von Finckenstein doesn’t get it

On February 3, 2011, Konrad von Finckenstein, Chairman of the CRTC, told the Industry Committee,

All ISPs advertise their rates, bandwidth caps and the additional usage charges that apply. Consumers can shop around for the plan that best meet their needs. Internet services are now sold like other public utilities, such as water, gas and electricity.

When I read this, I knew von Finckenstein really didn’t understand how the Internet works on a network level.

With water, gas, and electricity, you’re paying for a consumable resource that takes considerable expense to generate, purify, or otherwise prepare before it’s ready for our use. You’re also paying to use the infrastructure that delivers the resource to your home.

Internet services are fundamentally different. You’re paying to move data, which is for all practical purposes infinite. You don’t pay your provider for data. Rather you pay Netflix for data in the form of streaming movies, you pay iTunes for music, you pay Amazon for e‑books, and you get a lot of data for free from web sites all over the world. You do pay your ISP to move that data from their connection to the Internet backbone, and then across their own network, to you. But how much does that cost? It’s certainly not free.

If you exceed the data cap on your plan, the big Canadian ISPs will charge you between $1 and $5 per gigabyte. Data isn’t cheap, based on those numbers.

Hugh Thompson’s article, “What is a fair price for Internet service?” appeared in The Globe and Mail earlier this month, and in it, he tracked down the cost of moving data. He wrote,

To find out what is a fair price, I contacted several industry insiders. They informed me that approximately four years ago, the cost for a certain large Telco to transmit one gigabyte of data was around 12 cents. That’s after all of its operational and fixed costs were accounted for. Thanks to improved technology and more powerful machines, that number dropped to around 6 cents two years ago and is about 3 cents per gigabyte today.

So if you’re signed up with Rogers on their mid-range ‘Express’ plan, you pay $46.99 (plus tax and whatever other fees) for no more than 60 GB of data per month. If you use that much data, it costs Rogers about $1.80 to deliver it to you. If you use more data, they’ll charge you an extra $2 for every additional gigabyte. You pay more for that one gigabyte than they paid for the 60 included in the monthly fee. Quite a mark-up, isn’t it?

My point is that the cost of actually moving the data you use is a very small part of your bill, and it’s getting smaller. In this way, a comparison with water, gas, or electricity makes little sense.

Another difference is usage. Our use of these utilities is largely static. Granted we probably do use more electricity than we did in decades past because of all the electronic devices we rely on, but the increase has been gradual, especially because we’ve been increasingly practicing conservation. The Internet however, is a different story entirely. Our average data use has increased annually by 30% to 50%, depending on whose figures you believe, for at least the last decade.

One characteristic the Internet does share with water, gas, and electricity is that it is over-sold. Although our electricity service advertises no monthly maximum, the system could not deliver all the electricity required if we all turned on every electric device we have at home and at the office. Efficiency is highest as demand approaches capacity so a utility will make the most money by having the capacity to meet the peak demand, and no more. What we pay for in an Internet service is less and less about data quantity and more and more about data capacity.

Switching to a water analogy, if the cost of obtaining, filtering, and disinfecting water were almost nothing, the amount of water we use would have very little direct effect on our bill. What we would be paying for is the delivery, and we would be charged a premium for having a bigger pipe connected to our homes. So it is with the Internet today. We’re doubling our water use every two to three years and the water company has been slow to increase the size of the pipes connecting them to the source of the water. All they’ve done is increase the pressure.

That was fine for a time, but the pressure is at its limit so what does the water company do? They reduce the water usage by economic means. Rather than upgrade the infrastructure to meet demand, they just charge more, forcing you to limit your use. They’re creating a scarcity where none really exists. This has two upsides for the big ISPs. They get more money for offering the same service and they avoid spending money to upgrade their networks.

Sweet deal, isn’t it?

This doesn’t usually work in a free market because someone else will rush in and offer the service for a lower price when your provider increases their price simply because they can. In the case of the Internet, the massive infrastructure costs limit competition. It’s not so simple to set up a new ISP. Because of this, the big ISPs have power over Canadian Internet users. The CRTC should be watching out for us, but they’re not.

Although it’s a simplification on some levels, this is why I’m staunchly opposed to usage-based billing in the form the CRTC approved and has since put on hold.