NCTA Funds Study Claiming Usage-Based Broadband Pricing Is Pro-Consumer

Free Press Disputes Findings of Paper Authored by Michigan State Professors

The National Cable & Telecommunications Association funded a new academic research study finding that usage-based pricing of broadband gives ISPs an incentive to provide more affordable plans -- while an industry critic disputed the paper’s findings, arguing that only effective competition will drive prices down.

The paper, “The Economics of Usage-Based Pricing in Local Broadband Markets,” was written by Johannes Bauer and Steven Wildman, professors in Michigan State University’s Department of Telecommunication, Information Studies & Media. NCTA provided funding for the study, according to spokesman Brian Dietz.

“[U]sage-based pricing of broadband service is likely to affect consumer welfare -- but not in the harmful manner suggested by its critics,” the paper says. “To the contrary, as we show in this report, the substantial research literature on the subject of differential pricing based on usage and quality suggests that the effects of well-designed UBP plans on consumers are likely to be beneficial, as are the effects of UBP on investments in the broadband infrastructure.”

In their paper, Wildman and Bauer said that when broadband customers pay the same rate for broadband regardless of how much they consume, Internet service providers find few incentives to invest in better service, to access small markets or to offer lower prices. When customers pay for what they use, “it gives suppliers an incentive to offer lower-priced options they otherwise would not find profitable.”

By contrast, they wrote, “a government-mandated single-price approach to pricing broadband biases the design and pricing of service toward the interests of subscribers willing to pay the most to the detriment of low volume and low income consumers who are less likely to be offered service packages they are willing to purchase,” the professors said.

Wildman appeared at an NCTA briefing Friday at the trade group’s headquarters on usage-based broadband pricing trends.

Disputing the paper’s findings, Matt Wood, policy director of consumer-advocacy group Free Press, said usage-based pricing models are designed simply to make more money for ISPs.

“The idea that the cable industry would charge people less for broadband access, if only it were allowed to do so, is laughable,” Wood said. “So is the claim that higher cable profits will result in savings and benefits that trickle down to consumers. Nothing but effective competition will drive prices down, and cable operators already make exorbitant returns on their Internet offerings should they care to pass some of that cash back along to their paying customers.”

U.S. Internet service providers that have adopted usage-based pricing including AT&T and Suddenlink Communications. Comcast in May 2012 eliminated its 250-Gigabyte monthly cap and instead is testing different usage-based pricing models with a minimum of 300 GB before fees kick in.

Time Warner Cable, meanwhile, plans to expand its optional usage-based billing plan for lighter Internet users nationwide by the end of 2012 with the exception of Hawaii. Under the operator’s broadband Essentials plan, customers who use less than 5 Gigabytes of data per month get a $5 discount on their bill. Usage over that limit is billed at $1 per Gigabyte, with a maximum of $25 in surcharges.

Also appearing at the NCTA’s event Friday were Boston College Law School professor Daniel Lyons, who in October published a study titled “The Impact of Data Caps and Other Forms of Usage-Based Pricing for Broadband Access”; and Dave Caputo, president and CEO of bandwidth-management equipment vendor Sandvine.