Usage Based Billing

This is a first for us. We actually had a request for a comment on this topic.

Canadian internet service providers (ISPs) have requested permission of the regulatory authorities to begin billing customers on the basis of how much data they download. Their argument, it seems, is that the increased usage is beginning to slow down their networks and they need the increased revenue to be able to finance an upgrade to their infrastructure.

The economics of the internet are similar to the economics of any transportation system. The marginal cost of providing the service is low and constant up until demand reaches capacity. At that point congestion increases costs. A recent Financial Post article estimates that the cost of transmitting 1 gigabyte (GB) is currently less than one cent. Capital intensive industries, such as the internet, have high capital costs and low marginal costs, and marginal cost is almost always less than average cost. While marginal cost pricing would be efficient, it would not be sustainable. This said, Bell’s proposal to charge $1.12 per GB for usage above 60 GB and $1.87 per GB above 300 GB, as reported in a CBC article, seems to be a bit high.

Finance theory helps us evaluate the claim that the ISPs need the additional revenue to fund upgrades. Investment decisions are based primarily on net present values, a number that discounts future costs and revenues to determine the profitability of an investment. If the NPV is positive, the investment will add to profits. The key is that NPV looks at future cash flows, not historical cash flows. The interest rate used in the discounting is the risk adjusted weighted average cost of capital. A quick review of BCE’s annual report shows a mix of common and preferred equity, long term debt and retained earnings in descending order of magnitude. They do not rely heavily on past profits to fund infrastructure.

We suspect that the real motive behind the push for usage based billing is to make services such as Netflix more expensive. BCE has purchased CTV, Rogers owns Sportsnet, Shaw and Telus sell television delivery through cable or internet TV. Unlimited internet usage with lowcost Netflix makes their broadcast businesses less profitable.