This week at the NTCA Cable Show, FCC Chairman Julius Genachowski reiterated that he supports the idea of broadband usage caps and tiered pricing. In a conversation with former FCC chairman Michael Powell, Genochowski said “usage-based pricing could be a healthy and beneficial part of the ecosystem.” Various public interest groups slammed the chairman’s comments shortly after, and there has been a little backpedaling from his office since then. But, I hope the Chairman still agrees that broadband providers have a need to manage their networks and should be able to set pricing based on the cost of providing the service.

Free lunch? No such thing.

There are those who will rail against any kind of caps or tiered pricing.  They’ve grown up with free content on the Internet and free apps on their phones.  They don’t understand the business of broadband. Sometimes, I think, that they think, there are no real costs associated with providing broadband service. It’s just a cable and some bits of data. You’ll hear comments like “I’m paying $50 per month for a broadband connection, dang it, and I should be able to use that as often and as much as I like.”

Hang up. There’s no one home.

It reminds me of the old dial-up days.  Back then, you paid for a group of phone lines and modems that you made available to your customers. When someone dialed in and connected to the Internet through your service, they used one of those lines and modems, taking them out of the pool available to other customers. You expected they would hang up every now and then. That’s how you priced your service. You’d charge something like $19.95 per month for a dial-up account figuring that you could oversubscribe every phone line and modem six or eight times to one. You knew not everyone would be on at the same time. With dial-up, bandwidth was not that big an issue, because you could only transfer so much data over a 50 Kbps (at best) connection.  It was mostly about the cost of the ISP’s phone line and modem the customer was using. The pricing model didn’t work if you had a customer using one of your modems all the time, unless they were willing to pay you a lot more for a dedicated connection.

Of course, you’d get the handful of customers who kept their connection up all the time, whether they were in front of their computer or not.  They would say “I’m paying $19.95 a month for this Internet service, dang it, and I should be able to stay on-line all the time.”  You’d do your best to explain that just the phone line alone that they were using was costing you more than $19.95 per month, not to mention the fact that they were taking a modem out of your pool and the other related costs in providing the service. They didn’t seem to care.  It didn’t help that ISPs back then were advertising the service as “unlimited”.  When pressed, the definition of unlimited meant while actively using the service, not unlimited time per month.

Broadband, on the other hand, is an always-on service.  A subscriber doesn’t “hang up” and you don’t expect them to unplug their modem.  But, flat-rate pricing models were built on the expectation that folks would take a break from transferring data every now and then.  Bandwidth is also a limited resource. As you give your customers the ability to transfer more data, they have the ability to eat a lot more of that resource.  An ISP today can’t give every customer a dedicated 10 Mbps connection out to the Internet. The ISP’s “pool” of bandwidth to the Internet has to be shared with other subscribers. Like modems in dial-up days, bandwidth has to be oversubscribed for the pricing model to work out.

Ten years ago most subscribers weren’t using a lot of bandwidth because there wasn’t a lot to do on the Internet besides surf static Web pages and send email.  Today, more of us are watching videos on Facebook and YouTube, watching Hulu to catch up on the show they missed, or streaming HD movies on their gaming console, Blu-Ray player or Internet-ready TV.  Some are cutting the pay-TV cord and going completely over-the-top (OTT). This is a double-whammy for cable and IPTV providers, because they lose the revenue from their video service, plus the subscriber is now going to use a lot more bandwidth.

You don’t leave the faucet running for a reason.

You don’t expect the power company or water company to give everyone a flat rate for their service.  Would you want your water bill to go up because your neighbor waters his lawn every day, washes  two cars weekly, and has a fake waterfall behind his house?  In a similar way, broadband providers need to be able to price their service such that those using the most bandwidth pay more.  As people cut the pay-TV cord, there needs to be a way to recover that lost revenue and cover the increase in bandwidth costs. If regulations force a one-price-fits-all model, then that one price is going to be higher for everyone.  If my neighbor’s dog watches reruns of Lassie on Hulu several hours a day, I don’t want to pay for it.