Billing Broadband: Fixed, Variable, or Both?

A very long time ago, back in the mid-90's, I got into an interesting conversation at a business event with an acquaintance from MCI (remember them?). We were discussing which works better in the long-distance telephony market, variable or flat-rate billing. The standard up until then was billing for time and distance. MCI in particular was experimenting with variations of flat-rate long distance billing to compete against AT&T. This was still some years before VoIP appeared and AT&T was still a company largely focused on long distance telephony.

One of MCI's key competitive advantages was its billing system. With it they could come up with novel and often mind-bendingly complex billing plans. Perhaps the most famous was Friends and Family. At the end of the month each subscriber's calling patterns were analyzed in accordance with the selected plan, generating a bill that charged flat-rate or nothing for certain calls and charged the rest using the prevailing message-rate paradigm. Over time differential charges for distance disappeared, assisted in part by the reduction and elimination of certain state and federal regulated fees to be paid to the parties' local telcos. And over time the average rates declined. The regulatory regime in Canada was similar.

Two Things I Learned

I learned two things from that discussion and afterward. First, there is no one correct way to charge for use of the network - not flat-rate and not message-rate. These are business choices to enhance competitiveness and manage profitability. For example, if your main competitor charges by message, you would offer a flat-rate plan. A lot of your competitor's customers will switch to you. Many people think flat-rate is a good deal (Disney learned that long ago when coming up with one fee for all attractions at their amusement parks) even when their actual use of the phone doesn't justify it. Even when they do realize it, they will still enjoy the feeling of not watching the clock on every call.

Conversely, if a subscriber has flat-rate and sees a competitor offering message-rate, many of them will jump at the opportunity to lower their bills by conceiving the notion they are paying too much for the calls they actually make, or that they can get by with making fewer or shorter calls. These folks will eagerly watch the clock to congratulate themselves on how much money they're saving. They're a bit like some Volkswagen Beetle owners back in the 70s with their passion over fuel economy.

The curious thing is that both types of customer are the same people but at different points in time. They have short memories or, like diets, are sure that this time the new-old plan can finally work for them. The long distance companies knew this and catered to it. Over their large customer bases, no matter which plan(s) they offered, they tuned their promotions and plans to ensure they made about the same revenue either way. The key objective was to entice new customers. That's where MCI excelled, knowing that AT&T's obsolete billing system would not allow them to respond. AT&T understood this of course and gradually improved their systems to better compete.

The second thing I learned is that billing systems and complex plans are expensive. It costs money in software, storage, customer care and marketing to bill down to fine details of every customer's calls. Flat-rate is comparatively cheap.

Now that the underlying costs of telephony are so low, there has been a shift from cyclic changes in billing to a secular shift to flat-rate. It just isn't worth it anymore. Look at the labyrinthine billing plans the cell phone companies offer. They not only annoy their customers, it costs too much for them to manage that complexity. Telephony is going flat-rate and this time it'll probably stick for good. Even heavily-regulated international pricing is going this route.

Broadband Pricing

Now we come to broadband. Up until now, for the most part billing has been flat-rate, though tiered by speed and sometimes by monthly caps. With the probability that P2P throttling will become disallowed or a competitive disadvantage, there is now an initiative by some ISPs to do usage billing. When I learned about this I had a flashback to my old telephony days, which I talked about earlier in this post. Here we go again, I thought, the same old flat-rate versus message-rate billing fight, but now on the battlefield of broadband competition, with a side dish of the ISPs' attempt to favour some internet properties (theirs) over others.

Broadband ISP infrastructure is already capable of measuring upstream and downstream usage per subscriber, and even throttle speed and total usage in real time. Everyone pretty much has the same tools so it is not the uneven playing field that once existed between MCI and AT&T. Surprisingly however this has morphed into an ethical issue rather than one of simple market competition. Here I'm referring to flat-rate and usage billing, not the more incendiary topic of per-application discrimination.

Flat-rate broadband was deceptively simple and cheap to bill, and so has ruled the day up to the present. Now with P2P, YouTube, iTunes and more, flat-rate doesn't look so great to the ISPs. Network costs go up yet revenue for the most part does not. The telcos are further irritated that many ISPs to whom they wholesale DSL (involuntarily, as mandated by regulation), also offer flat-rate but without the application discrimination. This is called competition.

Raising everybody's rates is one alternative. This has been problematic since the bulk of the broadband customer base is served by telcos and cablecos, both of whom are heavily regulated. Now the government and politics gets involved. If it were left as a purely business and competitive matter it might resolve itself. More likely that would not happen in the short term since competition isn't strong enough; the broadband market is currently served in most areas by only a couple of ISPs, making for an oligopoly and a distorted market. Regulators also distort the market, though differently most of the time. For example, by requiring DSL wholesale to non-facilities based ISPs.

My own thought is that usage-based billing for broadband makes sense. It keeps the ISPs out of the nasty business of throttling P2P and other high-usage applications, and thus keeping the politicians and regulators out of their hair.

They will still, I suspect, be regulated out of doing application-based throttling in most jurisdictions in Canada and the US. Sure, it's true they won't like the fact that other providers of entertainment products, including video, will have to be tolerated on an equal footing. It's the price they'll have to pay to get their revenues and costs, and therefore their profits, predictable and sustainable. As for the rest, well, competition should be good for them and for us, their customers.