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History and the Internet

October 31st, 2004 · No Comments

[via Shrikant Patil] The Economist asks: “Will charging based on content come to the internet? The history of transportation offers clues.”

In a recently published paper, Andrew Odlyzko, a professor at the University of Minnesota, divines lessons from the history of transportation to explain the telecoms industry’s attraction to price discrimination, and what it may mean in future. Of course, in general telecoms, companies already exploit variations in what customers are willing to pay for digital bits, depending on whether they take the form of a cable television programme or an SMS text message. On the internet, however, charging according to content would mark a big change.

On the net, discrimination might mean one price for web and e-mail traffic, another for instant messaging and still others for telephone calls, music and films. Is it likely? Mr Odlyzko hopes not, although history strongly suggests that the temptation exists. He thinks that price discrimination might not be in telecoms companies’ interests after all. Unlike on canals, toll roads and so forth, internet capacity is abundant. Internet service is therefore a commodity. Simpler, flat-rate pricing, he argues, is likely to increase usage: discrimination would turn some users away.

Indeed, he says, distinguishing between different types of traffic would mean so much technical rejigging that the openness of the internet would be destroyed. Because the internet is decentralised and simply priced, it is cheap for many other networksrun by big companies, universities and telecoms firmsto connect to it. This in turn gives the internet a great capacity for innovation. Price discrimination could jeopardise all this. While content delivery does lend itself to a closed network, connectivity does not. Open networks are likely to win because they can attract more revenues from users, Mr Odlyzko says. Is this wishful thinking? History, as he shows, is full of examples of successful price discrimination. The telecoms companies may yet think it worth a try.

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