Jeffrey KrausS
By Jeffrey Krauss, Network Nitpicker
and President of Telecommunications and Technology Policy
Two months ago, I wrote about using wireless home networks to share your cable modem service with your neighbors. Since that time, I've received several comments about the column and the issues that it raises. For example–what if your service agreement prohibits sharing or resale? Is sharing or resale a theft of service? But first, let's talk about sharing incentives created by flat rate pricing.

Economists generally agree that it's a good idea to structure prices so that users who impose more costs on the network must pay a higher price. For a telecommunications network, usage-based pricing is one embodiment of this principle, providing that network costs are related to traffic volumes. For cable modem service, there is a weak relationship between traffic volumes and costs, in the sense that the cable modem service uses a shared bandwidth resource, and additional bandwidth must be assigned when the resource eventually becomes congested. But costs are very lumpy, not smoothly varying with usage. The cable operator makes a large initial investment, and traffic volumes are very low initially, and he does not need to make an additional investment until much later in the evolution of the service. In other words, a cable modem network looks very much like a fixed cost service that is independent of traffic volume.

Cable modem service is priced at a flat rate, allowing unlimited usage. At least, mine is. That is different from dial-up Internet service providers (ISPs), who usually have a low-cost option (e.g., $10 for 10 hours a month) in addition to an unlimited usage option. Dial-up ISPs have costs that are more usage-related than cable modem service, because they have telephone-related costs that depend on minutes of use. The only time they pass these along explicitly to users is when you dial in through a toll-free 800-number, but other usage-dependent costs are averaged into their flat rates.

Flat-rate pricing of cable modem service is economically rational, in the sense that costs are mostly fixed and don't change much as traffic volume changes. In addition, there is a cost associated with metering. Flat-rate pricing avoids metering costs.

Pricing structures provide consumption incentives for customers. You eat more at an all-you-can-eat restaurant than an a la carte restaurant. Flat-rate pricing of Internet access service results in more total usage than usage-based pricing (unless, of course, the flat rate is set too high, which results in fewer users). But in an all-you-can-eat restaurant, you have an incentive to waste food. Fill up your plate, and throw away what you don't eat. But if you leave food on the buffet-line platter, it can be selected by someone else later. With cable modem service, it's just the opposite. Any capacity that is used is not wasted. The wasted capacity is what evaporates and is not used, because it cannot be saved for later.

Flat-rate pricing creates an incentive to share the Internet access service among multiple computers. The fact that the cable modem itself is expensive, and can be shared, only increases the incentive for sharing. On the other hand, usage-based pricing would depress that incentive. But even if the cable operator wanted to depress usage, usage-based pricing would impose additional metering costs that might not be recoverable. And usage-based pricing might be economically irrational in the sense that the network costs are largely fixed. Shared use helps to soak up capacity that would be wasted if it were to evaporate unused.

Policy issues

What about theft of service? If I share my cable modem service with my neighbor, is that theft of service? I would argue that it is not. That's in contrast to the case where you run a cable to your neighbor's house so he can watch movies from your cable service. In that case, it is theft of service because the movie is a form of property–intellectual property–and the cable service is a performance of the movie that allows its display in your home.

But cable modem service is not the delivery of intellectual property–it is the furnishing of a bare channel of communication that the users can fill up with their own intellectual property. Now, admittedly, that argument depends somewhat on whether the FCC eventually classifies cable modem service as a communications service or an information service. If it is classed as a communications service, then there is a longstanding FCC policy that shared use is permissible, and so is resale. If the FCC classifies cable modem Internet access as an information service, then maybe the theft of service question isn't quite so clear, but it is certainly different from giving your neighbor an unauthorized performance of a movie because it isn't clear what is being stolen.

I've looked at a few cable modem service agreements, and they generally prohibit resale, but are silent on sharing. Some prohibit "providing services to others," but don't define "others" or make it clear whether "providing" means sharing, reselling or something else. Will cable companies try to enforce these prohibitions? Probably not right away. I doubt that any cable company wants to take the risk of an adverse court decision. So while I would not plan to start a heavy advertising campaign to my neighbors, if you are already sharing cable modem service with a few neighbors, I think it will be quite awhile before anyone really notices.