The End of Flat Rate Internet Access?

A couple weeks ago AT&T Broadband instituted a $7 price hike for Internet access. It appears that AT&T does not intended to stop there. A recent BusinessWeek article states that just about every major cable company in the United States (AT&T Broadband included) intends to switch from a flat rate to a pay-per-use pricing model.

Saddled with $60 billion in debt from network expansion and cable Internet roll out, the biggest players in the market are no doubt discouraged by notoriously slow customer growth. Much of this is blamed on the high price tag of broadband services (relative to dial-up services), of which cable is actually one of the lowest priced.

To combat this, the cable companies intend to actually lower the cost of cable broadband solutions by offering a base plan which is cheaper than what customers currently pay. Much like a cell phone, you would get a certain allotment of minutes--except in this case, it would be bandwidth.

The cable companies state that 1% of their users consume up 16% of their resources. They argue that charging on a pay-per-use model will allow them to offer broadband services at a much more competitive price. This may be true, but are we to believe that the pricing structure will be such that the 1% will make up the difference from the discount that the other 99% will receive?

Let's do the math. AT&T Broadband wants to set its base price at something more attractive to dial-up subscribers. Let's assume they take just $6 off the current price of $45.95 a month. $39.95 is still twice as much as your average dial-up connection, but it will suffice for this argument. According to AT&T's numbers, 1 customer will have to make up the difference of 100 others, meaning that 1 out of every 100 users will end up paying an average of $639.95. I don't see a user paying over $600 a month for Internet access--well, at least not for the second month.

Ah, but wait. AT&T didn't say that service was going to be any cheaper for existing customers, just that it was going to charge the heavy users more. In fact, AT&T didn't even say it was only the 1% that could expect to pay more. This leads us to believe that the moderate to heavy users will be paying more than they currently do to subsidized a lower base rate or low cost introductory rates.

You pay for what you use: that's fair right? Well, sort of. The thing is, AT&T sold the service one way, a way that didn't involve convoluted price plans or complicated billing statements. One assumes that AT&T billing statements will look more like cell phone statements; except, instead of minutes, they'll itemize the amount of bandwidth used. Unlike minutes, which are universally understood and easily estimated, bandwidth is a fairly cryptic and difficult to gauge measurement.

To illustrate my point, answer these two questions: roughly how many minutes did you talk on the phone today? Now, how much bandwidth did you use? I don't know about you, but I don't have the slightest clue how much bandwidth I personally used.

Theoretically, if you just check your e-mail, buy the occasional plane ticket, etc. online, then your cable bill goes down. However, if you are a moderate to heavy cable user (whatever that means) you can expect to pay extra.

To further compound the issue, a cable connection is always up, which means your computer may be moving information while you are not. Leave your e-mail client open, a browser window with a rotating banner ad, etc., and you may be incurring an additional cost while you're not sitting at your computer. Worse, if you've installed a music swapping application like KaZaA, people you don't even know could be downloading music from your computer, running up your cable bill to get their "free" music. That's not even to mention spyware or viruses that periodically affect just about every Internet user.

It becomes clear that the new pricing model will only lower the perceive price of cable. At best, the average customer might fall back to pre-price-hike prices. The moderate to heavy users will see price increases reflective of their use. They will subsidize the cost for the rest. It reminds me of the practice of "former price comparisons", but on a longer timeline.

In the end, after all the smoke-and-mirrors, the average AT&T customer can expect to pay the same--if not more--than they did last month. The average customer will not fully understand or be able to predict their monthly bill. They will have gained nothing. In fact, if AT&T's ploy works and their subscription rate increases, the quality of the service will theoretically decrease because cable is a closed system (i.e. as the number of customers increases, the amount or resources available to each decreases).

And in the background, the entertainment industry is breathing a sigh or relief because the pay-per-use pricing model will no doubt put a damper on file swapping--illegal or otherwise.

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