By Bronwyn Howell

Last week, Sens. Ben Ray Luján (D-NM) and Cory Booker (D-NJ) “introduced legislation to prohibit predatory data caps that force families to pay high costs and unnecessary fees to access high-speed broadband.” Their justification is that “as Americans’ need for data is increasing, pricing structures for broadband services must encourage participation in the digital economy, promote competition and innovation, and ensure investment in national broadband infrastructure is used to its highest capacity.” Their Uncap America Act requires “data caps”—a term my AEI colleague Daniel Lyons calls a misnomer—“be only used for network management purposes and directs the Federal Communications Commission to hold providers accountable when they impose [allegedly] predatory [pricing regimes.]”

The senators allege that data caps are used by telecommunications firms to artificially limit supply and therefore are principally a strategic tool to increase provider profits. Unfortunately, they do not consider that the alternative to data caps—flat-rate tariffs, where all consumers pay the same fee regardless of the amount of data consumed—directly contradicts the senators’ very objectives.

The reality is that consumers vary markedly in their consumption of data. For as long as broadband has been offered, the distribution of demand has been skewed, with mean demand sitting above the median. This means that more subscribers consume less data than average, because a small number of consumers—fueled by flat-rate tariffs—consume notably more than average. By offering a range of tariffs, higher fees can be charged for flat-rate tariffs, and consumers with lower usage can opt for lower tariffs with data caps reflecting their different usage. This progressive tariff structure means that high-use consumers pay more for their higher usage of data. There are several reasons why exclusively allowing flat-rate tariffs is suboptimal.

First, if only flat-rate
tariffs are offered, many low-volume consumers currently buying low-cap plans
will inevitably have to pay more for their current internet connections or be
priced out of the market. That is, offering only flat-rate tariffs will result
in lower
numbers of internet subscribers than will a range of capped and uncapped
plans. Participation in the digital economy will decrease, and digital divides
will increase. While those who can still afford a connection can use more data
at no additional fee, the gap between them and the higher number of unconnected
citizens will increase.

Second, legislative mandating of flat-rate tariffs reduces competition and innovation in the internet service provider (ISP) sector. As this market matures, competition relies on firms being able to offer many different products customized to consumer preferences—both across data volume and other characteristics, such as upload and download speed. Indeed, flat-rate tariffs (one-size-fits-all products) can prevail in a market only when there is some degree of market power held by providers. A new entrant looking to differentiate itself and gain market share in a market where only flat-rate tariffs are charged will be drawn to serve consumers who are either currently priced out of the market or are paying more than they need to. Usage-based tariffs are an obvious way to do this. Flat-rate tariffs alone can prevail only if steps are taken to limit competitive entry of capped plans—such as the Uncap America Act.

Third, it is far from clear that flat-rate tariffs will drive efficient investment in the ISP sector. If flat-rate tariffs drive additional data usage by those who can afford the higher fees, additional capacity must be provisioned—and earlier than would be the case under a range of usage-based tariffs. However, this is not necessarily the most efficient use of funds. If the benefits per megabyte derived by consumers who are unable to afford a connection are greater than those of the very high-consumption users, greater total welfare will arise from having less total traffic but with more subscribers on the network.

While the senators undoubtedly have good intentions, their proposals fly in the face of economic realities. And if the economics defy them, a simple analogy may help reveal the realities. If flat-rate broadband tariffs are such a good idea, why not also require them for other utilities, such as electricity? After all, the need for electricity is also increasing (especially as the vehicle fleet is increasingly electrifying) and flat-rate tariffs will enable greater participation by low-using electricity consumers. And this utility, too, began with simple flat-rate tariffs, just like broadband did. Yet usage-based tariffs are now accepted as both fairer and more efficient in this sector. It is time for the same economic logic to prevail in broadband markets.

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