, and what consumers think about it.

    Like

  8. It sounds like this issue is due to path dependence.  Once upon a time, firms were individually best off charging $0.15/MB when others do, so they play the Nash equilibrium strategy and charge $0.15/MB. Then technology improves and firms (and consumers) are individually better off charging $0.15/GB. But they are collectively better off charging $0.15/MB and nobody wants to change that.
    We either have firms cooperating in a prisoner’s dilemma, or they are cooperating in an assurance game. If it is the former situation, it may be possible to re-establish a competitive situation by having the government create a firm which plays the Nash equilibrium and charges $0.15/GB.

    Like

Comments are closed.