The History of Communications and its Implications for the Internet

Abstract

The Internet is the latest in a long succession of communication technologies. The goal of this work is to draw lessons from the evolution of all these services. Little attention is paid to technology as such, since that has changed radically many times. Instead, the stress is on the steady growth in volume of communication, the evolution in the type of traffic sent, the qualitative change this growth produces in how people treat communication, and the evolution of pricing. The focus is on the user, and in particular on how quality and price differentiation have been used by service providers to influence consumer behavior, and how consumers have reacted.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.Communication services have long exhibited many characteristics of modern high-tech industries, namely high fixed costs, network effects, and difficulty in allocating costs among many products and services. Therefore the historical lessons of this paper are likely to be applicable to many pricing situations in the future. When prices are high, and purchases infrequent, airline-style "yield management" is likely to dominate. On the other hand, when prices are low, and a service is used many times a day, simple pricing and uniformly high quality are likely to be more common.Historical analogies as well as current expenditure data also suggest that in the "digital convergence" of broadcasting and point-to-point communications, it is the latter...

A mathematical model of the Paris Metro Pricing scheme for charging packet networks

“…Also, according to (11), λ i increases continuously when p tot increases, so that λ = I i=1 λ i increases continuously with p tot . Thus, there exists a unique p tot such that both λ (obtained from Eq.…”

“…Indeed, no signalling protocols would have to be used, and the tariff would be fixed, which is preferred by most users [11].…”

The Evolution of Price Discrimination in Transportation and its Implications for the Internet

“…The phone companies (private as well as government ones) then fought a worldwide battle, spanning several decades, to switch to metered billing. They succeeded almost everywhere, as is detailed in Odlyzko (2000b) and Odlyzko (2001b). They were supported by a remarkable consensus of experts.…”

“…But the general trend in communications has been towards simpler pricing and decreasing price discrimination. This is described in detail in Odlyzko (2000b) and Odlyzko (2001b). There was one notable counterexample, though.…”

“…Although flat rates were regarded as damaging, they did not harm the U.S. telephone industry in the long run, as a comparison with other countries shows Odlyzko (2000b) and Odlyzko (2001b). U.S. phone industry revenues have traditionally been higher, as fractions of GDP, than those of most other countries, and the industry was dynamic and profitable.…”