Flat-fee all-you-can-eat broadband doesn’t make sense

The new iPhone 4 iPhone prices have been announced and people have declared their surprise as the networks declare unlimited capped at 750MB per month. Of course it’s not unlimited and 750MB is easy to eat into when watching YouTube or BBC iPlayer video. Unfortunately bandwidth costs money and flat-rate end-user fees don’t make sense in the mobile world as well as the fixed broadband world.

Why is this? Users have got used to flat-rate deals and bundles and operators have encouraged users to think that flat-rate is the way forward. In the US local telephone calls are free (as in completely free, unmetered) while in Europe there aren’t really free calls, some may be zero rated, but they’re metered all the same and the bill is multiplied by zero (that’s a big difference). Bundles are based on the law of averages which means that most users wont use anywhere near their allowance so if a telco offers unlimited calls for £10 per month, MOST people will not make £10 worth of phone calls, however some will exceed £10 in a big way, but overall it works out (this is assuming you have lots and lots of customers which is why the telecoms companies have been consolidating over the last few years).

The same is true for broadband, the mobile and fixed ISPs bundle an amount of data into a package and overall most users wont use that data while a very few do and therefore the averages work out. Unfortunately with the introduction of smart phones such as the iPhone the model changes considerably and users actually start to use lots of bandwidth and that bandwidth has a real cost.

ISPs generally don’t have their own networks across the world and they utilise other bigger players to provide them with bandwidth services (for example connecting the UK to the US ISPs), this type of connection is known as transit connectivity and is charged for bits going out and coming in with costs of around £10/Mb/month.

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That may not sound much, but 1Mb isn’t a lot of data (assume a byte is 8 bits, so that’s around 131KB of data). Of course not everyone is going across to other parts of the world and UK only data is virtually free (apart from the cost of building the actual network), but as more and more users connect to more and more high bandwidth services those costs mount up and the ISPs and mobile operators have to pay for those costs – which is where capping comes in and flat-rate no longer makes sense.

Though there are still quite a few fixed line ISPs that offer ‘unlimited’ Internet without caps, it’s a losing battle as their back-end costs are variable and increase as the end-user speeds increase, while the end-user, expects to see the pricing stay the same. The only way ISPs can keep bundles competitive is to offer more and more high value bundle services such that one part of the bundle subsidises another (which is where quad play services come in such as Internet, video, phone and mobile).

Though cross subsidisation helps, it’s only part of the cure and as smart phones proliferate in the mobile space and broadband gets faster on wired networks, capping will start to be the norm again (or significant traffic shaping).