Wednesday, March 30, 2011

Why America should be very worried about what is happening in Canada with caps and usage based billing

[A decade Canada was second only to South Korea in terms of broadband deployment and adoption. But unfortunately due to a number of factors including unrestrained market concentration, lack of foreign competition and regulatory capture Canada has fallen to the middle of the pack in terms of broadband deployment. 
Canada has now the most restrictive caps and usage based billing practices amongst the OECD countries.   The US looks like it is headed in the same direction with the recent Comcast-NBC merger and the upcoming proposed merger between T-Mobile and AT&T. AT&T and Comcast have already announced caps (although much higher than in Canada).   But with increasing market concentration and duopoly market it is likely that the US will soon follow Canada’s path to becoming a second rate  broadband country.  The only ray of hope is Google’s fiber announcement in Kansas City and the Internet 2 UCAN initiative.

Myself and many others like the brilliant Michael Geist have been blogging about the worrying concentration of market power and the anti-competitive duopoly for some years now. Thanks to some financial support from Netflix we have been able to undertake some in depth analysis of the myths and facts of usage based billing and caps which I hope will clarify some of the fear,  uncertainty and doubt created by the  telephone and cable companies on this subject.  Michael Geist’s paper deals specifically with the wholesale issues that are being debated before the Canadian regulator at this moment, while my paper is more generic and describes some of the technical and economic solutions to usage based billing and caps.

Michael Geist’s paper: 
Canada’s Usage Based Billing Controversy: How to address the Wholesale and Retail issues

My paper
Myths and Fallacies about Usage Based Billing (UBB)

It is important for regulators and policy makers to understand the mechanics behind (UBB) and whether streaming video and other services imply an actual true increased cost for the service providers.  More importantly it will be useful to understand whether or not infrequent or occasional users of the Internet are in fact subsidizing heavy users and if there is any true cost correlation with usage.

UBB has been proposed as an economic “Internet traffic management practice” intended to reduce network congestion by controlling heavy users rather than using technical processes to achieve the same effect.  It has also been suggested that UBB is necessary to provide telephone and cable companies with revenues and incentives to make sufficient investment in their broadband infrastructure in order to meet the future tsunami of data that is predicted to be delivered over the Internet.

In this paper we will demonstrate three important facts:
a.                   Internet video streaming services actually reduce costs for Internet backbone networks operated by telephone and cable companies, even as traffic volume grows;
b.                  There is no correlation between volume of Internet consumption and costs for telephone and cable company last mile providers and that congestion, if any, is more of an artifact of design assumptions made by the operators; and
c.                   Cable and telephone companies operate competing video streaming services over the same last mile infrastructure used for Internet access services, which generally are not priced based on usage, and yet somehow seem to able to avoid congestion as well as provide the service for fraction a price of what they charge for delivery of the same video content delivered over the Internet.

These three facts call into question the whole rationale and validity of the need for UBB. More importantly, in other jurisdictions outside of Canada, Internet service is often provide without UBB and so one must question what is the real purpose of UBB in Canada?

The former monopoly cable-TV and telephone companies control the local wireline infrastructure duopoly and they offer on-demand regulated and unregulated video streaming services over this last mile broadband infrastructure that is also used to provide competitive Internet access. As well, several of these firms have extensive investments in broadcast content.  This suggests that UBB may serve other purposes for these incumbent network operators. UBB can be a means for cable and telephone companies to recoup any decline in revenues as users shift to Internet services. It can also serve to constrain the competitiveness of unaffiliated on-line video streaming services by increasing end-user costs for those services. When passed-on at wholesale, UBB also greatly reduces the pricing flexibility of independent ISPs, making them less effective competitors. Moreover, and paradoxically, UBB puts downward pressure on demand for Internet services which reduces the need for, rather than creating an incentive for, network investment.  

I look forward to your comments and questions


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