from the executive summary
Usage-based pricing, today most commonly encountered in the form of data caps, is rapidly becoming part of the Internet access landscape. Wired and wireless Internet service providers – most of whom had traditionally operated on an unlimited basis – are evaluating or implementing pricing strategies that limit the amount of data a customer can use, charge customers for using data beyond a predetermined amount, or combine the two.
Although some providers have been quick to embrace these pricing structures, consumers have generally not been enthusiastic, and have often expressed strong protests. For their part, regulators have largely avoided asking even basic questions about this trend.
This whitepaper is an attempt to begin a serious consideration of usage-based pricing. It attempts to move beyond rhetoric and recognizes that usage-based pricing is a tool. As with any tool, usage-based pricing can be used for both productive and destructive ends. Sometimes these ends are intentional. Other times, they are a byproduct of other goals or even a lack of careful consideration.
Regardless of the motivation driving its implementation, usage-based pricing has the potential to significantly impact how networks are designed and used. This, in turn, impacts the innovation that relies on those networks. Before deciding if and when usage-based pricing is desirable, it is critical to fully understand the history of usage-based pricing, how it impacts markets, and both the benefits and harms that such a model can bring.
This paper aims to explain the basic issues surrounding usage-based versus flat-rate pricing. Section I examines the trend towards usage-based pricing in both the wired and wireless markets. Section II then considers the benefits and justifications for using usage-based pricing. This is followed in Section III by a review of the history and economics of flat rate pricing. Since broadband access is central to so many national and societal goals, the penultimate section – Section IV – discusses the problems that might be caused by usage-based pricing. Finally, we end with a series of conclusions and recommendations for responsible implementation of usage-based pricing.