Why bandwidth caps could be a threat to competition

Since the first dot-com boom, unmetered Internet access has been the industry standard. But recently, usage-based billing has been staging a comeback.

Comcast instituted a bandwidth cap in 2008, and some other wired ISPs, including AT&T, have followed suit. In 2010, three of the four national wireless carriers—Sprint is the only holdout—switched from unlimited data plans to plans featuring bandwidth caps. To many people, the argument for metered bandwidth seems intuitive and obvious. Bandwidth is a scarce resource, and advocates argue that usage-based pricing encourages efficient network use and ensures that heavy users pay their "fair share." Yet the economics of metering aren't as simple as they might appear. Companies are often surprised by how well flat-rate billing schemes work. Customers love them, and flat-rate billing encourages more intensive use of networks that sit idle most of the time. Network providers insist that they are simply trying to cope with rapidly rising demand for bandwidth. But critics charge that the trend toward bandwidth caps is driven by more sinister motives, especially in the residential broadband market.

In this story we'll examine the economics of metering and try to explain why it has suddenly come back into vogue.