Internet Policy Memo (2012)

7/30/2019 Internet Policy Memo (2012)

1/5

Fixing the Governments

Role in Internet Buildout

and Usage-Based Pricing

TO: President Obamas

FROM: Matthew Bruchon

DATE: May 20, 20122

ISPs claim usage-based pricing (UBP) plans are needed to reduce network

congestion, but evidence suggests they hurt national priorities. The government

should give UBP greater scrutiny and promote buildout of network capacity.

The nations largest wired Internet service

providers (ISPs) have recently began to institute

usage-based pricing (UBP) schemes in which

users are either given a usage cap per month, ormust pay per unit of data sent. Comcast and

AT&T did so in 2008 and 2011, respectively,

and Time Warner is currently conducting market

tests. In each case, the public responded with

anger, but there was little they could do other

than complain due to a lack of competition in the

ISP market.1

The ISPs have justified these pricing schemes on

the basis of congestion control, arguing that

UBP is necessary to discouraging certain

Internet users from wasting bandwidth and

pushing the limits of the networks capacity.

The FCC has endorsed UBP in the past.

However, a recent analysis of the costs and

benefits of UBP schemes indicates the schemes

are unlikely to yield the desired reduction in

congestion, and that their impacts will run

counter to the nations telecommunications

priorities of net neutrality, low-cost widespread

access, and innovation.

2

A more effective solution to any potential

problems with congestion would be to build out

more network capacity. However, ISPs have

little incentive to improve service due to their

near-monopoly status in most markets in the

United States; many areas are underserved

because ISPs prefer not to make the extra capital

investment.3 Furthermore, ISPs, interested in

protecting market power, have actively lobbied

to prevent local governments from building outtheir own networks.

To address the rising prevalence of UBP plans

and their negative effects on the nations

priorities in telecommunications, the

government should revise its pro-UBP policy as

follows:

Greater scrutiny should be applied to

improve transparency around UBP plans

and ISPs reasons for using them. The government should research ways to

incentivize buildout of network capacity.

Federal legislation should clarify the

right of local governments to provide

Internet to their citizens.

These steps can help to protect consumers,

address the issue of congestion, and mitigate

market failures in Internet service provision.

UBP Does Not Fix Congestion

In April 2012, Public Knowledge, a public

interest group focused on communications

policy, released an analysis of the costs and

benefits of UBP; the analysis was performed by

leading academic and legal experts in the field.


2/5

The study found that UBP plans generally fail to

achieve their intended benefitsthat is, the

reduction of network congestion through the

discouraging of wasteful hogging of bandwidth

without any explicit targeting or discrimination

against specific users.

One reason UBP fails to achieve its stated goal

is that its fundamental motivationthat a few

users are devouring huge amounts of data and

leaving only morsels for everyone elseis

invalid. Because the Internet uses a protocol

called statistical multiplexing, available

bandwidth is split between everyone using the

network at any given moment. Statistical

multiplexing means that congestion may occur

when many users are using the Internet at thesame time, but congestion is not generally

caused by individual users greedily using the

network. UBPs design does not reflect the

nature of Internet traffic control.4

Another reason UBP produces little benefit in

terms of congestion control is that its pricing

method provides the wrong type of feedback.

UBP plans rely on a monthly cap or a cost per

data consumed in a given month. However,

congestion does not take place on a timescale of

months, but rather one of minutes and seconds.

Congestion occurs when many users try to use

the network at the same time; one analogy is that

of a traffic jam at rush hour. Charging users per

month without offering any incentive to use less

bandwidth during peak hours does little to

prevent congestion events.5

Furthermore, some ISPs have sometimes

exempted their own services from UBP

schemes, even when those services might

contribute to congestion. For example, many

ISPswhich are typically also cable

companieshave their own Internet-based

video streaming services, which are a large

source of revenue. These Internet-based TV

services have sometimes been exempted from

the monthly bandwidth caps to encourage users

to watch as much streaming video as they wish

to.6 If the ISPs were serious about using UBP to

reduce congestion, they would not exempt their

own services from data pricing.

UBP Hurts National Priorities

Aside from failing to achieve their stated

benefits, UBP plans also work against national

priorities of net neutrality, widespread low-cost

Internet service, and innovation, according to the

Public Knowledge cost-benefit analysis.

UBP plans work against the national priority of

treating all forms of Internet traffic without

discrimination, known as net neutrality. This islargely due to the fact, mentioned above, that

ISPs typically exempt their own services from

UBP, such that users are free to consume those

services as much as they wish without it

counting against their monthly Internet data

consumption.

These ISP-delivered services are often TV via

Internet, which is a high-quality, high-data rate

form of video. On the other hand, if a customer

watches streaming video through Netflix, theywill take a large hit on their monthly bill, since

Netflix videos are also a large amount of data.

This is akin to discrimination against services

provided by content providers that compete

against the ISPs own streaming content

services. Since a 2005 statement by the FCC,

net neutrality and non-discrimination has been a

basic guiding principle of the nations Internet

policy. 7

Furthermore, the Public Knowledge analysis

found that UBP inherently raises the cost, and

reduces the value, of Internet access from those

ISPs, compared to traditional billing schemes

with no monthly limit. This runs counter to the

governments goal of more widespread

broadband adoption. That goal has been a


3/5

recent priority; President Obama has stated a

goal of providing access to 98 percent of thenation in the next five years, and the 2009

stimulus act included $7.3 billion specifically to

encourage broadband adoption. As the figure

above shows, this is still a major area in which

the US can improve; the US is ranked behind 14

countries which are adopting broadband more

rapidly.8

More broadly speaking, any form of pricing

which penalizes users for the quantity of Internet

traffic they use inherently discouragesinnovation in Internet-based technology

development. For example, one of the most

notable technological advances in recent years

has been the rise in cloud-based technologies,

which allow users to store data, and perform

computationally intensive tasks, remotely.

These cloud-based technologies are, by their

very nature, more data-heavy, since data must be

transferred from the users home computer to the

cloud. As the Public Knowledge analysis notes:

This type of innovation creates unexpected

applications. The original designers of the iPad

may not have anticipated its use in medicine or

as a cash register for bands on tour. However,

the fact that the iPad is connected to the larger

cloud made it a platform for unexpected

innovation.9

Cloud-based technologies are

but one innovation that is

hampered by UBP. There

are almost certainly others

which have not yet been

anticipated, given the natureof online innovation to be

disruptive in ways we rarely

can forecast.

ISPs Are Often

Monopolies

Given the lack of congestion

reduction benefits derived

from UBP, and the costs evidenced in its

harmful effect on national telecommunications

policy priorities, UBP is a poor strategy to

support. Rather than rationing Internet usage (or

raising prices to get the same amount of usage),

a more optimal strategy is to increase capacity

through network improvements and expanding

in underserved areas. This would work with,

instead of against, the goals of reducing cost and

increasing access, without the harmful side

effects of violating net neutrality and hampering

innovation.

Why hasnt this approach been favored by ISPs?

The simple answer, according to Susan

Crawford, is that in any given market, the cable

company is a virtual monopoly in the ISP

market. This is because Digital Subscriber Line

(DSL) services offered through the copper

telephone wires are drastically slower than cable

Internet and satellite Internets latency is

crippling. Smart phones and tablets which use

3G wireless Internet are designed to becomplements to home Internet, not substitutes.

FiOS such as that offered by Verizon would

have been a possible competitor, but Verizon

recently shelved plans to continue building out

new FiOS service due to prohibitive capital

costs.10

0

1

2

3

Percent increase in wired broadband penetration, June 2010-11 (US shown in red)13


4/5

These high capital costs and technological

advantages have given cable companies vast

control of ISP markets. While there isnt one

company controlling the entire nations Internet

service, there are gentlemens agreements

between the major players such that in any given

market, no two companies directly compete for

customers. There is no opportunity for

customers to switch to a competitor if they areunhappy with the ISPs pricing scheme. Due to

this market control, it is more sensible for the

ISPs to raise costs (using congestion control as a

reason) than to increase service by expanding

capacity.

This implies not only that there may be some

congestion concerns as Internet traffic continues

to increase, but also that some areas of the

country will be underserved or not served by

ISPs. In particular, new Internet service will not

be built out to rural areas, because the capital

costs are too high to justify serving sparsely

populated areas.

Aside from simply taking advantage of their

market power to price usage more freely, ISPs

have also actively sought to preserve their

monopolies by preventing competition from

forming. In a number of statesillustrated in

the figurethe state legislatures have passed

laws restricting or fully blocking the creation of

municipal, public utility-style Internet service.

In some cases, this may be to prevent publicsector competitors; in other cases,

such as rural communities, it may

be to prevent the spread of good

news or success stories about the

viability of Internet as a publicly

provided utility.11

Recommendations

The analysis published by Public

Knowledge suggests that the

FCCs current policy of giving

ISPs carte blanche to institute

UBP schemes of their own design

is faulty. As discussed above, the

current policy does very little, if

anything, to help congestion

while actively hurting several of

the nations broad policy goals.

One policy option suggested by Public

Knowledge is to increase transparency in the

decision-making processes employed by the

ISPs that instituted UBP. This could be

achieved by the FCC applying stricter scrutiny

to such decisions, and requiring the ISPs to

document and public publicly their rationale for

the pricing scheme, as well as any supporting

data such as cost benefit analyses. Aside from

raising public awareness of the rationale for

UBP, the public reporting requirements would

likely either compel the ISPs to create pricingschemes that either advance a publicly

acceptable goal, or to face public backlash of

some kind, with the additional risk of a

regulatory response if the public speaks loudly

enough.12

Map of states which restrict or block municipal Internet service (colored red)14


5/5

Another option is for the government to research

ways to better incentivize the buildout of new

Internet capacity. Because buildout is capitally

intensive and ISPs dominate their respective

markets, they face little incentive to invest in

new infrastructure. There are various optionsthat could be explored in more depth, including:

Government loans or subsidies for capital-

intensive Internet buildout, possibly to

non-incumbent market entrants to

encourage more competition

Carefully constructed legislation requiring

ISPs to apply a certain fraction of their

profits to infrastructure improvements

Some form of public-private partnership

to plan a socially optimal routing of new

cables and build them

Any of these could potentially help to address

the high capital costs ISPs are reluctant to take

on.

A final policy recommendation is to craft federal

legislation that somehow requires that local and

state governments be reserved the right to

provide Internet service as a public utility.

Forbidding states from passing laws grantingprivate sector ISPs virtual monopolies would

help restore some degree of competition to

Internet service markets. It would also have the

effect of allowing communities that would

otherwise be unprofitable to serve, such as

remote rural communities, to organize

government-operated Internet service.

Citations

1. Odlyzko, Andrew, et al. Know Your

Limits: Considering the Role of Data Caps

and Usage Based Billing in Internet Access

Service. Public Knowledge. 2012. (6-8).2. Ibid.

3. Crawford, Susan. The Communications

Crisis in America. Harvard Law & Policy

Review, Vol. 5 (259).

4. Odlyzko et al., supra note 1 (16).



7. Ibid.



10. Crawford, supra note 3 (249).

11. Crawford, supra note 3 (255-260).


13. OECD. OECD fixed (wired) broadband

penetration (per 100 inhabitants) net

increase since June 2010-2011, by country

(2011)

14. Community Broadband Networks.

Community Broadband Map.

Internet Policy Memo (2012)

Documents

Transcript of Internet Policy Memo (2012)