Internet pricing and the history of communications



                        Andrew Odlyzko

                          AT&T Labs
                  Florham Park, NJ 07932, USA

                     amo@research.att.com
               http://www.research.att.com/~amo


                          Abstract


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.