Question: What happens when the price of any desired good is raised? What happens when the price of any desired good is raised?

 

Basic economics gives you the answer: people consumer more any desirable product when the price falls, less of that same product when the price increases. People find substitute satisfactions and also change their behavior to extract maximum value at minimum price.

 

That, simply, is why so much government-imposed regulation does not achieve its intended goals, or has unintended and inefficient or damaging consequences.

 

If one wants users to use electricity, water, natural gas, gasoline in thoughtful and efficient ways, it is counterproductive to shift to lower per-unit prices. In fact, one might benefit from providing actual incentives for reducing consumption.

 

Communications bandwidth is not immune from basic economic laws. Flat-rate pricing arguably has contributed to U.S. leadership in Internet applications by removing barriers to use. In similar ways, buckets of usage, family plans and “Digital One Rate” (same price for any minute of mobile voice within the U.S.) are related innovations that spurred uptake of new services.

 

Still, there is a big difference between low-penetration and high-penetration services, low usage and high usage, high-margin and low-margin products, all of which dramatically shape the cost of delivering any product. Business practices and costs for a low-penetration, low-usage products are quite different from high-penetration, high-usage products. And then one has to look at product margin.

 

The basic financial driver for the global communications industry is moving from a high-margin, low-bandwidth “voice” product to a “moderate” margin, very-high bandwidth broadband access product. That means investment costs are much higher precisely at the point that margins are significantly lower.

 

Not all voice products created equal. Historically, business voice has been high margin, consumer services low margin. International long distance was high margin, local voice services much less so. As a rule of thumb, telephone companies make money on urban customers, break even on suburban customers and lose money on rural customers.

 

Of course, the first thing that happened to margins with the advent of IP telephony is that the highest-margin services (international long distance) were attacked first. Now we are seeing broader adoption of SIP trunking services and IP telephony that are attacking business voice margins.

 

Like it or not, the global communications business is required to abandon its high-margin voice model, partly because the margins are evaporating, partly because gross revenue is shrinking as well.

 

Keep in mind that the lucrative parts of the voice business have always been usage-based. The parts of the business that break even or lose money are the “flat rate, unlimited usage” parts of the business.

 

Logic simply requires that as the business shifts to a moderate-margin model, more of the business will shift to a metered, usage model. Not all of it, in all likelihood, will be strictly “metered.” But there will be more use of bucket pricing, to better match usage to retail price, and to encourage rational behavior on the part of consumers.

 

That is not to say any particular retail packaging model is inevitable. “Breakage” is very-high margin, but very customer annoying. A better approach likely is simply to better correlate usage with retail price, within some reasonable marketplace levels.

 

Users will keep consuming more bandwidth. But that isn’t to say “raw bandwidth” will be a high-margin product in most cases. Margin will be higher for value-added products, only adequate for basic Internet access bandwidth products.

 

Most low-margin products are sold on a consumption basis. That likely is the future for basic broadband access. Precisly how the product’s consumption is rated is not yet clear. But mobile buckets of usage are a likely model.