As the National Broadband Network pricing debate continues, we should consider which is the most appropriate model for costing a bit that costs virtually nothing to carry.
I sometimes think about batteries, and not just when the Wiimotes go dead. With just two major manufacturers producing batteries you'd actually want to use, the market for humble AAs is both top-heavy and defined by a high-volume, consistent, easily repeatable product whose cost of manufacturing is nominal.
As the incremental cost of carrying a networked bit trends towards zero, carriers could feasibly move towards unlimited, uncapped services and still benefit from ever-healthier profit margins.
So why aren't your stock-standard batteries getting any cheaper? I'd say we've been paying around $1 per AA for well over the past decade, and probably longer.
It may seem like a random point, but in a cosy duopoly where there is a mutual disinterest to lower prices, it seems interesting at the very least to note that batteries are a market where increases in both demand and supply have failed to lower prices appreciably. This result is inconsistent with basic tenets of supply and demand, which assume that increased supply naturally pushes prices lower (as long as demand doesn't outstrip supply, of course). These tenets follow the same basic model as the lottery: if you suddenly won millions in the lottery, after all, wouldn't you share some with friends and family?
Competition and the abundance of cheap wholesale minutes have driven the price of phone calls through the floor, and the same philosophy has been evident in recent data plan changes by Internode — which recently dropped its prices after getting access to loads and loads of bandwidth when Pipe Networks' PPC-1 undersea cable finally went live this month. Internode celebrated by boosting many data plans' quotas by 66 per cent and cutting $10 off the entry price for its SOHO Extreme and SOHO NakedExtreme plans. There's also a plan providing up to 200GB of data per month — generous by most measures.
Behind the changes were a fundamental realisation: major jumps in bandwidth provide cost savings that can be passed on to customers and improve competitiveness. Other ISPs do the same: iiNet, for example, recently boosted its broadband business plan quotas while competition and economies of scale drove 3 Mobile to halve the price of its mobile broadband plans some time back. Just this week, Optus followed suit by rejigging its wireless broadband plans with plans starting at 1GB for $15.
This is how pricing is supposed to work. Wouldn't it thus seem logical that a major infrastructure expansion would drive down the per-bit cost of data carriage, and that those lower costs would push prices down at least a little bit? Heck, as the incremental cost of carrying a networked bit trends towards zero, carriers could feasibly move towards unlimited, uncapped services and still benefit from ever-healthier profit margins.
You might think so, but Telstra doesn't. Some weeks ago, a contingent of journalists met with several key Telstra executives to trumpet the near-completion of Telstra's Next IP network. "Given that your new data core has a substantially expanded aggregate capacity, and that your costs are much lower and trending towards nil, can we expect data pricing to drop?" I asked after a long presentation in which we were repeatedly told how Next IP had opened the floodgates of bandwidth on Telstra's network.
"The unit cost of data will decline," Telstra CTO Hugh Bradlow responded, "but not to nil. Carriers that have uncapped plans are busy bleeding at the moment, and they'll either die or change their methodology. I envision the rest of the world falling in line behind us."
There's truth in that statement, and subterfuge: truth, because previously-uncapped US carriers such as Time Warner Cable and Comcast have indeed introduced capped plans to rein in unchecked data siphoning; and subterfuge, because those caps are so generous — 250GB in Comcast's case — so as to be mainly symbolic.
Time Warner Cable, whose CEO Glenn Britt almost apologetically admitted to BusinessWeek that "we made a mistake early on by not defining our business based on the consumption dimension", charges just $US1 ($A1.10) for each GB customers download past their cap. Telstra charges $150 per extra GB. (To be entirely accurate, customers on Telstra's high-end plans are simply speed-limited; of course, Comcast customers that exceed their quota just get a warning phone call).
Given that Telstra would by all presumption have one of the region's fastest core networks, can its costs really be 150 times of Time Warner Cable's?
Given that Telstra would by all presumption have one of the region's fastest core networks, can its costs really be 150 times of Time Warner Cable's? Of course not. And herein lies the truth of Australian broadband: regardless of supply, bits are worth whatever carriers want them to be worth. This is plainly true because Telstra is more than capable of allowing customers to guzzle unmetered Foxtel content by the gigabyte over its networks.
There's cost recovery, there's justifiable profit margin, and then there's just plain ripping off your customers. When carriage costs drop, some ISPs are rewarding customers with lower pricing and more generous plans; others change their bundles only when their pricing is so out of step with general trends that even their less discerning customers are starting to complain. Others simply charge whatever they need to meet profit objectives, and tell customers to take it or leave it.
As the NBN slowly comes online, these dynamics will be revisited as part of a discussion that is currently manifesting itself in the spurious claims that the NBN will push broadband pricing to $200 a month. While that's as unlikely as claims the NBN should be free, one would hope that the wide range of pricing claims will at least get people thinking about the real value of the NBN's bandwidth – and appropriate costs for accessing it.
What do you think? Will NBN pricing follow the battery model or the phone call model?
