09 December 2009

The power of incentives (in the wireless industry)

As someone who took a couple of economics classes (and knows just enough to be dangerous), I find AT&T's continued network troubles to be quite puzzling.

[AT&T] has been criticized by owners of the [iPhone] for delayed text and voice messages, sluggish download speeds and other network problems.

[President and CEO for AT&T Mobility and Consumer Markets Ralph] de la Vega cited the heaviest data users, saying that 40 percent of AT&T’s data traffic came from just 3 percent of its smartphone customers.

But he emphasized that the company would first focus on educating consumers about their data consumption in the hope that doing so would encourage them to cut back, even though they are paying for unlimited data use.

(New York Times, "AT&T to Urge Customers to Use Less Wireless Data")

I laughed out loud when I read the headline. AT&T thinks that educating users will get them to consume less data, even if it gives them no incentive to do so. I think this is about as likely to work as encouraging people to emit less carbon while giving them no incentive to do so. The article does say AT&T might be considering a non-constant pricing plan; I hope they realize this is a really good idea, soon.

The unlimited data plan is untenable with today's technology. When you, as a user, actually try and take advantage of your "unlimited" data plan, not only are you limited by the mediocrity of the network, you are making other users very, very sad by congesting the network! Offering unlimited plans only makes sense when you have actually built out sufficient capacity to cover the demand. That's why unlimited long distance calls (on both landlines and cell phones) are a good idea (now), and unlimited data plans aren't.

Carriers and consumers claim to prefer unlimited data plans because they're simple. But that simplicity comes at a huge cost to quality, which I bet many people would be willing to pay some amount to avoid.

Personally, I would welcome pay-per-byte pricing to the wireless industry (though I'm not holding my breath). By making people pay an amount commensurate with their impact on other users, it would avert the tragedy of the commons that is AT&T's network today.

Perhaps more importantly, pay-per-byte also provides the right incentives on the network provider's end. When you pay by the byte, your provider has an incentive to build out capacity, because they want to deliver those bytes to you as fast as possible, so they can free up their resources, so they can push you more bytes, which makes them even more money. Under an unlimited pricing structure, the provider has every incentive to drag their feet. Building out capacity costs them money now, but doing nothing at all doesn't cost them anything until your contract expires.

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