“Toll Free” Broadband Service: Double Billing Ripoff, or a Better Than Best Efforts Premium Option?

            Representatives of both AT&T and Verizon have stated that their companies will soon offer “toll free” broadband services.  So far they have not provided much detail, but the prospect for customer and content provider surcharges should trigger concern, even outside the context of the network neutrality debate.

            First let’s consider the frame the carrier reps use: “Toll Free.”  This is an old school “Bellhead” reference to a pricing strategy where the called party pays instead of the calling party.  Lots of commercial ventures have offered consumers Wide Area Telephone Service (“WATS”) line access using the 1-800 and now 866, 877 and 888 prefixes.  So toll free historically has referred to a pricing arrangement where consumers can avoid having to pay for a long distance telephone call. 

            The toll free reference may be a red herring here, because it’s likely that the arrangement will simply mean consumers will not have minutes of use or downloaded bytes debited against a monthly usage cap.  Toll free will mean debit-free to the end user with a surcharge to the content provider. 

            The proposed arrangement appears to parallel what Amazon has secured for cellular carrier delivery of e-books with two big differences.  First Amazon is having delivered content costing $10 or more in a single transaction, while ventures like Netflix may be offered expedited delivery of content costing $8 a month for “unlimited” streaming.  Also we should appreciate that when Amazon pays the e-book downloader pays nothing and does not even have to subscribe to cellphone service.   In both the wireline and wireless environment where “toll free” data will operate, end users already are subscribing to monthly service: DSL, fiber or a hybrid fiber wireline broadband service, and/or cellphone service.  So the value a carrier offers appears to be “better than best efforts” Internet routing of possibly “mission critical” bits coupled with a end user sweetener of not debiting minutes or bytes from a monthly basket.

            Is this a fair deal, or double billing?  End users will end up paying for such premium service, so it’s fair to ask when—if ever—one would want better than best efforts routing when plain vanilla best efforts heretofore has worked just fine.  The network neutrality advocates have a legitimate concern that carriers will find a way to degrade service to content providers like Netflix and Google making the premium routing a necessity.  Bear in mind that Netflix already pays Content Distribution Networks, such as Level-3, for high quality, “toll-grade” delivery.  Recently Comcast demanded a delivery surcharge in light of the higher volume of traffic Level-3 hands off to Comcast for final delivery than the amount Comcast hands off to Level-3 for upstream delivery through the Internet cloud.  So is Netflix getting hit up for a double or triple payment: once to Comcast for last mile delivery, twice to Level-3 and other long haul Internet cloud carriers and thrice to Verizon/AT&T?  Let’s not forget that end users already are paying $30-100 monthly for their wired and wireless broadband connections.  Doesn’t that broadband subscription entitle subscribers to timely and efficient delivery of any and all traffic without surcharges?

A Shift in the Balance of Power Between Wireless Carriers and Subscribers

            Today’s Wall Street Journal reports that wireless carriers have begun to reduce the subsidies they offer wireless subscribers.  See http://online.wsj.com/article/SB10001424052702304020104577384562576617618.html.
This maneuver occurs at the very same time as carriers have raised their data plan rates resulting in an increase in the major financial metric used by the industry: Average Revenue per User.

            A fair minded person, putting the pieces together, would conclude that the industry is becoming less competitive and acts in parallel, i.e., carriers collectively engage in the same conduct as to the major terms, conditions and prices for service.   Bear in mind that no carrier has announced a reduction in service rates as a result of reduced subsidy burdens.  No carrier has to do so, including languishing Sprint and T-Mobile.

            The ubiquitous excuse for all things bad in the wireless industry—spectrum scarcity—has nothing to do with the extent carriers have to offer handset subsidies.  Moreover if one considers the wireless marketplace as nearing maturity in terms of market penetration, shouldn’t carriers have to sharpen their pencil to offer better deals and a more compelling value proposition for laggards?  Apparently not.

            The leading buy side telecom financial analyst, Craig Moffett of Berstein Research predicts “a more disciplined and more profitable future” for carriers, no doubt at the expense of consumer surplus.