This past week, the FTC announced they will propose new rules on internet traffic that would allow broadband providers to charge companies a premium for access to their fastest lanes, FCC to Propose New ‘Net Neutrality’ Rules. The proposed rules would prevent ISPs from blocking or slowing down specific websites, but they would allow ISPs to charge a premium for preferential service. An early and predictable response was the proposed rule is bad because it could force consumers to pay more for access to certain kinds of information, or disadvantage those who cannot afford it. My response is – that’s the way it should work. If the information or service provides value, the providers should be allowed to charge prices that reflect that value.
Let’s consider some examples. You want to fly from New York to London, which typically involves an overnight flight. You have a meeting in London in the morning, so you would like to get some sleep on the plane. The seats in first class lay flat and would certainly enable you to sleep much better than a cramped seat in coach class. However, first class is much more expensive. A round trip economy class ticket would cost between $1,700 and $2,000. A first class ticket would cost $8,500 or more, and a business class ticket would cost $5,000 or more. The plane uses more space per seat in first and business classes, and the number of seats is limited. Prices are a great way to allocate those scarce resources. The travelers who want or need more space can get it by paying extra.
I wrote a blog in December, Pricing Lessons from the Cheap Seats, in which I described the different sources of value offered by certain seat packages at a professional football game. Close parking, a seat protected from the snow, and access to an indoor concession area were all valuable to me, and I paid extra for those things. The season ticket holders who recognized their offers were more valuable and therefore charged higher prices were smart. They targeted buyers who were willing to pay extra for value.
It was not that long ago that nearly all information on the internet was free. Most newspapers and magazines posted their content, and it was available free. The idea was internet users would come to the sites with quality information more often, which would build demand for the printed content and for advertisers. The publishers soon realized that if their valuable content was always free, it would be hard to generate enough income to pay for the creation and publication of that content. As a result, most publishers now limit readers to a certain number of free articles per month. Those who want to see the content more regularly must buy a subscription. So, is that disadvantaging readers who don’t subscribe?
Just like an airplane and seats in a stadium, broadband is a scarce resource. It costs money to add capacity. The level of value perceived by groups of buyers varies significantly. In the broadband world, Netflix is generating huge value for its shareholders by using that broadband to offer content to its subscribers. Asking Netflix to pay for that value is no different than Netflix asking its subscribers to pay for access. Similarly, Amazon, YouTube and other content providers are capturing value by offering bandwidth-hungry content over the web. That bandwidth clearly provides value to those content providers, and it is appropriate for the ISPs to charge for it. Requiring the ISPs to offer the same service to all customers for the same price would be like asking the airlines to let everyone fly first class for economy fares, or giving everyone in the stadium club seats for the same price as nose-bleed seats. Those economics just don’t work, and they would be examples of poor pricing practices.
In my opinion, the drive for “net neutrality” is really a push to enable those who get the most value out of broadband to avoid being able to pay for it. That is completely counter to best practices in pricing which recognize where value is highest and charge appropriately.