It’s good news for business that Canadians are among the heaviest Internet users on the planet. But it’s bad news when customers and vital business transactions get hung up due to congestion.

Given that Internet use will continue to grow, something will have to change to prevent gridlock – and that change will likely be how Internet users pay for service.

A computer engineering masters graduate at the University of Victoria has developed a new formula Internet service providers can use to establish prices tailor-made for customers.

Price “is a way to maximize utility,” says Jun Wang. Right now, flat-rate pricing for Internet use is the norm in North America. Users mostly pay a flat rate for access, regardless of what time they dial up, whether they spend an hour or a minute online, download text or move the massive information required in downloading movies. Commercial users can pay a little more to opt for more bandwidth, but again, are charged a flat-rate fee.

Don Denton, Business Edge
University of Victoria’s Jun Wang has developed a formula Internet service providers can apply to determine pricing.

About two-thirds of Canadians are so-called Internauts. A Leger Marketing survey in December 2003 discovered 48 per cent of computer owners use the Internet at least three times a day. Most – 71 per cent – spend 15 minutes online each session; five per cent stay connected all day.

With flat-rate pricing, they all pay about the same for service, which covers fixed and operating costs.

But when the network is congested, marginal costs increase dramatically. The user not only experiences delays, but causes delays to users already online – the same effect as an extra commuter nosing into rush-hour traffic. “With no barrier for users to use the network at any time, then the network will be congested” some of the time, says Wang.

While that’s not a problem for sight-seers, it can have fatal consequences for an ambulance. Whether on the web or the highway, rush hour has a social cost.

“With price increases, people would not use the Internet at peak times when (their business) is not urgent.”

Usage is sensitive to pricing, notes Andrew Odlyzko, a former AT&T Labs researcher who is now director of the digital technology centre at the University of Minnesota.

With usage-based pricing, he believes consumers would be willing to wait for cheaper rates to write that e-mail to their sister or send that joke to a friend, while businesses are likely to pay more for more responsive service.

In a rapidly growing market, flat-rate pricing makes sense because it encourages people to use the service, Odlyzko says in a treatise on Internet pricing. But as utilization goes up, congestion becomes a bigger and bigger problem. Efficient use of the system then becomes important.

A number of pricing options have been debated over the years. Each has its advantages and disadvantages, says Wang.

The ‘smart market’ alternative would auction Internet service with bids changing due to forces such as congestion. When the network is congested, users would assign a price they’re willing to pay for immediate service. Information packets would be prioritized by the bids, with queuing, delays and the possibility of being dropped. Users would be charged according to the bid of the highest priority packet not admitted to the network. “Complicated and not practical,” says Wang.

The ‘time-based’ option is used widely in Europe and Asia, where telephone service charges are also time-based. Use more time, pay a bigger fee. But this option does little to move non-urgent traffic away from congested times, says Wang.

When the market matures, that could result in the same delays for Internet users as for long- distance telephone callers on Christmas Day – a worldwide wait.

‘Edge’ pricing – charging more during peak use hours – is a concept to which North American hydro customers are accustomed, paying a flat rate for basic service and extra for service at peak demand.

The Internet lends itself to flat-rate pricing because it does not have the high marginal costs of other utilities (hydro producers need to pass on the cost of generating extra electricity at peak times, for example). The cost of establishing and running the Net is spread over many users and price of the service is easily covered by a flat rate. However, flat-rate charges make no distinction between text-only consumers and multi-media road hogs who take up more bandwidth. Since all users pay an average share of costs through connection fees, low-intensity users are actually subsidizing heavy users. Usage-based pricing would see heaviest users paying most of the costs.

But changing would require a system that can track how many times a customer logs on, how much time they’re on, whether they download or send text or movies, and when they do so. It could cost more to track usage than to provide the service.

“The schemes that aim to provide differentiated service levels and sophisticated pricing schemes are unlikely to be widely adopted,” argues Odlyzko. Customers want simplicity – as long-distance telephone competitors have discovered, many users won’t switch to shave a few pennies from their bill and some are willing to pay more for a simpler scheme.

Wang’s formula takes into account a number of variables – time of use, congestion on the Net, the volume of information and other factors. Yet it’s “simple to understand,” says Wang, would cover even new developments such as Wi-Fi and does not require an investment in new technology.