A Tip of the Cap

There’s an editorial in today’s New York Times called “To Cap, Or Not” and you have to wonder who writes this stuff.

In a nutshell, this money line in the editorial is this:  wireline usage data caps warrant a close look by federal regulators.

Let’s start at a high altitude.  Some wireline providers impose a cap on the amount of data a user can pull down, but more common is a “pay for what you  eat” approach.  The Times editorial, in fact, mentions an AT&T plan to charge users $10 for each 50 gigabytes of use over a 250 gigabyte limit.

Well, what do they imagine?  That everybody pays one price and then can use all they want?  Is there anything on Earth that works that way?  The wireline broadband network is finite, even if growing rapidly, and allowing each user to consume as much bandwidth as they want is recipe for a congestion disaster on the network.  And, of course, the Times’ concerns about charging users for what they use comes on the heels of their concerns about charging websites a premium price for premium service.  So there’s the Internet in the mind of the Times’ editorial writers: users should be able to use as much of it as they want, regardless of capacity, and when their free use of it on the margin creates congestion or otherwise overloads the system, everybody should suffer equally.  In short, encourage congestion and disallow any attempt to ration it or relieve it.  Just when you thought we’d escaped the Tragedy of the Commons!

What is it about the Internet that makes people forget what they used to know about economics?  It’s almost as if people think it happens like magic, and that human rules don’t apply.  I’m sure there are some people at the Times who chuckle about how out of touch Ted Stevens was when said the Internet “was not a big truck.  It’s a series of tubes.”  But is their view any more sophisticated?  They seem to think the Internet is some magic mojo wire that  appeared out of nowhere and is free, and that once you set it up, it effortlessly runs itself.

For example, the Times says that “adding capacity is cheaper than putting up a network, and becoming cheaper all the time.”  So apparently the Times thinks that if there is contagion, then the ISP simply ought to make the investment in expanding capacity without any hope of compensation.  I mean, that’s what they’re saying – they’re wary of pay-for-what-you-use, but want providers to provide more as if users were willing to pay for the additional capacity.

The Times then concedes that there is contagion, but argues that “peak demand is the problem.  But caps make no allowance for this.”  Fine, how would you make such an allowance?  When there’s an emergency drought, for example, water districts announce curbs on “non-essential” uses, like lawn watering.  But when Comcast tried that – by cutting back on Bit Torrent use, since it was predominantly for file sharing, which is the lawn watering of broadband traffic – the FCC took it to court and the Times supported them.  Or, we can do what Con Ed is doing right now in New York City – I was there yesterday, and there was a notice in the elevator of the building I was in telling people there to curb use and be ready for brown-outs.  Can you imagine a notice appearing – where?  on your screen? – telling you to please do your broadband stuff later?  Or “rolling blackouts” of service?

And then there’s what utilities at the cutting edge are doing – smart metering and using peak-load pricing.  My electric bill tells me how much juice I use during peak and off-peak hours, and it’s no sweat to run the dishwasher or washing machine before I go to sleep.  I mean, I’m an American.  But does the Times want smart metering on broadband hook-ups?  Time of day use?  Do people want a pop-up on their screen (I don’t know if that’s possible, so don’t get on me if it’s not) or an app in their tool bar telling them what the cost of a gig is at that moment?  Let alone the fascistic optics of a pop-up telling you it’s time to use less information….

But the real issue on the Times’ (collective) mind is probably competition.  It keeps coming around to that.  For example, the Times says that some users have a choice between a cable and a telco, but others “have no choice at all.  Caps should not just be a way for Internet providers to extract monopoly rents.”

Sure, but…  For one, broadband is becoming a market in which wireline and wireless actively compete, even more so as wireless speeds catch up to their competitors.  Second, the market power of ISPs is checked in part by device, content, and other service providers who together comprise the integrated package of broadband services, as I’ve argued before.    But even more important, if providers have monopoly power as the Times fears, they’re already using it, one presumes; they don’t need the pretext of use caps to exercise it.

The Times then ponders whether AT&T has a conflict because its U-Verse product offers television and other entertainments that compete with Netflix.  The Times admits that Netflix on its little old lonesome “hogs” – their word, not mine – 30 percent of peak Internet traffic in North America.  So U-Verse does not appear to be a major competitive problem for Netflix – I doubt anybody at Netflix is staying up at night worrying about U-Verse.  Moreover, the cost and congestion effect of an AT&T, internally-sourced, entertainment stream is likely going to be less than that of a Netflix package brought to the network backbone by Level 3, distributed over the network, and delivered to the local loop.  And let’s remember that we have a century of anti-trust law that prohibits predatory behavior.  If AT&T is acting in a predatory manner, use it.

There’s an ongoing technological race between the ability of the broadband network to carry more stuff and the development of more bit-intense stuff for them to carry.  Consumers have been the beneficiaries of that race.  But those benefits are won at the expense of the ongoing tension between usage and network capacity.  Paying for what you use is the solution – it’s one that’s worked in every market on Earth.  The Times is worried about caps, but if they have a better answer, we’d tip our cap to them.

[Editor’s note: This article is cross-posted by permission from Ev Ehrlich’s Everyday Economics blog.]