Alice is a librarian: she has a house full of books. Bob likes books, he wants to read as many as he can, and is willing to pay. Alice –being of savvy businesswoman– wants to open her library to the public for a fee. She wants to maximize profits; Bob wants to maximize the number of books he gets, up to the limit of what he can read, and he wants to minimize the money he spends.
The books are a limited resource, if Bob takes out all the copies out of the library Alice can’t have more clients, she needs to manage her library to make sure customers don’t abuse the system.
We’ll consider everything else to be equal. All books have the same value, and they all take the same time to read.
Let’s consider 2 different business models:
- All-you-can-read for a monthly fee, say $20.
- Pay-per-book: Reading 1 book costs $1 for example.
Alice gets $20 from Bob, and he gets free access to the library for the rest of the month.
To increase her profits Alice needs more customers, that’s the only way; she can’t charge Bob more. Since the number of books is limited, more customers means less books per customer. Every time a customer takes out a copy from the library it reduces Alice’s potential profit. To maximize her profit Alice should minimize its resource usage: limit the number of customers, or how many books a customer can take each month. Bob tries read as many as he can: one extra book doesn’t cost him anything, without any quota he can get more than his fair share.
Alice’s goal is not aligned with Bob’s goal. Alice wants to reduce the number of books Bob reads, Bob wants to maximize it.
With a price of $1 per book, Alice doesn’t really care how many customers she has. She wants to rent as many books as possible. 1 or 100 customers doesn’t really make a difference to her bottom-line.
Here our 2 characters’ goals are aligned, Alice wants Bob to read as much as he can. Bob can choose how much he reads and spends.
It’s clear that the pay-per-use formula works better than all-you-can-read.
So why do we use the worst model for our Internet access and phone? Why don’t we try to align the goals of carriers and customers?
Getting connected is not all about bandwidth; there are fixed costs than can’t be easily covered by a pay-per-use model. A price per Gigabyte with a minimum price per month could lower our bills while holding back the freeloaders.
That’s not going to happen anything soon though. Many have interests in keeping the old fixed price per month going. Internet and phone carriers like it, because it’s an easy way to maintain and increase their profits. Customers will pick up plans that exceed their needs, and pay more than they should as a result. The price of bandwidth tends to fall steadily over time, but carriers don’t lower their price very often. Freeloaders also want to keep the system the way it is, customers who use most of their quota are the ones getting the best value from their broadband access.
If we want broadband to be more ubiquitous and cheaper, we need to treat it as a real commodity, like water or electricity.