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March 27, 2008

Metered Pricing – Is Sauce for the Goose Sauce for the Gander?

Reader and friend Aswath is a supporter of metered pricing by ISPs. We disagree on this and he commented, fairly enough, that I’m apparently contradicting myself when I praise the metered pricing at Amazon S3:

“I share your enthusiasm for S3. Indeed I have been using it for my application as well. I have been hoping that you will touch upon the metered pricing, since in other contexts you have expressed a preference for fixed pricing model. There are other storage providers who charge for only storage and nothing for bandwidth consumption. I surmise that these providers have modeled usage pattern and have included it in the storage price. But I understand S3 pricing model and feel it is more transparent than the bundled model. I am curious to know your thoughts.

“On a related point that ISPs, especially WISPs should use Amazon's pricing model. Then they do not have to worry about P2P and they do not have to place restrictions on which applications are permissible and which are not.”

Good question.

I do agree that it’s far better for ISPs to charge explicitly for usage than that to surreptitiously, or even openly, disadvantage or restrict certain services in their network. ISPs do have the right to make this kind of pricing decision (and some do); I just think that ISPs will both make their customers happier and make more money if they offer flat-rate all-you-can eat plans, perhaps in addition to metered plans which charge by the byte transferred.

My experience, which I’ve written about before, comes from my time as head of AT&T WorldNet Service where we popularized (but certainly didn’t invent) flat-rate pricing for dialup Internet access. Our experience was both that the flat rate attracted customers who may have been afraid to sign up for a metered plan AND that customers, on the average, paid MORE for flat-rate service than they would have paid if the meter had been running (we also offered a metered plan). Our conclusion was that they were willing to pay us a premium for taking the risk of “excess” usage and for the simplicity of a predictable bill whose detail they would never have to check.

Interestingly, when we introduced this plan, Dan Hesse, who is now head of Sprint, was my boss at AT&T. Without his support I never would have been allowed to do this sort of radical pricing even though I argued that local phone service had been priced at a flat rate for years.

Dan is apparently also still an advocate of flat consumer rates. I was overjoyed to see him, himself, in a TV commercial explaining that Sprint offers one flat rate for all voice, web-surfing, and data transfer on its mobile phones. He needs to change the game to succeed in a tough turn-around of Sprint. Flat rate is a game changer.

The argument against flat rate pricing is that there will be “abusers” meaning those who really do find a way to use scads of service. I would certainly agree that resale of a consumer service is an abuse. But what about becoming a volunteer hub for P2P file sharing?

Most of the time (because capacity is only limited during peak hours) it doesn’t matter whether there’s a lot of file sharing going on. In fact, moving files around off-peak can be considered a service to the network because it puts content closer to where people consume it and makes the network more valuable. At peak times networks may experience congestion. Networks certainly should force equal sharing when capacity is over-subscribed rather than targeting certain applications; especially when we don’t have a competitive broadband industry in the United States and have to worry about providers using traffic management as an excuse to handicap apps (like VoIP or video) which come from their competitors.

Networks may choose to do what Verizon Wireless has recently done, put a high upper limit which most users won’t come near on what was formerly an unlimited service and turn the meter on when you go over the threshold. Other networks slow down the data rate of those who exceed a certain usage. These aren’t evil strategies if they’re properly explained and advertised. But they might not make good marketing sense. Competition will help sort that out (I hope) but the movement of the wireless carriers to unlimited voice (and data for Sprint) is some indication of what the market wants.

So back to Aswath’s question: why do I like Amazon’s very metered pricing for S3 if I’m such a fan of flat rate pricing? It’s because S3 is NOT a consumer service; it’s a service which is designed for resale; a service which is built to be baked into other people’s services. I’m sure some users of S3 are tens of thousands of times bigger than other users. It’s a real advantage to us small users to buy exactly what we use – not what we think we’ll use but what we actually use – and not a bit more.

Those of us who use S3 as a backend resource for services that we sell to consumers benefit from paying for just what we use. We benefit again if we sell to consumers on a flat rate basis and both have an easier time signing them up and receive a premium for predictability and simplicity. 

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