Bandwidth Experiment Raises Concerns

Published August 1, 2008

Time Warner Cable, Inc., has begun a metered bandwidth experiment in Beaumont, Texas, establishing limits on the bandwidth its customers may use and charging additional fees for those exceeding preset limits.

On June 5 the company began offering a tiered plan to Beaumont customers. The lowest tier charges customers $29.95 per month and offers 768 kilobits per second and a monthly bandwidth limit of 5 gigabytes. The plan’s highest tier charges $54.90 per month for 15 megabits per second and a monthly bandwidth limit of 40 gigabytes. Time Warner will include customers’ uploads and downloads in calculating bandwidth usage.

Customers who exceed their plan’s limits will pay an additional $1 for every extra gigabyte of bandwidth used.

The bandwidth caps will not substantively affect the Internet experience of users who simply browse through Web sites, but they can impose considerable restrictions on those who download files and movies. Even one high-definition movie can exceed the 5 gigabytes of bandwidth permitted in Time Warner’s lowest tier of service.

Comcast Corp., Time Warner’s competitor and the largest provider of cable services in the United States, has indicated it too might institute metered bandwidth–with a monthly cap of 250 gigabytes for all users. Bend Cable Communications already has a monthly bandwidth cap of 100 gigabytes for its customers, charging $1.50 for every additional gigabyte used.

Using Monopoly Power

Cable providers such as Time Warner often have government-granted monopolies to provide cable services in a particular area. In Beaumont, Time Warner is the sole legal provider of cable Internet access.

This has led analysts to express concern that metered bandwidth policies constitute an exercise of service providers’ monopoly power. “State-created monopolies will gouge the consumer to the extent they can and historically have corrupted the regulators,” said Samuel Bostaph, Ph.D., chairman of the Department of Economics at the University of Dallas.

Bostaph, himself a Time Warner customer, expressed his displeasure at the company’s attempts to seek special government favors and protections from competition.

“Time Warner kicks back $8.53 [of my user fee] every month to three layers of government,” Bostaph said. “In return, I am blocked from obtaining service from any other company by government goons.”

Such rent-seeking is ubiquitous today, Bostaph said. “Internet access control by government-granted franchises illustrates this fact in that the government entity in question always gets a kickback from cable companies,” he said

“All regional, state-created monopolies should be eliminated, and the services be provided by any firms that can operate profitably,” Bostaph recommended. “Their pricing policies should be determined by the firms themselves.”

Considering Alternatives

Analysts have not reached a consensus on whether a free market would support metered bandwidth plans. South Korea has a highly competitive market for Internet service provision, with few regulations, and average connection speeds are several times those in the United States. Virtually all of South Korea’s Internet plans have unmetered bandwidth.

As a result of easily available access, South Korea has a vibrant online gaming culture, and the typical South Korean can access a movie online at a lower cost than purchasing it on DVD. However, much of South Korea’s Internet infrastructure was directly built or subsidized by the government, so the implications for the United States are ambiguous.

In Europe, Internet service providers used to have nearly ubiquitous metered bandwidth plans until 2006, but the emergence of widespread online video services such as YouTube has led to increasing dissatisfaction with bandwidth limits. After suffering significant losses, virtually all European Internet service providers abandoned metered bandwidth in favor of unmetered packages.

Timothy B. Lee, an adjunct scholar at the Cato Institute, noted, “It is hard to say what a truly competitive market will be like. To get some idea, we can look at the market for commercial Internet access. There is a variety of options there, from flat rate to metered. So I doubt that only one kind of package will ultimately win out.”

Benefiting from Competition

Cable Internet service is not the only option for many users throughout the country. Satellite, wireless, and DSL providers are granted far fewer regional monopolies than cable companies. In addition, DSL metered bandwidth plans are unlikely for technical reasons.

According to some analysts, this variety of alternatives to cable might provide competitive checks that prevent policies such as Time Warner’s from becoming overly inconvenient to consumers.

“The fact that there are multiple competitors is a big help; it constrains the extent to which the companies are able to raise prices,” said Lee. He welcomes any factors making the market more competitive. “A more competitive market would create pressures for prices to be lower,” irrespective of whether customers have metered or unmetered bandwidth plans.

Metered plans might even be an improvement for consumers, Lee said, since they provide more knowledge about how much bandwidth is actually at their disposal. Many “unmetered” plans actually have unannounced built-in limits, he noted. When users exceed those limits, they are given a warning, and if they continue consuming extra bandwidth, their accounts are suspended. “With metered bandwidth, at least we know where the caps are,” Lee said.

Determining Pricing Strategy

Whether Time Warner’s metered bandwidth plan succeeds depends on where the caps are set, according to Lee. “If most customers don’t go near the caps, this policy will be fine.”

Lee emphasized the knowledge problem surrounding the determination of an optimal pricing policy. “No one knows what the right pricing strategy is. This is why we need experimentation. We need to let Time Warner try this plan out. If the caps are high enough, it will work. But Time Warner needs to figure out how high the caps ought to be set through trial and error.”

Lee opposes government attempts to regulate Time Warner’s behavior or prohibit metered bandwidth experiments.

Gennady Stolyarov II ([email protected]) is editor-in-chief of The Rational Argumentator, an online magazine advocating the principles of reason, rights, and progress.