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A Tiered Data Plan CAN Close the Digital Divide

Now here is a concept and model that seems to be fair and may work. Economists Robe rt Shapiro and Kevin Hassetts released a white paper this week, “A New Analysis of Broadband Adoption Rates” which surmises that tiered broadband data prices may actually assist broadband adoption for lower income consumers.

The fact remains that 5 to 20 percent of people are consuming most of the broadband bandwidth today. The flat price model we have today is tantamount to a regressive pricing structure because the remaining 80 to 95 percent of those who use the Internet for email and browsing websites that don’t require streaming or downloading are subsidizing heavy users. The authors predict near universal broadband adoption by 2017 or 2018 but that given all of the necessary investments in the infrastructure to accommodate rising needs, the costs of broadband will increase across the board for all to recover these costs. These increased costs will slow down adoption by those for whom the price of broadband is a deterrent for adoption, the study says.

As a solution, the authors recommend a pricing model where the highest bandwidth users pay more to account for their elevated use. That seems fair to me. Pay for what you use. If in the end, more Americans, especially those from poor and minority households are able to afford access, we all win.

This model actually is best for the United States if it wants to rise in the ranks globally among other economies in terms of broadband adoption and usage. Currently, the US is behind some developing countries even. Getting close to 100% adoption in broadband means we must have an educated and cultivated economy that is able to take advantage of all the benefits of broadband. It is not socialism if you think in terms of what is beneficial for our nation as a whole. It is novel because it is a “trickle up” economic model and we see how “trickle down” hasn’t gotten us too far recently, it sounds like it’s a worth a try.

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8 comments

  • […] This post was mentioned on Twitter by Ms. Spinks, Jeneba Jalloh Ghatt. Jeneba Jalloh Ghatt said: A Tiered Data Plan CAN Close the Digital Divide http://bit.ly/bg931G #broadand #netpolicy #ntia […]

  • Tiered data plans — already offered by many mainstream U.S. network operators, and increasing by their presence — don’t benefit consumers in any way whatsoever. The presumption is that network operators will take increased revenues from premium subscribers and re-direct that money into developing improved infrastructure, and by extension, lower-priced services (eventually).

    In the private market, that argument is valid only when competition truly exists, something that can’t be said of the U.S. telecom industry. History instructs us monopolies rarely, if ever, apply revenue flows from tiered services and similar plans toward R&D. The money goes to corporate profits.

  • Point taken but the fact remains, you still get increased adoption of broadband by more people if more carriers adopted tiered pricing plans, irrespective if there are competitors in their market. If a household is hampered to sign up for broadband by a $79.00 pricing plan because that price point is priced so high to accommodate high bandwidth users, tiered options will enable those like the elderly, transients and low income individuals who will monitor usage if given a lower price point – say $25- per month to adopt broadband. Anecdotally, I know of several persons who only purchased their first mobile phone when the prices started to drop and pre-paid became available. It’s about removing the barriers to access across the board to increase adoption.

  • As an ISP with direct experience with different pricing models, I agree with JJ – tiered plans make broadband more affordable. (We do tiered bandwidth rather than tiered data volume.) The only point in her article in which I disagree is that I would not characterize it as a “trickle up” model. Rather, it’s an attempt to eliminate “trickling” in either direction. Everyone gets the best deal possible.

  • “… you still get increased adoption of broadband by more people if more carriers adopted tiered pricing plans, irrespective if there are competitors in their market.”

    That’s not a “fact”, Jeneba, but pure conjecture on your part.

    In practice, when a monopoly introduces tiered pricing — a form of price discrimination — the first thing that happens is a ‘reservation price’ is set at the maximum point high users will pay, thereby taking up the consumer surplus. The lower priced tiers provide services scaled down beyond the point where consumers can’t take advantage of the true benefits of broadband without paying premiums. For example, Time Warner Cable rolled out a tiered data plan in select markets about 18 months ago. TWC offered their subscribers plans of 5-, 10-, 20-, and 40GB. Allowing for approximately 7+GB on average to download a movie via broadband, and a monthly charge of $20 for the lowest tier, subscribers of the 5 GB plan paid premiums for exceeding their cap. In some cases, the cumulative fees paid by entry- and lower-tiered consumers surpass that of what the high-end consumers pay. Given the popularity of Web 2.0 services possible only with broadband it’s plainly evident whatever increases in consumer broadband adoption materialize from tiered data plans are likely to be just cosmetic.

  • But here again, you are talking about year 2 or 3 on the adoption curve. I agree that today’s minimum user of Internet is tomorrow’s greatly expanded user. But that tomorrow is not really tomorrow. It is in a year or two or three or four.

    Today, it is better to get people on board in the first place and getting them to realize the benefits of broadband. At some point, once reluctant adopters realize the value and begin to maximize the potential, it is my hope that they would have been well on their way to being better educated and earning more money and may be in the position to pay the cost associated with higher usage. And even if broadband access does not increase the earning potential of those in low income homes, you must remember that lower income households have high adoption of premium cable services so if there is a perceived value to a service, they will pay for it. Those who were reluctant to get their first mobile phone until the price came down substantially today cannot imagine their lives without their phones and are willing to pay more, to a certain extent, to keep their phone.

    Again the focus is on getting to that near 100% adoption rate.

    And you mention that the tiered pricing is a form of price discrimination, but isn’t that how most services work? Do you go to the gas pump and fill your tank and expect to pay a flat rate? What about electricity in your home? What world do you not expect to pay for more services that you use? It’s not called price discrimination. It is called reality.

  • Here in Australia we have suffered from, and been severely hampered by, an oligraphy in our telecommunications network.

    Now we are in the process of building a National Broadband Network across all Australia so everyone can (1) receive and use the internet and (2) not be held hostage to the prices demanded by Telstra.

    It is to be hoped that pricing will come down considerably because right now it is horrendously expensive and slow!

  • “… you are talking about year 2 or 3 on the adoption curve.”

    No. I’m talking current events. I even provided a example in Time Warner Cable’s attempt at tiered data plans.

    In fact, your hypothesis runs contrary to the industry’s historical trends. Telecom services — local and long distance voice, 56K Internet, broadband, and mobile telephony — have experienced their greatest consumer adoption growth under flat-rate plans. Even if tiered rate plans resulted in lower prices that facilitated universal broadband adoption (a real shaky ‘if’), you’d again face the problem of low-end subscribers unable to realize the benefits of broadband, i.e.; streaming media, P2P networks, etc., minus paying new premiums as in the TWC example. That’s what’s called a pyrrhic victory.

    It’s true I purchase gasoline by the gallon and electricity by the kilowatt-hour. But there’s a modicum of competition among gas stations for my money, and rates charged by the electric utility are regulated by the local gov’t. The U.S. telecom industry neither features competition nor are its rates regulated (or even transparent).

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