Friday, May 01, 2009

Why Shouldn't Internet and Cable TV Be Priced Based on Usage?

Time Warner floated a plan to charge people based on the amount of data they downloaded and the internet erupted in protest causing them to shelve the idea. And while I think the actual price structure of Time Warner's plan was too expensive, the idea of charging based on usage rather than just the speed of the connection was a fair one.

The question of fairness of pricing can be extended to include cable TV and cell phone companies as well, as all three have similar economic models with large upfront costs to build their networks and small marginal costs to add new subscribers. Each could choose to charge customers based on quantity used, quality of the product, or the amount of selection provided. Interestingly, each chooses to charge only on one and a different one for each.

Cell Phone
Quantity: Number of minutes you use.

Quality: Quality of the voice connection/number of drops.
Selection: Number of people you are allowed to call.

Cable TV

Quantity: Number of minutes you watch.
Quality: Quality of the transmission (HD).
Selection: Number of channels you are allowed to watch.

Broadband Internet
Quantity: Number of gigabytes you download.
Quality: Speed of your connection.
Selection: Number of sites you are allowed to access.

Charging based on both quality and quantity is fairest while charging based on the amount of selection doesn't make a lot of sense.

Unlimited access plans should only be for heavy use customers such as the $100 plans for ulimited use offered by cell phone companies. If that was the only plan cell phone companies provided, it would be unfair to those that just use their cell phone a limited amount (or it might price them out all together). A person that checks their email and a surf a few websites a day should not have to pay as much as someone who is online constantly and downloads bandwidth intensive movies. A single person who watches only a few hours of television a month shouldn't be charged the same as a large family with multiple TVs that watch 5 hours of TV a day. Charging by amount downloaded or number of minutes watched would be fairer.

Companies should also charge more for higher quality service. Cell phone plan should charge more for service that included better voice quality and fewer dropped calls. Cable TV should charge more for HD channels and cleaner transmission. Internet providers should charge more for faster pipes. It is fair for those that get a higher quality product to pay more for it. Charging for quality would also give the companies a greater incentive to improve.

Charging based on selection, as with cable TV based on the number of channels, doesn't make a lot of sense. There is currently a push to allow customers to pay for channels a ala carte rather than in bundles, but this is just a slightly different way to charge based on selection. To see how bizarre this price structure and how a la carte isn't a good solution, imagine if it were applied to the internet. People would pay based on bundles of sites they could surf to, and they would be complaining that they were paying to access 10,000 sites, but only viewing 100 of them. They would argue that they shouldn't be charged for the 9,900 sites they aren't accessing and want to be charged just for the sites they do visit (which they think should be 1% of the current price since they are only viewing 1% of the sites).

Instead of a la carte purchasing the better solution is to give customers access to every channel but charge based on the number of minutes watched. If one watches only 10 hours a month comprised of 5 different shows, but those happen to be in 5 different bundles of channels, they would have to pay over $100 a month to do this. There should be a limited minute plan with unlimited access to channels for $20 or so to make it more fair. Part of the problem is that cable companies make contracts with TV channels based on the number of subscribers. This should be changed so that cable channels are compensated by the number of minutes their channel is watched rather than the number of subscribers with access to it.

A combination of charging based on usage and quality is the fairest way for cell phone, cable TV and internet companies to charge for their products.


Anonymous said...

The number one issue is to blow out the city-by-city cable monopoly. Until then pricing strategies can be taken as gambits in regulatory game theory.

I have Time Warner, but across the river Verizon is offering fiber optic. My cable company need never worry about that because there is a regulatory boundary.

- odograph

Fat Knowledge said...


Long time no comment. Good to hear from you man.

I agree with you on the monopoly and pricing. I wonder though if it is justified to run both a fiber optic cable for the phone company and the cable company to each house. Maybe monopolistic prices are cheaper than running two cables to each house and having each house just use one.

One idea I have is for the government to run a single fiber optic cable to each house and then sell access to companies in a competitive manner. I think this could be the best of both worlds.

I was just looking at the concept of pricing by quality, quantity or selection here, but you raise a good point.

CableTechTalk said...

The problem is that cable operators have to pay programmers for the content, whether you watch it or not. With cable service, you're paying for the ability to watch the channels. Programming content is in an entirely different area than voice service or Internet access. A bit is just a bit, but that doesn't work for talent or athletes.

Fat Knowledge said...

Cable Tech Talk,

Good point. But, as I mentioned in the post I would like to see the operators pay programmers by the minutes watched rather than a usage fee for unlimited access.

In the past this was probably tricky to do technically to count up when shows were being watched, but now that cable boxes are becoming standard, it should be more feasible.

And, as I was thinking about it more, what I am really calling for is an extension of the Pay-Per-View model. Except now, I would like to be able to choose any show on any channel to purchase piecemeal. Cable companies know how to do this, so I don't see why they can't extend the model.

Fat Knowledge said...

Cable Tech Talk,

What I should probably modify is that when I state that the business models for the 3 are the same that isn't correct. Internet and cell phones don't cover content, where as the cable bill does. If I want content on my phone or the internet, I either go to free advertised based providers, or I pay those providers myself (1-900 numbers or WSJ like sites that charge for content).

Some of cable's content it gets for free (network stations), but most of it it must pay, which does add a marginal cost.

But, this doesn't change my point that I think cable tv should have fees based on usage rather than selection.

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