Thursday, August 11, 2011

Prices and Profits in the Broadband Marketplace

I read this morning in the trade press that Free Press's Research Director Derek Turner is criticizing FCC Chairman Julius Genachowski for saying some kind words about usage-based pricing for broadband services.
According to yesterday's TR Daily [subscription required], Chairman Genachowski said on Tuesday that consumption-based pricing “can allow consumers that use less to be charged less,” and that it can “encourage efficiency and investment in networks.” And Communications Daily [subscription required] reports today that Mr. Genachowski said usage caps such as those adopted by AT&T and Verizon “fundamentally” may “provide consumers more choice."
Mr. Genachowski's comments follow on the heels of FTC Chairman Jon Leibowitz's endorsement of usage-based pricing for broadband services this past June at the Cable Show. The FTC Chairman expressed surprise that more usage-based pricing plans had not already been adopted, pointing out that most other products on the market are priced based on the volume consumed by customers. According to Chairman Leibowitz, it is only rational that broadband would be treated the same way.
So, according to Communications Daily, here is what Mr. Turner said: “While the rest of the world is moving away from this type of price-gouging, it is puzzling why the FCC chairman would endorse a practice that in the long run will relegate the United States to an Internet backwater.” While acknowledging that adoption of usage-based pricing could help low-volume users “in theory," Mr. Turner said, "doing so would not help [the broadband providers] achieve their primary goal — continued explosive growth of profits."
I suppose, in theory, it is nice that Mr. Turner at least recognizes, in theory, that usage-based pricing may be beneficial to low-volume users. But, unfortunately, his utter disdain for corporate "profits," and his unremitting fondness for accusations of "price-gouging," blind him from recognizing that, in the real world, usage-based pricing promotes economic efficiency in a way that not only benefits low-volume users, but also enhances overall consumer welfare.
By generally railing against "profits" and "pricing gouging" as Free Press does consistently, Mr. Turner makes his intentions – once again – crystal-clear. What he really prefers is government-owned and operated communications networks, or at the very least, private sector communications networks whose rates and service terms are closely regulated under traditional public utility principles. In Mr. Turner's world, with government-owned broadband networks, there would be no need to worry about profits because we don't expect governments to turn a profit. Quite the contrary – deficits and debt are what we expect and what we get.
And with broadband providers regulated as public utilities, Mr. Turner would look to regulators to prevent what he calls "price gouging." I understand that Mr. Turner always prefers a lower price to a higher one. But the only way to determine a "reasonable" price – even though Mr. Turner nevertheless might never agree it is not a "gouging" price – is to conduct full-blown rate cases. Having lived through many of them back in the Ma Bell era of the 70s and 80s, I am absolutely certain that, in today's competitive marketplace, we don't want to turn the clock back to those drawn-out, usually inconclusive affairs.  
Mr. Turner's preference for a world without profits or prices is one way to go – but it is completely the wrong way. Indeed, it was tried in the Soviet Union for seventy years with disastrous results before being abandoned.
There is no dispute that in the past five years, private sector broadband providers have invested over $300 billion in private capital to build-out and upgrade high-speed broadband networks that now provide access to over 95% of the nation's households. And, there is no dispute that, even so, with Internet usage continuing to explode, and especially for wireless, there will be a continuing need to invest at least $30-$40 billion per year to expand and upgrade capacity-constrained broadband networks in order to meet consumer demand and expectations.
The notion that the private sector will continue to invest hundreds of billions of dollars in broadband networks, as it has over the past decade, without the prospect of profits, however Mr. Turner chooses to characterize them, is fanciful.
And the notion that broadband providers, in a competitive market, should not be allowed to employ price signals so consumers can avail themselves of choices is fanciful too. Indeed, in the context of today's broadband marketplace, it is downright mischievous. For what "all you can eat" pricing means in this context is that either low-volume users will be required to subsidize the usage of high-volume users, which raises equity issues. Or that all – repeat, all -- users will be required to pay more for the build-out of additional network capacity than they otherwise would absent the adoption of usage-based pricing. It is either/or.
In other words, usage-based plans, by giving consumers choices related to pricing signals, promote both fairness and efficiency.
Neither FTC Chairman Leibowitz nor FCC Chairman Genachowski, both Obama Administration picks, can possibly be characterized as corporate stooges or anti-regulation. I certainly don't always agree with them. Indeed, I think often they are too quick to look to impose new regulations. But I am happy to come to their defense when they take positions that are consistent with enhancing overall consumer welfare.      
That is manifestly the case here – and I happily rise in their defense.