What we learned about differential pricing

Last week’s CRTC hearing to examine differential pricing practices related to internet data plans highlighted many areas of confusion among Canada’s regulatory professionals.

Outside of the ISP community, many people seem to think that data tiers (often erroneously called “caps”) were created for traffic management. The misunderstanding may arise from the CRTC’s approval of such retail pricing mechanisms as a traffic management tool. As described by Xplornet (among others) tiers are not defined by the network organizations; rather they are primarily a creation by marketing departments to create a range of product options for consumers at different price points.

Data tiers are a very coarse method of managing congestion, in that they can be seen, especially on the wireless side, to constrain demand. Rogers explained last week, “traffic incurs costs, causes costs. So if you had unlimited traffic, in effect you would have unlimited cost.” Data tiers are a means to monetize the network investment in a way that those who want the capacity for more traffic pay more toward those costs. Of far greater import is the popularity of data tiers when unlimited plans are available. for example, Eastlink told the Commission that the vast majority of its wireline internet subscribers had unlimited data plans. Rogers said 40% of its wireline internet subscribers are signing up for unlimited plans.

Despite wide availability and high levels of adoption of unlimited data plans, there are some consumers who choose a lower priced option. Such tiers existed before the CRTC’s internet traffic management decision in 2009 and continue to exist as a means of price differentiation so that consumers can select which plan is best suited for their situation.

Open Media wants to deny that choice to consumers, asking the CRTC to ban data tiers. That makes no sense. At any price point for an unlimited plan, there will be consumers who would benefit from a lower priced option that includes some lower level of data. How can consumers benefit from losing choice? And, as a number of parties indicated to the CRTC, eliminating data tiers would result in price increases for the majority of customers.

Another area of misunderstanding was whether negotiations were required in order for an ISP to cease charging “per byte” for a particular application, a practice known as “zero-rating”. The confusion may have arisen from a casual read of the submission by TBayTel, where it says “This type of arrangement is possible to negotiate when the ISP has sufficient scale and market power but not for small providers like Tbaytel and many others.” However, TBayTel was refering to “sponsored data” with that statement, the practice where “ISPs are compensated by the application providers”. To zero-rate a particular app or data stream, no negotiations are required. The ISP simply stops charging for those bytes for a certain class of users. TBayTel has offered zero-rating to its customers, with a $15 flat rate for Blackberry users to have unlimited social networking.

TBayTel had been cited by a number of parties as saying it was too small to negotiate arrangements for zero-rating plans. The Independent Broadcast Group told the CRTC that TBayTel said it doesn’t “have the resources really to go out and put together an unlimited music type service or similar things that the big guys could do.” In reality, any ISP could implement zero-rating plans as a promotion without consultation or negotiations with the relevant applications.

Videotron said:

Écoutez, on ne niera pas que certains de nos concurrents seraient peut-être plus rapides ou d’autres moins rapides à pouvoir nous copier ou pouvoir lancer quelque chose de semblable, mais je vous répondrais que c’est un peu la dynamique de marché et que tant mieux.

Differential pricing is a means of offering targeted promotional pricing to attract or retain a certain demographic of customers. In a competitive marketplace, differential pricing provides increased choice. Such plans are optional and do not limit customers from accessing any other content. As I wrote before (see A matter of choice), Open Media’s claim that the practice “makes websites they don’t like slower” is simply not true. This false claim was part of its campaign to solicit support for its position in the proceeding. Given the false premise, one might question the support it garnered to oppose a pro-consumer choice practice.

As I have said many times before, differential pricing does not inhibit access to any content, it raises prices for no one and reduces costs for some. Banning the practice will reduce choice in the marketplace, raise prices for some and lower prices for no one.

1 thought on “What we learned about differential pricing”

  1. So, here goes with regards to: http://mhgoldberg.com/blog/?p=9734#comment-13174

    > I have not said that unlimited plans are impractical in wired networks.
    > They exist.
    I’m glad we got that out of the way.

    What makes you think wireless networks are somehow special?

    Plenty of markets have unlimited wireless plans. 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.
    People like free (or as cheap as possible) stuff. News at eleven.

    But framing the issue like this conveniently just sidesteps the real issue. The question isn’t do we need cheaper wireless plans. The real question is, why are wireless plans so expensive in the first place?

    Zero rating is just lipstick on that pig.

    > Download speeds and usage tiers are a reasonable method to differentiate
    > services being offered.
    The first is reasonable, the second not so much. Usage tiers are just a way to make more margin. We have telco CEOs on record to prove this.

    Counting bytes and charging for usage is just a technically convenient way to bill. What it is not, is intuitive and easy to understand. Furthermore it is counterproductive in combating the only resource consumption pattern that matters in networks, i.e. congestion.

    If you only have a few bytes to use, you are going to use them when it matters the most to you. In other words, during prime time. Hello, congestion.

    > These people will benefit from zero-rated services.
    This conveniently ignores those who it disadvantages: non-zero-rated content and service providers and the users of non-zero-rated services.

    You want market consolidation and monopolies? Because that’s how you get market consolidation and monopolies.

    > The plurality of the network is enhanced by more people being able to connect.
    The plurality of the network is not solely determined by the number of people being able to connect. It is also very much dependent on the number voices that can be heard, the content that can be offered and the services that can be provided.

    There can be a net negative impact on the plurality of the network if we have more users, but fewer service providers.

    > It is harmed by raising the price of services through bans on targeted discounts.
    This is where most economists would disagree with you. Price dumping is generally frowned upon.

    > Limiting operators’ pricing flexibility reduces consumer choice, which harms
    > consumers in the short run and the long run.
    Banning zero-rating does not limit operators’ pricing flexibility in any meaningful way. They still have a full arsenal of pricing options, they just can’t use the discriminatory ones.

    > This keeps some people from ever going online.
    Do you actually have any sources supporting this claim that zero-rating is the only thing making some people going online?

    Zero-rating has multiple issues, some of which I have pointed out in this comment and others in my previous post. If there is any doubt on that, I’d be happy to expound some more. That is, if you decide to publish this 🙂

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