Healthy and Beneficial Broadband Pricing

Yes, this was the week of the Facebook debacle and the Google-Oracle decision, but we focus our weekly review instead on some remarks by Federal Communications Commission Chairman Julius Genachowski at The Cable Show in Boston.

First, some background. On May 16, Verizon Communications CFO Fran Shammo indicated Verizon Wireless plans to eliminate the $30 per month unlimited data plan that it still provides to 3G customers who were "grandfathered" into the plan because they were data customers prior to the company's switch to tiered data pricing last July. He said that as these 3G unlimited data plan customers migrate to 4G LTE, they will have to purchase the company's data-share plan (which Verizon plans to launch in mid-summer) and move off the $30 per month unlimited data plan. "Everyone will be on data share," Shammo said.

On May 17, Comcast changed its Acceptable Use Policy, replacing the Internet service provider’s current 250 GB monthly data usage threshold with a more flexible one. One version will introduce a 300 GB cap and offer additional tiers of service, with bigger caps, along with the ability to buy more chunks of data. Another version also uses a 300 GB cap and the ability to buy incremental blocks of data as needed. Comcast, which has more than 18 million high-speed data customers, says it will experiment with the two plans in some of its territories. It also says that in markets where it’s not trying the new plans, it will scrap its data cap entirely until it settles on a new plan. The move comes as Comcast has taken heat about the way it treats data on some of its proprietary video services, in particular the Xfinity app for Microsoft’s Xbox console.

CNet’s Marguerite Reardon compared the Verizon and Comcast moves and, in short, finds that Comcast's move, which increases its existing cap from 250GB to 300GB and now imposes an overage fee for those who exceed the cap, is likely a positive for its subscribers. Even the consumer advocates who typically hate the idea of data caps applauded the company for improving the policy. Meanwhile, Verizon's new plan, which will force existing subscribers "grandfathered" on its unlimited data plan into a tiered shared-data plan, will likely eventually lead to higher prices for wireless consumers.

San Jose Mercury News columnist Troy Wolverton celebrated the Comcast move as a consumer victory. He wrote, “Instead of threatening to cut off service to anyone exceeding its limits, Comcast now plans to simply charge them more. That's not ideal, but it's an improvement. Because the company hasn't finalized its new policy and because the announced change is apparently in response to an outcry from consumers, activists and competitors, there's reason to believe continued pressure could force it to offer an even better deal to customers. And we deserve it. If it's true that few people bump up against the old caps, then Comcast ought to easily be able to double or even triple the data allotments -- or eliminate them altogether.”

But Wolverton also looked at what many see as a major concern about a shift towards usage-based pricing:

"treating similar services differently based on who's providing them is ultimately a bad deal for consumers. Comcast pitches its new app as beneficial to its subscribers. They get the ability to watch its streaming video at no additional cost whether in dollars or in deductions from their usage amount. But the move is anti-competitive. Because it gives consumers a strong incentive to use Comcast's no-cost streaming service over Netflix's or Hulu's, it could lead to much less competition. And if Comcast is able to get away with it, there's no telling how many other services it would set up on "private networks." That could leave the Internet looking a lot like cable TV, where companies like Comcast determine the content you can access and the price you'll pay for it. Let's not go there."

Recently, a few bloggers conducted tests that seem to show Comcast’s traffic to its Xbox 360 running Xfinity TV On Demand, which does not count against a user’s usage cap (as announced in March), uses a different type of traffic routing. The effect is that the Xfinity TV service has its own dedicated channel on a given Internet connection, through what Comcast calls a “separate service flow.”

At the time, Comcast claimed it was serving its Xfinity TV service through a “private IP network” rather than the public Internet. But it's a claim that appears to not actually be true. Many argued this means Comcast is prioritizing traffic, a charge the company denies. So what exactly is Comcast doing? Who’s right, and why does it matter? The short answer: Comcast is doing some type of traffic management. It comes down to how “prioritization” is defined—if the company would be found to be favoring one type of traffic over another, that would be a violation of federal regulations.

On May 22 at the aforementioned cable industry confab in Boston, FCC Chairman Genachowski said, “usage-based pricing could be healthy and beneficial” for broadband and high-tech industries. “Business model innovation is very important,” he said. “There was a point of view a couple years ago that there was only one permissible pricing model for broadband. I didn’t agree.”

GigaOm’s Stacey Higginbotham was quick to point out that this was not a new tack for Chairman Genachowski. Back in 2010, he specifically called out approval for usage-based broadband pricing as part of the network neutrality regulations. At the time he said: “Our work has also demonstrated the importance of business innovation to promote network investment and efficient use of networks, including measures to match price to cost such as usage-based pricing.” In a subsequent interview, Chairman Genachowski said, “[U]sage-based pricing with increase efficiency, can enable consumer choice and competition, it can result in consumers who use broadband paying less.” Consumers will look at the caps to determine whether they are being treated fairly, he suggested.

Groups were quick to react to Genachowski’s statement this week.

Public Knowledge legal director Harold Feld says Genachowski's statement presents a "false picture." Feld said the question isn't whether or not there is one pricing model. The question, he said, is "will all the benefits of broadband Chairman Genachowski has articulated in the past ever happen in a world where broadband providers get a free pass on any pricing scheme or restriction if they use the magic words 'bandwidth cap?'" "If we really want to see students downloading textbooks or watching Harvard lectures online, it would be nice to know if they will ever have the bandwidth capacity to do so," he said.

Free Press policy director Matt Wood said "the data caps being pushed by the biggest cable companies are bad for consumers — and the FCC should be investigating these caps, not endorsing them."

AT&T senior vice president for external affairs Jim Cicconi said, “This isn’t the first time the chairman has recognized the need for flexibility in broadband pricing, but his words today come at a time when one company has been pushing the FCC to impose a particular pricing model on Internet service providers. Under that company’s proposal, the costs of providing their service would be borne by all consumers, not just those who choose to use their service. This would be fundamentally unfair, and that’s why Chairman Genachowski’s pushback is significant. “

Stacey Higginbotham suggested that even though Chairman Genachowski is in favor of new pricing models for broadband, it would be awesome if he started asking questions about how those caps are set and what impact they have on consumer behavior. A bigger question is whether or not he agrees to practices that would exempt an ISP’s traffic from their own broadband cap, as Comcast is doing with its Xfinity service over the Xbox. And from a consumer point of view, a cap isn’t terrible in and of itself, but it can be a tool used to protect an ISP’s pay TV business or their profits absent robust competition in the market.

This week, the Phoenix Center for Advanced Legal & Economic Public Policy Studies released a paper by George Ford who argues that society would actually be better off if ISPs charged fees that offset their lost profits associated with the loss of video subscriptions. He suggests regulatory oversight of usage-based pricing is unlikely to improve social well-being.

On May 24, Art Brodsky of Public Knowledge took a long look at Chairman Genachowski’s remarks. He points out:

  1. Data caps are not “usage-based pricing.” Consumers do not “use” data, as they might “use” electricity or natural gas. There is no shortage of bits; they are infinitely replaceable, as opposed to a kilowatt of electricity of a cubic foot of natural gas. Once they are burned, they are gone forever. What consumers are paying for is transmission capacity. There is no way to tell how much it really costs, whether the $10 for the additional 50 GB of capacity over the basic data cap of 300 GB bears any relation to anything.
  2. In a true “usage-based pricing” scheme, consumers would pay based on what they use. The data caps are nothing of the sort. “Use” 2 GB per month or 300 GB, and consumers pay the same basic monthly rate. There is no opportunity to end up “paying less,” as Genachowski said. Only more, which is what industry is counting on.
  3. There is no way that such pricing can give consumers any more choice or create any more competition. In fact, the trends are going the opposite direction. The FCC, while praising the merits of competition in the abstract, has done nothing actually to increase competition and add to consumer choice in the broadband market.

Brodsky concludes: “When consumers who want essential information and services are at the mercy of a tightly controlled marketplace dominated by big companies, which were given that dominance by regulators in the first place, the government agency charged with consumer protection should be extra vigilant. It should not make a point of making big industries feel good about themselves, which is unfortunately what happened in Boston.”

We’d be remiss if we didn’t mention too that L2Networks Corporation filed the first formal network neutrality/open Internet complaint with the Federal Communications Commission on May 22, challenging the legality of actions taken by the Albany Water Gas & Light Commission, a regional utility and fiber-optic based Competitive Local Exchange Carrier (CLEC) regulated within the state of Georgia. Recently, The Albany Water, Gas & Light Commission filed a criminal complaint against L2Networks alleging theft-of-service in Dougherty County, Georgia. The alleged claim against L2Networks states L2N should have compensated the utility for use of their fiber-optic internet infrastructure whilst delivering Voice over IP (VoIP) services over the utilities “internet backbone” to existing internet customers of the utility. The filing set to address Federal law was issued nearly in concert with the proceeding of a formal complaint issued by L2Networks to the Georgia Public Service Commission (PSC) in order to address potential outstanding issues that may fall outside of the state PSC’s jurisdiction. The impact of the legal complaint, if successful, has the potential to immediately create an irreversible ripple effect along with the creation of various legal challenges across nearly every national content and application provider like Netflix, Vonage, Packet8, Facebook, Google, Amazon and other entities that provide application based services across the Internet.

Assuming you haven’t been overtaxing your ISP, we’ll see you next week in the Headlines.