The history of communications and its implications for the Internet Andrew Odlyzko AT&T Labs Florham Park, NJ 07932, USA amo@research.att.com http://www.research.att.com/~amo Abstract The Internet is the latest in a long succession of communication technologies. The goal of this work is to draw lessons from the evolution of all these services. Little attention is paid to technology as such, since that has changed radically many times. Instead, the stress is on the steady growth in volume of communication, the evolution in the type of traffic sent, the qualitative change this growth produces in how people treat communication, and the evolution of pricing. The focus is on the user, and in particular on how quality and price differentiation have been used by service providers to influence consumer behavior, and how consumers have reacted. There are repeating patterns in the histories of communication technologies, including ordinary mail, the telegraph, the telephone, and the Internet. In particular, the typical story for each service is that quality rises, prices decrease, and usage increases to produce increased total revenues. At the same time, prices become simpler. The historical analogies of this paper suggest that the Internet will evolve in a similar way, towards simplicity. The schemes that aim to provide differentiated service levels and sophisticated pricing schemes are unlikely to be widely adopted. Price and quality differentiation are valuable tools that can provide higher revenues and increase utilization efficiency of a network, and thus in general increase social welfare. Such measures, most noticeable in airline pricing, are spreading to many services and products, especially high-tech ones. However, it appears that as communication services become less expensive and are used more frequently, those arguments lose out to customers' desire for simplicity. In practice, user preferences express themselves through willingness to pay more for simple pricing plans. In addition, there is a strong ``threshhold'' effect to usage-sensitive billing. Even tiny charges based on utilization decrease usage substantially. In a rapidly growing market, it is in the service providers' interest to encourage usage, and that argues for simple, preferably flat rate, pricing. Historical evidence suggests that when service costs decrease, such arguments prevail over the need to operate a network at high utilization levels and to extract the highest possible revenues. Communication services have long exhibited many characteristics of modern high-tech industries, namely high fixed costs, network effects, and difficulty in allocating costs among many products and services. Therefore the historical lessons of this paper are likely to be applicable to many pricing situations in the future. When prices are high, and purchases infrequent, airline-style ``yield management'' is likely to dominate. On the other hand, when prices are low, and a service is used many times a day, simple pricing and uniformly high quality are likely to be more common. Historical analogies as well as current expenditure data also suggest that in the ``digital convergence'' of broadcasting and point-to-point communications, it is the latter that will dominate in shaping the evolution of the Internet. The current preoccupation with professionally produced ``content'' is probably more a distraction than help in planning for the future. Content has never been king, it is not king now, and most likely will not be king in the future. The development of the Internet is likely to be determined by the same growth of the myriad unpredictable commercial and social interactions that have fueled other communication services. For full paper, see