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Smart Data Pricing: Using Economics to Manage Network Congestion

Smart Data Pricing, illustration

Credit: John Lund

Since 2010, there has been rapid evolution in pricing practices among Internet service providers (ISPs) in the U.S. and other international markets, particularly in moving away from flat-rate to usage-based pricing in cellular networks.19 In 2010, AT&T eliminated unlimited data plans and introduced a tiered plan of about $10/GB, along with deliberately slowing the traffic of heavy users and adding hefty overage fees. Verizon and other U.S. ISPs have since introduced similar data plans. These changes have fueled the continuing debate about Net neutrality and the openness of the Internet.

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ISPs argue these price increases and usage penalties are needed in response to rapid growth in data traffic, as driven by increasing demand for smart devices, bandwidth-hungry applications, cloud-based services, machine-to-machine traffic, and mediarich Web content.5,20 This explosive growth, which Cisco's visual networking index projects will cause a nearly tenfold increase in global wireless traffic between 2014 and 2019,4 requires investment in expanding wired and wireless network capacities (such as additional spectrum, Wi-Fi hotspots for offloading data traffic, backhauling infrastructure, and newer technologies like 4G/LTE and femtocells). The benefits of this capacity expansion are partly accrued by the content providers who attract more advertising and e-commerce revenue from greater user demand while further driving demand for bandwidth. ISPs contend they are trapped in a vicious cycle that does not allow them to match their prices to their costs. Measures (such as throttling, data caps, and usage-based metered pricing) are thus viewed as essential for regulating demand and managing network congestion.


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