Electricity, Gas & Megabytes: Is The Internet A Utility?
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With around 40 percent penetration in Australia, should the Internet be considered a utility? More specifically, should pricing models of ISPs reflect this train of thought?
Increasingly, bandwidth is being thought of as a commodity -- with megabyte the unit. Indeed this is nothing new, as ISPs and global telcos have always paid on a data usage basis, rather than a flat rate or timed model.
An interesting example that supports this theory of the Internet being a utility is the acquisition of Dingo Blue by Australian Gas Light. Late last year, AGL paid $22 million for the ISP/Telco Reseller from Cable & Wireless Optus. The investment gave credence to the suggestion that for a company such as AGL, it must expand into and develop other utilities in order to grow.
Another instance highlighting the marriage of gas and bandwidth is in the physical infrastructure of broadband. In the U.S. in particular, gas pipes have provided an ideal home for national fibre optic rollouts and has seen former gas giant Wilson Communications transform itself into a telecommunications juggernaut.
Initially, ISPs in Australia charged by the hour or more accurately speaking, like a wounded bull, by the hour. In the early days of the Web, Ozemail was able to charge $10/hour to its rapidly expanding subscriber base. The subsequent glut of ISPs into the market soon fixed that however, transforming the industry standard model from a timed one to a flat monthly subscription price.
The ensuing competition mounted extreme pressure on the margins of narrowband dial-up accounts, with worthwhile returns being generated only by the largest of players.
If ISPs were to charge on a pure volume basis, would the margins increase or spiral even further into oblivion? The answer of course is dependent on the demographic and usage patterns of each ISPs subscriber base. If an ISP's customers were mainly conservative downloaders then margins would decrease, however if the opposite were true then margins would increase.
Fundamental to the cause would be consumer acceptance of this new pricing regime. How compelling is a volume based model pricing model from a user's perspective? A study conducted last month by the Boston Research Group and BroadJump found that "more than 60 percent of the broadband respondents said they would pay on a pay-per-use basis rather than a subscription basis."
So why haven't we seen ISPs offer purely volume based subscriptions? Some guidance can be taken from Telstra's latest move to cap broadband accounts. In the email to notify customers of the change, Telstra noted that 5 percent of its broadband userbase accounted for 35 percent of the traffic. This would indicate that the majority of accounts operate quite profitably under the monthly fee model and that the move is one aimed at making money from both normal users and lavish downloaders.