Why metered broadband won’t last

When Verizon’s chief technology officer, Dick Lynch, recently predicted an end to flat-rate broadband, many in the industry saw it as a late entry into the general consensus. After all, the combination of runaway consumer bandwidth demand and meager service provider revenue growth is unsustainable, right?

“The concept of a flat-rated infinitely expanding service for everyone just won’t work,” Lynch told the audience at the Fiber-to-the-Home Conference.

Not everyone agrees.

“I think ultimately we’ll end up with a simple flat rate,” said Craig Labovitz, chief scientist for Arbor Networks, which sells network management systems. “The question is over what time scale.”

“Generally stuff starts out flat-rate, and it’s very expensive for a select few,” Labovitz said, citing the telegraph and the telephone as examples. “Then as it becomes more ubiquitous, it becomes metered as you try to relax capacity…and you try to dis-incentivize people from using your capacity. And then it ends up being flat-rate again as ultimately there’s a strong economic [force toward] consumers preferring simplicity as a key metric.”

Though the economic concepts he referred to aren’t new, Labovitz cited an academic paper written in 2007 by David Levinson and Andrew Odlyzko, professors at the University of Minnesota widely respected for their authority on Internet economics.

In that paper, Levinson and Odlyzko argued that metered prices can potentially pose the threat of under-consumption, even among users who don’t pose a burden to the network. They cite historic surges in usage that resulted from flat-rate pricing for Internet service in 1996 and mobile telephony in 1998. (Both were instigated by AT&T, incidentally.) They posit that bundled services are even easier to offer at a flat rate because high consumption of one service may be balanced out by less consumption of another. And they maintain that calculating metered charges comes with its own cost – for providers and consumers alike.

“The cost of collecting charges on each transaction, both in real terms for the operator and the user and in dissuading total demand by increasing marginal costs…makes [metering] too expensive,” the authors wrote, adding that metering does make sense in some cases, “When the aim is less to collect revenues and more to discourage usage.”

It’s hard to reconcile Verizon’s views about the untenable ratio of network costs to user demand with comments made by the same company at the same event just two years earlier. At the 2007 FTTH Conference, Terry Denson, vice president of FiOS TV content strategy and acquisition, boasted that Verizon would be able to offer 100-Mb/s services long before the market would find ways to use that much bandwidth. “I don't think customer behavior is going to get there for several years,” Denson said then.

If history is any guide, metering broadband would push customer demand for 100-Mb/s services even further away.