Thursday, February 03, 2011

The Argument Against Usage Based Billing

Responding to David Eaves

Well, I don't agree with you that the roads should be tolled, and for the same sort of reasons I don't support usage based billing for internet services.

But before that main argument, let me reiterate the point made by some commenters, that what has transpired in the era of UBB in Canada thus far is blatant gouging by the ISPs. As reported in the Globe and Mail today, the cost for ISPs is as low as 3 cents per gigabyte, while providers like Rogers are turning around and charging consumers $5 for that gigabyte. They could raise their rate $10 a month, thus allowing consumers an additional 300+ gigabytes a month, a limit that would never likely be reached.

Additionally, a secondaryt point to the main argument is that the charging of bandwidth fees are in response, not to the cost of providing bandwidth, but rather, their desire to eliminate the competition. ISPs in Canada are content providers as well. So services like Netflix pose direct competition to the content end of their business. So the rates are increased in order to establish an ISP content monopoly. Such conditions are not conducive the creation of new industry, especially in internet content and services, and this will have a double impact when the inevitable happens under the current realm of CRTC-non-regulation and the ISPs are sold to American interests.

But the main point about UBB, as with tolls on the roads, is that it's an inefficient cost-allocation mechanism that creates a drain on the economy, with no gain in productivity. The imposition of tolls on roads requires the creation of an infrastructure to collect these tolls. This infrastructure does not produce any wealth; it merely drains it.

Moreover, it makes the roads less usable. That's why tolls are actually used only in a few places, on major highways. Anything like an actual toll on all roads would be so cumbersome as to render road traffic entirely unusable. Similar tolls on the internet, which while they may appear to be simple and straightforward, like a highway toll, risk becoming a cumbersome overhead, as providers in our un-regulated and non-net-neutral internet reach special deals with various providers. This means that each stream of internet traffic would be billed differently, which in turn entails an entire overhead for monitoring and managing those streams.

Finally, because of the overhead, and because of borrowing costs required in order to acquire and establish a UBB internet, the tolls may never actually serve their purpose. Just like highway management companies (or manyother private enterprises that begin as privatizationb but evolve into PPPs) the proprieters will return to the government well for subsidies and additional funding again and again. Like the managers of the Saint John Harbour Bridge toll, they will collect money for 25 years and actually lose ground, the entire total having gone to pay back overhead.

David Eaves replies:

Stephen - I confess being surprised to read this from you. I think the idea that tolls are inefficient as a system is a weird logic - especially when applied to roads! (I'm open to the possibility that they may be inefficient for monitoring internet traffic). But electronic tolls on highways have made the system very efficient, and London's downtown toll is one of the great success stories of modern urban planning. THat said I can't speak to the Saint John harbour toll... but when you have a scarce resource you need to find a way to allocate it (or create incentives to increase the amount of it) and I don't see that part of the discussion taking place.

I think we are aligned though around wanting a fair price for access - so I'd love for their to be a fair usage based billing rate. Indeed, looking at the Globe article you referenced, that fact was raised by the commentor who talked about the price. Yes, it only costs a few pennies to deliver a gigabyte, but it doesn't cost a few pennies to deliver an additional gigabyte.

Scotia Capital analyst Jeff Fan said that if the government tears down the usage-based billing decision, it would essentially break the link between Internet traffic volume and revenues, and could discourage network investments by large telecom and cable companies.

Mr. Fan added that current estimates – that it costs less than a penny to transport a gigabyte of data, while companies such as Bell want to charge as much as $2.50 per gigabyte when customers go over their limits – may not hold true as traffic increases on networks where there is no investment.

“Without building more capacity, that math, or that cost-per-bit, probably wouldn’t be sustainable,” Mr. Fan said. “It’s become political, but I’m not sure the politicians have thought things through.”
Again, I think we are mostly aligned. And I'm open to the possibility that tolling on the internet may not be efficient, but haven't seen evidence of that yet, and I"m not finding the claim that isn't efficient for roads persuasive.
My response

The London system isn't exactly an example of usage based billing. It doesn't measure, for example, how many kilometers you drive, so a fleet-based vehicle making deliveries pays exactly the same amount as a vehicle driving a block into the ring and then parking (actually, the fleet vehicles pay less). Traffic that originates and stays within the zone is not (apparently) billed at all.

Meanwhile, we could question how efficient the system is. "TfL's annual report for 2006–7 shows that revenues from the congestion charge were £252.4m over the financial year, representing 8.5% of TfL's annual revenues. More than half of this was spent on the cost of running the toll system, at £130.1 million. Once other charges were deducted, the congestion charge brought in an annual operating net income of £89.1m for TfL." http://en.wikipedia.org/wiki/L... Certainly, as a mechanism for *paying* for roads, it would be a miserable failure.

Moreover, this does not take into account much of the inefficiency that has simply been offloaded. Leaving aside the financial encumbrance of paying the toll (which can be significant - 2,000 pounds for 200 days of work-day travel in a year) drivers must also manage to pay tolls their own way, paying the charge online, by SMS text message, in certain shops, or by phone. If you don't pay, you have to pay a fine - and a significant percentage of the revenues are based on fines, a testament to how inefficient the payment system is. And if you pay but were not detected as having used the road, there's no refund.

Of course, the *purpose* of the London toll isn't to pay for the roads, it's to reduce congestion. That's why it can be so inefficient and still be claimed to be a success. Indeed, it becomes successful by being inefficient, as it forces a higher toll, resulting in less traffic (and I would imagine a significantly different demographic of traffic as well; no doubt it keeps the riff-raff out).

Now this seems to resonate with what you say: "when you have a scarce resource you need to find a way to allocate it." Quite so. Economics wouldn't exist without such a requirement. But there is scarcity, and then there's scarcity. It is arguable that space for traffic in downtown London was genuinely scarce - you couldn't alleviate it by building more capacity, do it becomes necessary to regulate it by other means. But bandwidth, it could be argued, is not scarce, at least, not in this way. The current supply of bandwidth is such that it costs only 3 cents a gigabyte to provide. Traffic levels are nowhere what they would need to be in order to justify metered-billing at all, much less the current rates being charged by ISPs.

It is arguable, therefore - and I would argue - that insofar as there is a scarcity of bandwidth, it is an *artificial* scarcity. It is in the interests of ISPs to ensure that there is a limited supply of bandwidth, in order to be able to justify charging higher rates.

But even more to the point - ISPs traditionally charged for band *width* - that is, for a pipe of a certain size. That is what I (ostensively) buy when I buy internet access at home; that is what subcontractors literally buy. It was like buying a cable package, or telephone service. It didn't matter how much or how little TV you watch, or how many phone calls you made, you were paying for the *channel*

But what has happened is that ISPs started charging more than one customer for the same bandwidth. Using technoiques like traffic shaping, throttling and metering, they could *say* they were selling x bandwidth, but actually allocate less than x bandwidth per customer. This worked fine until customers started to actually use the bandwidth they were paying for. Then the ISPs were caught in their own practices, and that's where the bandwidth 'shortage' originated.

The suggestion now seems to be that ISPs should be rewarded for this practice. Fair enough; we could raise the cost for band *width* up to what it actually costs to provide that bandwidth. Nobody would complain about that. Except - the rates charged to consumers are *still* well above what it actually costs to provide the bandwidth, 10 to 40 times as much.

The other argument is that non-UBB would create a disincentive on the part of ISPs to invest in new bandwidth. Of course, utterly anything that increases costs and reduces revenues is interpreted by business as a "disincentive", so the flat "disincentive" argument is a bit disingenuous. The real question is whether it is *enough* of a disincentive to cause ISPs to cease investing in bandwidth.

Well, suppose it is. Then we (as a nation) could provide the next bit of bandwidth the way we provided the last bit - by building it as a government infrastructure project (a la CANARIE and similar programs, or via crown corporations, a la the old government telecoms). Because the reason the "additional gigabyte" costs so much more than the current gigabyte is that there was a significant social investment in bandwidth, which was inherited by the ISPs (that's why a lot of people feel that UBB is to a certain degree a betrayal of trust).

There was a proposal, in the last days of the Chretien administration, before we got the pro-business Martin and Harper governments, to engage in a national broadband program. As I recall, the pricetag was $10 billion. Cheaper, in other words, than the much less useful F-35 jets. This was shelved when Martin took power, and we never did see the expected expansion of capacity that we expected. ISPs simply reaped the windfall until usage increased. Then they said there's a bandwidth shortage.

Meanwhile, ISPs were not deterred from *investing* during this time. Rather, they decided that they didn't need to invest in bandwidth; for them, it was effectively free (for consumers, of course, it was a rapidly increasing expense). Instead, they borrowed and spent billions acquiring each other. The empires of Bell-Globe, Rogers and Telus were built almost entirely on credit. And it is *that* rather than infrastructure that we are being asked to subsidize.

If the same logic could take place in roads, it would be as though the government gave me a freeway system, which I sold to municipalities as 6-lane freeways, but actually delivered 4-lane freeways with a reduction in speed limit to 45 mph, and then borrowed money to acquire additional freeways from other owners (who got their freeways from their governments), spent nothing on the construction of new freeways, and then, when traffic on the freeway network threatened to approach what I was selling it for, demanded that a system be put into place to charge individual drivers for each kilometer they drove (with the entire cost of the metering system also to be borne by the drivers), so I wouldn't actually need to increase capacity, on the grounds that it would be a 'disincentive' to invest in new capacity to do otherwise.

It's a very bad idea, and UBB rewards ISPs for some very questionable business practices, meanwhile punishing the taxpayers who basically funded this entire infrastructure in the first place.

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