Differential pricing is about consumer choice

Why would groups that claim to represent consumers argue against the choice of services that can help save money?

I really don’t get it.

The CRTC is preparing for its “Examination of differential pricing practices related to Internet data plans,” with an oral hearing opening on October 31. Differential pricing refers to the practice by some Internet Service Providers (ISPs) to apply different metering rates to some data. Examples may be for certain types of data to be carried for free (such as customer account inquiries, anti-virus software or operating system updates, or emergency messaging) or for some applications to be flat rated (such as certain social networking apps, or some music or video programming).

Intellectually, I can somewhat understand the arguments from architectural purists who simplistically believe that all bits are the same, none should ever be blocked and all must be priced the same. I disagree with that perspective and lots of counter-examples can be identified that shatter the purity of their model to the point where their argument should be considered to be quaint and out-dated.

At the root of their argument is a view that all data plans should be unlimited and prices should be lowered to the point that limited free or flat rated plans are meaningless.

I can understand that argument. It is simplistic and impractical in the real world, but at least I can understand their argument.

But when this same argument is adopted by “consumer groups”, it confuses me.

The “Equitable Internet Coalition”, composed of the Consumers’ Association of Canada, the Council of Senior Citizens Organizations of British Columbia, the British Columbia Public Interest Advocacy Centre, the National Pensioners Federation and led by the Public Interest Advocacy Centre (“PIAC”) submitted an intervention to the CRTC that argues: data caps are an un-necessary evil; data caps are becoming more difficult to justify; data caps do not address issues of congestion; and, data caps do not ensure pricing fairness. The coalition says “differential pricing plans are not a sign of, or response to, competition, but instead they may be a symptom of a lack of competition, manifested in the existence of data caps in the first place.”

What the consumer groups failed to acknowledge is data volumes have variable incremental costs, most significantly pronounced on mobile networks; and, offering varying levels of data usage tiers (including unlimited data, in some cases) provides consumers with more options. logically, lower data usage tiers are priced at lower rates than plans that offer higher levels of data. So, when the coalition cites the United Nations Special Rapporteur on Human Rights on the importance of broadband internet access, I am confused that these representatives appear to want to remove lower cost options from the marketplace.

The coalition says “many low-income households struggle with the affordability of communications services”. With that, I completely agree. We need to find communications options that improve the affordability of communications services for low-income households. For more than 8 years, I have challenged the industry to develop sustainable solutions to help address this problem.

But, the coalition’s position, “without data caps, there would be no need for differential pricing practices” simply misses the mark. Abolishing data usage tiers results in reduced choice for consumers, reducing the ability to find lower priced options for consumers who don’t need or don’t want to pay for an unlimited plan.

Indeed, advocating to eliminate the option of various levels of data usage tiers seems to contradict a recommendation in PIAC’s July, 2016 “No Consumer Left Behind Part II” study [pdf, 3.5MB]. In Section 6, How to Solve the Affordability Problem, PIAC writes “Because affordability concerns a household’s control over their budget, affordability is also about choice which allows a household to access a service offering which meets their needs”:

Mandated service offerings can provide some assistance by offering a low-cost package based on features established by the regulator or elected officials to low-income users. However, these types of offerings do not take into account the diverse needs and levels of usage of low-income households. Rather, they tend to constrain low-income subscribers to a prescribed means of accessing and using communications services. This does not conform with the view of affordability as tied to the concepts of choice and control — low-income users should have the flexibility to choose the services and features which meet their household’s needs.

However, as communications services become more essential, mandated service offerings may — similar to the “skinny” basic television package — play a role in ensuring that a reasonably-priced entry-level package is available to all Canadians.

Let’s be clear. We can have an academic debate about the effectiveness of data tiers as a traffic management tool, but it would be absurd for the CRTC to ban such pricing models because it is a legitimate way for service providers to choose to monetize their investments: people who use more, pay more. Banning such pricing options will inevitably lead to higher prices for those who have elected to subscribe for limited data.

How can organizations claiming to represent “the interests of residential consumers, and in particular low-income groups” be acting to eliminate lower priced options for their stakeholders?

The Competition Bureau says:

Differential pricing can influence the fundamental choices that consumers make. When an Internet Service Provider (“ISP”) makes one product available at a lower cost than others, consumers may be incentivized to switch to that product. This is not always bad. In fact, discounting is an important strategy that businesses use to compete.

The Bureau says the CRTC should prevent ISPs from applying differential pricing that involves content with which the ISP is affiliated.

I have written extensively on these issues over the years:

As I wrote in 2011, “It is difficult to understand how consumers can benefit from restrictions in the types of offers available to them.”

There are other postings as well. In particular, it might be interesting to review “The state of connectivity,” posted February 29, 2016. That post describes a report released by Facebook and Analysys Mason that includes a description of key barriers to internet access.

Facebook submitted a short piece of evidence in the current proceeding, stating “Differential pricing – in particular, zero rating – is an important tool in the development of innovative offerings that can also help to address social needs such as bringing more unconnected people online.”

Facebook argues “there is no inconsistency between the core principles of net neutrality – including restrictions against operators blocking or throttling content – and permitting zero rating
arrangements.” Facebook says the CRTC should allow differential pricing arrangements to develop “using criteria that encourage innovation and protect consumers.”

While Facebook did not request the opportunity to appear at the public hearing, the Agenda indicates Facebook is scheduled for November 1.

The proceeding examining differential practices could impact the ability for service providers to innovate and offer choices to consumers.

It will be worth following.

3 thoughts on “Differential pricing is about consumer choice”

  1. What makes you think unlimited and uncapped data plans are impractical in wired networks?

    Zero rating does not encourage innovation or protect consumers. Zero rating creates a gatekeeper who gets to decide what Internet services are to be favored over others.

    Zero rating may save some consumers money in the short term, but in the long term it reduces the plurality of the Internet and thus results in consumer harm.

  2. I have not said that unlimited plans are impractical in wired networks. They exist.

    But at whatever price an operator offers unlimited service, there will be people who will prefer a lower price, or whose financial situation will require a lower price. Download speeds and usage tiers are a reasonable method to differentiate services being offered.

    These people will benefit from zero-rated services. The plurality of the network is enhanced by more people being able to connect. It is harmed by raising the price of services through bans on targeted discounts.

    Limiting operators’ pricing flexibility reduces consumer choice, which harms consumers in the short run and the long run. This keeps some people from ever going online.

  3. Pingback: CRTC hearings on net neutrality: What you need to know about differential pricing - National | Globalnews.ca

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