Net Neutrality and Models of Charging for Services

We ask our government to pay for, subsidize, or regulate access to lots of things, from the military to roads, bridges, schools, and, to some extent, the internet. We don't often talk about it, but there are several general models. Two I want to focus on are what I would call the "all-you-can-eat" model or the "a la carte" model. As the names imply, the all-you-can-eat model proposes that the goods be provided either free or with a fixed charge, while the a la carte model charges more for more usage, (however defined - see more below). The classic way to understand the difference (and the politics) would be to look at your landline phone bill from 20 years ago. All local calls are provided at one all-you-can-eat rate. You got charged the same $10 flat fee whether you had six teenage girls at home or you were a hermit. Long distance calls were charged per minute and for distance. No calls, no charge.

Which model is best for the internet? Thinking of the telephone bill is instructive. The establishment of local service fixed rate was required legislation for enactment in rural areas. Stringing 20 miles of telephone line to reach a handful of farms requires more expenditure per customer than stringing urban telephone lines where 20 feet can get dozens of apartment customers. Until the government required it, rural telephone and electrification did not take place. The a la carte model was too expensive to support rural service. The cost, of course, was spread out to urban dwellers in the form of very slightly higher costs for local service. Long distance calls, however, were all charged by minute and by distance.

Which is fair? Which is good public policy? Sometimes the answer is clear. Where the service wouldn't be provided at all without the cost-sharing of all-you-can-eat service, that model seems better. Where the demand is very small but intense, cost-sharing seems like subsidizing a special interest: few Americans wanted to share the costs for international calls that few made. Other times, the answer is just political. The all-you-can-eat model is not just about sharing costs - it's about opening access to all social classes. The cost of long distance calls made them out of reach for a large segment of the population except on rare occasion. The generation born in the 1940s and 1950s still views long distance calling as a kind of luxury although the cost has decreased a lot.

The a la carte model has one major flaw, however, and that is the potential for windfall profits and hidden charges. At first glance, charging more for a 3000 mile phone call than a 300 mile phone call seems fair - but, of course, it's all instantaneous for the electrons and there is no additional cost borne by the provider to match the extra cost charged to the user. When the ATT monopoly was broken, long distance charging and prices dropped dramatically to better accomodate the market reality. For cell phones, the pricing structure is radically different. The a la carte model also only approximates charging for usage, with the ability to cheat or overcharge. For the internet, the cost of bandwidth is not fixed, but relative - at any given moment, your downloading a movie could be hindering the net for others or totally irrelevant if usage is otherwise low.

We use all-you-can-eat funding for roads. It is worth noting that almost all the toll roads are in a handful of East Coast corridors where travel distances are shorter and roads were built by individual states without federal funding. Toll bridges too occur in the same situations, where there a local entity bears the entire cost of building the bridge, but wants to share the cost to other jurisdictions who benefit. In an aside, in conservative Orange County California, they experimented with toll LANES on roads with pricing that varied according to the time of day and relative traffic in the "free" lanes. This created the perverse incentive in the county not to improve the "free" lanes since they only earned money from the toll lanes if the free lanes were jammed. When it was discovered that the county had actually promised toll company not to spend any public money to expand roads to improve traffic flow for the non-toll-paying citizens, the gig was up.

The bad part about all-you-can eat pricing for the internet is that cost-sharing raises the minimum access charge for the occasional user. While all-you-can-eat service really help the college students and others who can afford $20/month and use lots, but couldn't possibly pay the $200/month they might be charged on an a la carte basis, it hurts the poor inner city mother who can't afford $20/month but might be able to afford $5/month for a small email box with no video/audio streaming allowed, if that is offered. The fear, and I think it is legitimate, is that we don't really have a competitive marketplace in the internet, so if providers were allowed to charge by bandwidth, this would be an excuse to dramatically increase prices for some users while NOT lowering the prices for other users. The $5/month plan wouldn't materialize, but $200/month internet bills would.

To my mind, this is what net neutrality is all about: it's not really about limiting access to content, but about making users pay a lot more for the level of usage that most are already accustomed to, in order to create new sources of profit to providers. The big companies' goal is to find a way to charge more to middle class and upper middle class people for the same service they provide at lower prices to those who can't afford to pay more.

So that's my take on net neutrality. It's about pricing, not "neutrality" of content, and it's crucial that we maintain the net neutrality model in order to prevent charging of oligopoly rents by providers.

This also explains why Republicans oppose net neutrality. It interferes with the potential for corporate profits at your expense.