June 17, 2008
Who Should Bear the Cost of the Bandwidth Hog?
Posted by Christine Hurt

In Sunday's NYT, an article reported that Time Warner, Comcast and AT&T were all pursuing strategies aimed at curbing so-called bandwidth hogs -- Internet users whose high-volume usage threatens to slow down everyone's Internet experience.  The Internet companies like to frame the problem as a free rider problem -- if everyone pays the same price for unlimited Internet usage, then a few MMORPG enthusiasts who also download movies and video clog up the works for those who just want to check email and get directions.  Users tend to fall into two, disparate camps:  using Internet for checking weather, headlines and email uses less than 5 gigabytes a month.  However, downloading one movie uses 5 gigabytes by itself.  So, it makes sense to charge varying amounts depending on usage, just like electricity, water, long distance, cell phones usage, etc. 

Except that I don't think electricity and telephones are good analogies.  The electric company provides power and also delivers it.  When you pay for the usage of electricity, part of that is for the infrastructure used to deliver it, but also part of your charge is for the actual product:  power.  When you download a movie from Netflix, your internet provider is someone different.  You have a merchant on the one hand and a delivery service on the other.  The burden of that delivery is borne by the internet provider, who has to come up with a way to charge you for it.  The internet provider would really be happy if you didn't download that movie.  (For example, Comcast's strategy is to slow down the Internet for bandwidth hogs, incentivizing less usage.)  But the merchant, Netflix, will not be happy with that result.  So, if internet providers begin charging "by the byte," then the online merchants who want to sell you products that must be delivered via the internet (music, TV, video, news, books) will lose business as the delivery charge rises.  As consumers feel incentivized to ration their own Internet usage, then online providers will feel the pinch.

So, here's my prediction.  Online providers such as Netflix, iTunes and television companies will borrow from one of two models.  One may be "free shipping," a la Amazon and Zappos.  The second may be something like the "toll free number," which allowed consumers to call out-of-town businesses back when long distance was almost prohibitively expensive. 

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