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Why the FCC should stay out of data plan pricing

Regulation2point0 co-founders Robert Hahn and Peter Passell argue that regulators should let the carriers adjust to changing technology and market conditions.

Editors' note: This is a guest column. See the bios of Robert Hahn and Peter Passell below.

A big question these days for smartphone users is whether telecommunications providers will continue to offer "all you can eat" data plans or switch to charging by the megabyte. The more important issue--at least from the perspective of the public-policy community--is whether the Federal Communications Commission will have a say in the matter. And recent, seemingly contradictory initiatives by the regulators provide good reasons to believe that the FCC should get out of the way.

In 2007, Comcast, the giant cable company and Internet service provider, faced a marketing problem. A relatively small number of subscribers were hogging huge swaths of bandwidth, as they traded movies and music with others. (Some of the exchange was legal, some of it probably not.) Comcast responded by limiting upload speeds for customers using peer-to-peer networks.

After an investigative reporter from the Associated Press caught the company blocking a transfer of the King James Bible using BitTorrent (leading one blogger to ask, "Why does Comcast hate Jesus?" a couple of advocacy groups, Free Press and Public Knowledge, filed a complaint with the FCC. The agency ordered Comcast to stop.

Three years later, in Comcast v. FCC (PDF), a federal appellate court reversed the FCC's order. But the court simply ruled that the FCC had overstepped its jurisdiction; it never addressed the legality of Comcast's behavior.

The irony, of course, is that Comcast ran afoul of the FCC, in part, for failing to use tiered pricing to ration bandwidth.

Comcast, it's worth noting, could have dealt with its peer-to-peer problem by switching to a pricing model that charged according to use. But the company feared that customers were wed to salad-bar-style pricing and would bolt at the change. Thus, apparently for competitive reasons, Comcast chose instead to block the offending traffic.

Now we can see why. Verizon, which is about to roll out its version of 4G high-speed wireless-data service, says it is planning to charge according to use. Verizon is worried that 4G will make it so convenient to move huge video files over wireless links that it would face a Comcast-like problem, if it didn't charge by the bucket of data.

Meanwhile, AT&T has beaten Verizon to the punch, announcing that new iPhone customers will pay by the megabyte. (Existing customers with all-you-can-eat plans will be allowed to keep them.)

Verizon's admission immediately brought forth criticism from the blogosphere. And the FCC wasn't far behind: it is already preparing new regulations to prevent "bill shock"--you know, when dad finds out that little Jennifer has downloaded every episode of "True Blood" and "The Vampire Diaries," and stuck him with a $400 cell phone bill.

The irony, of course, is that Comcast ran afoul of the FCC, in part, for failing to use tiered pricing to ration bandwidth. Now, apparently, Verizon has caught the FCC's attention by deciding to charge according to usage.

The FCC may do no more than require carriers to notify customers when they've exceed their allotted megabytes--something AT&T is apparently planning to do, even without a nudge from Washington. Still, we'd much prefer that the FCC stay out of data-service-pricing decisions altogether, letting the carriers adjust to changing technology and market conditions.

Telecommunications markets don't always get it right. But we doubt that the regulators could do better.