Data Caps and Usage-Based Pricing
TL;DR
Background: Internet use has soared in the years since the COVID-19 pandemic. Average monthly data usage grew 70% from 344 GB in 2019 to 586 GB in 2022. While only 16% of subscribers were on 200+ Mbps speed tiers in 2019, by 2023, 74% had such speeds, and a third of subscribers had speeds of 1,000 Mbps or more.
Most internet service providers (ISPs) now offer hybrid service plans, with a flat rate for an initial data allowance (or a data cap) and additional charges for additional data. This combination of data allowances and usage-based pricing creates a more direct relationship between a customer’s internet use and the price they pay for service.
But… These practices have come under scrutiny, with some advocating that the Federal Communications Commission (FCC) ban data caps and regulate usage-based pricing under Title II of the Communications Act. The FCC took a step in that direction with a recent inquiry seeking input on whether data caps harm competition or consumers’ ability to access broadband internet.
However… By enabling ISPs to recover more of their investment costs from heavy users, while potentially offering lower-priced plans to lighter users, usage-based pricing can drive increased broadband deployment and adoption, in addition to fostering a more robust, innovative internet ecosystem. Regulations that ban or severely restrict usage-based pricing could have the undesired consequence of stifling innovation, investment, and deployment.
KEY TAKEAWAYS
FOSTERING FAIRNESS AND ECONOMIC EFFICIENCY
Under flat-rate pricing, all consumers pay the same amount regardless how much data they use. This can potentially lead to overuse by heavy users and cross-subsidization by light users.
By contrast, usage-based pricing can improve broadband affordability and, in turn, increase adoption. Usage-based pricing allows consumers who use less data to pay less, while consumers who use more pay more. Aligning the costs of consumption with the prices that consumers pay encourages the responsible use of network resources.
IMPROVED AFFORDABILITY AND EXPANDED ADOPTION
Users with a low data demand may find broadband unaffordable under a flat-rate pricing plan and remain unconnected. Usage-based pricing allows for more granular pricing that better reflects individual consumption patterns. This approach can lead to lower prices for entry-level plans, which expands broadband adoption and, in turn, boosts provider revenues. Moreover, such pricing provides better cost recovery for serving heavy users.
While heavy users may be worse off under usage-based pricing, consumers overall are better off. Prices are more closely aligned to willingness-to-pay, the ISPs better cover their costs, and more consumers are connected to the internet.
USAGE-BASED PRICING CAN EXPAND BROADBAND DEPLOYMENT
Usage-based pricing strategies could render certain broadband-deployment projects economically viable that would otherwise be unprofitable, particularly those in underserved areas. Such pricing enables ISPs to recover more of their investment costs from heavy users while offering lower-priced plans to light users.
Like all firms, broadband providers have limited resources to invest. While profitability is necessary for investment, not all profitable investments can be undertaken. Among the universe of potentially profitable projects, firms are likely to give priority to those that promise the greatest returns. In other words, providers are more likely to prioritize investments that generate higher revenues at lower costs.
In some cases, usage-based pricing is one way to boost provider revenues. Where this is possible, the additional revenues provide additional resources for investment and improve the expected ROI on deployment. Shifting from fixed-rate to usage-based pricing can shift some deployment opportunities from unprofitable to profitable.
In this way, usage-based pricing not only eases congestion in the short run—by suppressing data demand—but also reduces congestion in the long run by funding increased investments in speed and capacity.
REGULATIONS MUST BALANCE CONSUMER INTERESTS WITH INCENTIVES TO INVEST AND INNOVATE
Rather than ban or severely restrict data caps and usage-based pricing, the FCC should prioritize a flexible regulatory approach that encourages innovation and investment while safeguarding consumer interests.
This approach should emphasize transparency, such as existing regulations that require ISPs to make clear and transparent consumer disclosures of their data-cap and usage-based-pricing policies.
It would also rely on antitrust law, FCC oversight, and the Federal Trade Commission’s (FTC) existing authority to address any anticompetitive or deceptive practices on a case-by-case basis.
For more on this issue, see the ICLE white paper “The Economics of Broadband Data Caps and Usage-Based Pricing” by Eric Fruits, Kristian Stout, and Geoffrey A. Manne.