FCC Should Take Broadband Pricing Flexibility Seriously

The FCC's Further Inquiry in its Open Internet proceeding seemingly continues its nearly year-long trek towards imposing net neutrality regulation on Internet service providers. And yet its Further Inquiry perhaps suggests a new receptivity by the agency to more flexible broadband pricing arrangements. Its latest Public Notice seeks public comments responding to questions that include wireless broadband pricing. The Notice appears to indicate some realization by the FCC about the potential benefits of flexible broadband pricing models. But at the same time, the Notice raises its own questions about whether the FCC fully grasps the implications of that realization.

In its brief references to broadband pricing, the Notice observes that "[m]obile broadband service providers such as AT&T Mobility and Leap Wireless (Cricket) have recently introduced pricing plans that charge different prices based on the amount of data a customer uses." The Notice adds that "[t]he emergence of these new business models may reduce mobile broadband providers' incentives to employ more restrictive network management practices that could run afoul of open Internet principles." And the Notice goes on to ask for public comments in response to the question: "To what extent do these [usage-based data pricing] business models mitigate concerns about congestion of scarce network capacity by third-party devices?"

The Commission should be complimented for this nod toward pricing flexibility and usage-based pricing, in particular. Usage-based or metered-billing models can serve as efficient methods for network operators to address bandwidth capacity limits and to make optimal use of existing infrastructure. Better yet, such pricing allows consumers to pay only for the amount they use – meaning that low-volume Internet users who primarily use the Internet to check e-mail or follow friends on Facebook would pay less than high-volume users who routinely send and receive data-rich files such as music or high-definition video. Consumers respond to pricing signals. That is a fundamental economic truth. Usage-based pricing is something that consumers are accustomed to when it comes to a variety of other goods and services. But one is hard pressed to know whether the Commission appreciates that fundamental economic tenet.

Many of these same points about usage-based pricing were aptly made by FSF Distinguished Adjunct Senior Fellow and former FCC Commissioner Deborah Taylor Tate in her FSF Perspectives essay "Paying For Use Is Fair":

Consumers should be able to take control of their own consumption of broadband just as they have for other electronic commodities, and in some cases, they could reduce their monthly broadband service. At least consumers should have the option to utilize a metered approach if they want. This type of transparency in billing, along with providing education and outreach to consumers, should be the goal of policymakers and providers alike.
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Broadband providers -- just like wireless providers -- should be allowed to use a consumption model without government interference as long as consumers know and understand what they are paying for.

But consider what should be a basic implication of the Commission's acknowledgment of the benefits of usage-based pricing models in the wireless context. Namely: those same benefits from usage-based pricing for addressing network scarcity, consumer preferences, and "reduc[ing] mobile broadband providers' incentives to employ more restrictive network management practices" should apply to broadband networks generally. But has the FCC faced up to the fact that once it recognizes the benefits of usage-based pricing for wireless broadband, it follows that similar benefits should obtain in the case of wireline broadband? A reading of the Notice suggests not.

Instead, there remains a disconnect between the Notice and the "nondiscrimination" regulation proposed earlier in the Open Internet proceeding. According to the Commission's proposed "nondiscrimination" regulation, "a broadband Internet access service provider may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access provider." Under the proposed "nondiscrimination" regulation, an ISP attempting to employ usage-based pricing would be burdened with having to prove to the Commission that its pricing model is "reasonable network management" according to the Commission's own judgment. Such a regulatory regime is hardly welcoming to broadband pricing flexibility that is responsive to consumer demand. (For more on the proposed regulation, see comments FSF submitted to the FCC in January as part of this proceeding.)

The likelihood of a plethora of complaints filed under the Commission's proposed "nondiscrimination" regulation challenging usage-based pricing would be a foregone conclusion. The hostility of would-be complainants to such pricing was on full display, for instance, when TimeWarner Cable unveiled a (subsequently quickly scuttled) plan to introduce metered pricing for its broadband services. Free Press howled about the plan and ex-Congressman Eric Massa even introduced a bill to saddle broadband ISPs with a Federal Trade Commission rate case regime to strictly control broadband pricing. (For more see FSF President Randolph May's FSF Perspectives essay "The 'Free Lunch' Free Press" and blog post "The Federal Internet Rate Regulation Commission"). It is unlikely that usage-based pricing models would emerge under a regulatory regime that would submit such pricing to overblown attacks as a part of public proceedings.

If the Commission were truly to recognize the fundamental role of pricing plans in free market commerce as a means to bridge scarcities of goods and services with consumer demand, it would opt for service provider pricing flexibility as the ideal approach over a detailed regulatory apparatus. But, as it now stands, the FCC's recent Notice hints at broadband pricing flexibility while its proposed regulation still points toward onerous pricing restrictions.

Hopefully, the Commission's apparent recognition of the benefits of usage-based pricing in one particular context will lead it to recognize these benefits in all contexts instead of opting for arbitrary, selective price regulation.