ISPs must sabotage your broadband to survive
Posted on 22 Oct 2012 at 09:34
Dick Pountain uses economics theory to explain why ISPs are forced to throttle your bandwidth
Turning information into money has become a most pressing problem. Much of our information torrent still arrives free of charge, but its owners are desperate to find ways to make us pay for it.
This desperation manifests itself in many ways, some of which don’t appear connected with information at all. For instance, those vicious legal spats between Apple and Samsung over patents are ultimately about the ownership of information: Apple’s claimed ownership of the idea of touch-based tablet computers, expressed in the form of patents on specific features.
Bandwidth is a valuable commodity, and extracting maximum profit from such commodities is a science that involves strange paradoxes
The arena of telecommunications is a vast battlefield on which two information wars are raging: the last war, not quite over yet, between the old landline-based giant telcos and the new mobile phone operators for your voice-call traffic; and a new war, heating up, between those mobile operators and IT companies such as Apple and Google, which seek to grab all their data traffic via paid-for smartphone and tablet apps.
According to research outfit Ovum, SMS text traffic is worth around $150 billion each year to the mobile operators, but over a third of iPhone users are already switching to IP-based messaging services such as Pinger. Like the old telcos, the mobile operators risk being reduced to merely owning the pipes through which other people’s profitable content flows.
Apple is currently having a rather good war, having ruthlessly preserved a proprietary grip on its own hardware ecosystem, and exploited this to make users pay for apps and content through online stores. Its carpet bombing of Adobe Flash – by excluding it from the iPad – is a tactical victory, damming off one whole stream of free content from the internet.
However, one battle isn’t the whole war. I recently described my experience of using a 3G iPad in Italy, but what I didn’t mention was that the deal I get is grossly inferior to the 3G connection for my laptop (€24 per month for 10GB as opposed to €19 per month unlimited). I grumbled to the chap in the TIM shop, but that’s the only deal for iPads: the company presumably analysed the traffic profile of iPad owners and decided that’s the only way to profit from them.
Bandwidth is a valuable commodity, and extracting maximum profit from such commodities is a science that involves strange paradoxes. You might think the most profit could be obtained by producing the largest amount of a highly desirable commodity, but that’s far from the truth. Pricing is everything, and often maximum profit is achieved by restricting supply to raise the price.
The archetypical case is the De Beers family’s rigid control over the world’s supply of diamonds, but the oil industry is a pretty good example too. For most of the 20th century there was a large surplus of oil reserves, but oil companies wouldn’t pump so much as to lower the price too far. Daniel Yergin’s massive tome The Prize: The Epic Quest for Oil, Money and Power describes in entertaining detail the hoops they jumped through to prevent new fields being exploited by rivals. Contrary to much free-market dogma, companies don’t enjoy price competition, and very large companies will go to great expense to avoid or subvert it.
The great theorist of such pricing policies was the eccentric economist Thorstein Veblen, the man who gave us the term "conspicuous consumption". He delighted in provoking with mocking and ironic terminology, and the term he chose for this case was "sabotage". A partisan blowing up a railway line; a striking worker dropping a spanner in his machine; an ISP throttling your internet feed; they’re all doing the same thing: deliberately reducing production to achieve certain ends. Veblen defined sabotage as "a conscientious withdrawal of efficiency" and didn’t regard it as a pejorative term – on the contrary.
"The common welfare in any community which is organised on the price system cannot be maintained without a salutary use of sabotage," he states, advocating "such restriction of output as will maintain prices at a reasonably profitable level and so guard against business depression".
Our current economic crisis is largely one of overproduction. The alternative to sabotage is to do away with prices and make everything free, but that invites massive overconsumption (the so-called "tragedy of the commons"). Eventually things would have to be rationed by other means, often not nice ones. That it’s better to pay people enough to buy stuff ought to be obvious, but seems to escape politicians and employers alike.
Author: Dick Pountain
Word count definitely got the better of the editors on this piece. It makes several interesting and deep points about supply and demand, but there was no room to spell them out properly. The last sentence is particularly gnomic.
By c6ten on 22 Oct 2012
Trust Dick ...
To torture an argument about the crisis of capitalism on the hook of broadband pricing!
If you sell anything at a fixed price (including, but not necessarily, free) which has variable cost you have to pull some kind of con trick to make a profit. You get the same problem with an all-you-can-eat restaurant, or an un-metered water supply.
Broadband is not being overproduced, on the contrary it is being overused. If it was metered like electricity, ISPs would build more in order to get more income and consumers would use less in order to pay less.
And "free market dogma" never said companies like competition, just that it sets prices to allocate resources efficiently.
By JohnAHind on 22 Oct 2012
Have to disagree, I'm afraid
"Bandwidth is a valuable commodity, and extracting maximum profit from such commodities is a science that involves strange paradoxes. You might think the most profit could be obtained by producing the largest amount of a highly desirable commodity, but that’s far from the truth. Pricing is everything, and often maximum profit is achieved by restricting supply to raise the price."
That would be true if broadband was price insensitive, which might be true where BT has a monopoly. But as soon as another provider offers LLU or cable, the situation quickly changes and many customers immediately desert BT. By the time you get to "market 3" where there are 3 or more LLU providers and also possibly a cable rival (VM/Smallworld). The rivalry and competition is intense.
Now if you look at the wholesale price of a GB entering or leaving a network, the price is minuscule, mere fractions of a penny. The real costs are infrastructure, marketing and support. If you have the infrastructure in place to handle large volumes, the variable cost from the exchange to out of the network is again minuscule.
The problem comes when an ISP doesn't have the backbone capacity to deal with the volumes of bandwidth that customers demand. Which is when the ISP has to introduce rationing.
Now there will always be many consumers who hardly use their Internet about half use less then 20GB per month. About 5% or so of customers will use about 50% of bandwidth. It varies between ISPs eg. Be(Unlimited) customers use more bandwidth then their stablemate O2, who use more then TalkTalk. But Be customers are prepared to pay more then TalkTalk customers do. It also appears that the average Be customer needs less support then the average TalkTalk customer. Be also do less advertising and more word of mouth.
Heavy customers and gamers are prepared, desperate even to pay more for their service in order to get a better service, then many ISPs are willing to provide. Another tier in pricing for heavy or extra low latency customers in return for an end to throttling and usage caps would be well received by many.
By James22_uk on 2 Nov 2012
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