Paying the Piper

The more you hear about the explosion of video downloads and the buildup of high-definition channels and political pressure for universal broadband, the more you’ll hear renewed calls for “network neutrality” from the largest providers of online viewing: Google/YouTube, Microsoft, Yahoo, AOL and other video platforms. They think they may be asked to pay for position (by cable and telco networks) as their programs try to squeeze through a scarcity of bandwidth.

One answer from the carriers is to expand their capacity. There may be a simpler way to direct the growing traffic: a marketplace pricing solution that encourages consumers to regulate themselves. One name for it is bandwidth-based billing, and one place it’s working is in Lawrence, Kansas, a university community on the download frontier.

“I’m not terrified about net neutrality,” says Sunflower Broadband GM Patrick Knorr, whose system has 30,000 subscribers. “For the past two years we’ve been charging high-end users of bandwidth premium charges for bit-transfer, not just speed. If you use more power at home, the power utility charges you more. Cable must charge for bandwidth in the same way. It’s the wave of the future; it’s what the industry will have to do. And it’s the only sustainable model.”

Knorr says a light user consumes less than 20 megabits of data/mo. and pays $19.95 for high-speed service at less than 1 gigabit transfer speed. But 10% of subs use 10+ Gb/mo.; the highest user buys 100 Gb of data volume and the system’s all-time record is 200 Gb, or 1,000x the light user. A typical big user pays $45/mo. for 10 Mb speed plus $20-40/mo. for 65 Gb of volume.

“At a basic bandwidth level, this model means I don’t have to throw that much QAM at data,” he says. “Bit-transfer billing enables the consumer to manage unnecessary Internet usage. How badly do they want the next download? By having a limit and a charge model, the customer makes the decision on what’s necessary in terms of throughput. Ultimately, Google doesn’t want to pay for capacity but doesn’t mind if people do.”

With above-average penetration of 60% of basics and 40% of homes passed using modems, Knorr is making sure he still has enough power in fat pipes. He has no intention of postponing investment in plant, so he’s installing more gigabit ethernet backbone. Among the questions he asks his team: “What if AT&T buys Yahoo?”

Analyst/investor Paul Kagan is chairman/CEO of PK Worldmedia, Inc. in Carmel, Calif. He owns shares in Yahoo. Information in his columns is not intended to be a recommendation to buy or sell securities. Read more about Sunflower:

Meet the System: Sunflower BroadbandCableWorld, Apr. 18, 2005

2003 System of the Year: Sunflower BroadbandCableWorld, Dec. 15, 2003

An Independent Grows in KansasCableWorld, Sep. 29, 2003

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