“The whole point of the Doomsday Machine is lost if you keep it a secret! Why didn’t you tell the world, eh?” — Dr. Strangelove, from Dr. Strangelove, or How I Stopped Worrying And Learned To Love The Bomb
Time Warner Cable (TWC) has announced it will expand its existing “Internet Essentials” program to more cities in Texas. Users that elect this pricing plan are limited to 5 GB per month. Go over, and you pay $1/GB until you hit a maximum of $25 extra on your monthly tab. Time Warner also provides you with meters so you can keep track of your usage. TWC also allows you to switch back and forth between unlimited and “essentials” easily and without any lock-in. If I find I keep going over, I can switch back to unlimited. As an added effort to make sure users know what they are getting in to when they opt for the more restricted plan, TWC gives you a 2 month grace period if you switch to Essentials where they track your overages and don’t charge you for them. This is a good thing, because, as I discuss below, one of the issues for these usage based billing/bandwidth cap things is that many people do not have any clue how much capacity they use.
As I’ve written before, I like the way TWC is experimenting with pricing here. I don’t know if customers will see this as a good deal, but that is the point of experimenting with different price plans. In fact, I wish other providers would experiment this way, rather than simply impose bandwidth caps or usage based billing (there is a difference between them, although most reports treat bandwidth caps as a form of UBB). Oddly, Time Warner Cable’s experiment may tell us a lot not only about whether customers like a low-bandwidth option (and whether five dollars is the right discount for it), but about whether other operators who are forcing their customers to take more constrained options are able to do so by exercising market power rather than because customers want it.
Which brings me to the Dr. Strangelove Rule of Price Signaling, which I describe below . . . .
A number of folks have expressed rather negative views about TWC’s Essentials, of which the most cogent is probably Stacey Higganbotham’s critique (updated somewhat here). A number of other people have also chimed in, and the criticism can be boiled down to the following:
1) I don’t trust TWC after the way they botched bandwidth caps in 2009 — this is obviously another plot to restrict my broadband, overcharge me, and protect their cable subscription revenues.
2) I can’t believe they offer only a $5 discount for massively restricting my capacity. What a rip off!
3) It is a bad idea to train people to restrict their capacity use while we are simultaneously encouraging people to use broadband for educational purposes (which involve lots of streaming video), civic engagement (also involves lots of video), telecommuting (moving mucking huge files), electronic medical records/home diagnostics/telemedicine (involves video AND mucking big files), and other stuff.
4) Most people have no clue how much bandwidth they use, and meters are unlikely to help.
I have actually written favorably about TWC’s Internet Essentials plan. Not because I would use it myself. I and my bandwidth intensive family could probably blow through 5 GB of capacity in a single day, none of which involves Netflix or other forms of entertainment streaming. I like TWC’s overall approach and I like the idea of product differentiation as a means of providing consumers with more choices. I may think that a $5 discount per month for significant bandwidth constraints is a bad deal for me, but I am not the universe of all customers. Also, there is a huge difference between “I think this is a bad deal” and “I think we ought to care about this from a policy perspective.” As long as it is a voluntary option and neutrally administered, it looks like a reasonable experiment to try.
The Question of Price Signalling.
But it does raise a very interesting problem: how do providers and consumer negotiate to find the right price for broadband? How does TWC discover if the program is a good idea but it is just not giving enough of a discount, and how do consumers even begin to understand how much broadband capacity they use. It’s not just a meters thing — its the fact that I have no idea how much bandwidth is being sucked up by advertisement, by software updates, or by applications that routinely report back to the Mothership. So how do I as a consumer even begin to evaluate whether this offer is a good deal or not. How does TWC — or, more importantly, how do companies with much more coercive policies (looking at you AT&T!) and/or confusing policies (looking at you VZ Wireless!) — decide how to set the prices and policies? How do consumers know what’s a good deal and what’s a rip off? And what happens with all the third parties consumers can’t control?
This is the problem of “price signalling.” In a functioning market, providers and consumers negotiate with each other for a proper price, or use pricing to otherwise affect behavior. Providers try to find out what the market will pay, and try to influence behavior using price. I, as a producer, may very much want to deliver a product or service in a particular way for some reason, but consumers may not want to receive it that way. So I alter the price to try to get them to change their behavior. Consumers respond by either purchasing at the price or not. But there are many reasons why a consumer may or may not like the product/service at this price. Maybe the price is too high? Maybe demand is intrinsically low? If I am trying to shift behavior, it may be that I have the right idea, but the wrong price point. Consumers, meanwhile, are looking for indicators that the price is actually worthwhile. That may come from use, but it also comes from comparison with alternatives in the market and my general knowledge of the good or service and how I intend to use it. All these things will influence how I respond to the price signal.
And, of course, I have to actually be aware of the price signal in the first place. You as a provider of plane tickets may want to signal me to pack fewer bags. But if I don’t know about the new baggage fee until I arrive at the gate, I can’t change my behavior — at least for this trip. If the fee is billed as temporary to offset high fuel costs, I have no idea how to plan my next trip. The price signal does not work — and we conclude you are actually manipulating prices for a reason other than to signal.
The Dr. Strangelove Rule of Price Signaling.
This leads me to what I call the Dr. Strangelove Rule of Price Signaling. “Just as the whole point of a doomsday device is lost if you keep it a secret, the whole point of price signaling is lost if the parties either cannot interpret the signal or cannot respond.”
To give an example of how this works. Maryland has built near where I live a road called the “Intercounty Connector.” (ICC) This road alleviates some of the miserable traffic congestion on the northern side of the beltway, so it is clearly got great demand potential. Nevertheless, the road remains consistently underutilized. Why? According to consumers, it’s because they hate the toll system and think it is too high. But the problem is worse because consumers don’t even have a good idea of what they are paying. The ICC uses a combination of usage based billing and congestion pricing designed to shift usage to off-peak hours. Users pay 25 cents/mile during peak hours (6-9 a.m., 4-7 p.m.), 20 cents/mile during offpeak hours, and 10 cents/mile during night period (11 p.m. to 5 a.m.). In addition to that, you pay a 150% higher rate if you don’t have an EZ-Pass for automated billing.
This system makes great economic sense, but users hate it. It’s confusing. They can’t understand the price signals. They can’t do much to shift their work hours or what exit they take to respond to the price signals. For those without EZ-Pass, there is a cost to get an EZ-Pass which, while not high, further adds to the cost of using the ICC. The result is that users treat the toll as if it were the maximum possible toll — $4 for end-to-end travel at peak time — and only use the road if they are willing to pay. None of the price signals has any discernible impact on behavior, and the state can’t seem to figure out how to respond to demand for a different pricing structure beyond the clear message that users hate the toll.
Implications For TWC and Usage Based Billing Generally.
None of this is a criticism of TWC. To the contrary, TWC is doing exactly what they ought to do in terms of price signalling. They are putting something out there and observing customer response. They have all kinds of tools to help users evaluate whether this is worth it or not, and they give you two months to get used to the new pricing pattern. At the same time, there are a lot of factors that weigh against rational price signalling by usage in this market. It is an incredibly difficult market for users to evaluate. There is a lot of network traffic (ads, software updates) that users cannot anticipate or control. Within my home, an increasing number of my devices use WiFi offload even when I am not consciously using my broadband connection. Even when I am downloading video, many factors may influence how much bandwidth I use. My crappy little webcam that I use to Skype with my friend in Ireland does not use nearly as much bandwidth as the online animation of drug interactions my wife watches as part of a continuing education webinar.
So I am actually very interested to see how the TWC experiment works out, and what conclusion TWC (and others) draw from the adoption rate. It is entirely possible that capacity is a lousy thing to try to price differently (as opposed to, say, speed). Alternatively, it may prove very attractive to some consumers and prove useful as an option — even if the majority of users don’t like it. The biggest implication, I suspect, lies with carriers that are more coercive. If users don’t like it when given a choice, but carriers other than TWC, such as Comcast or AT&T, can get away with pricing capacity for everyone anyway, that would be a strong price signal in itself — of market power.
Stay tuned . . .