If downloading was free everyone would be doing it

Part two in a series of two or more of top­ics rel­e­vant to the Net­work Neu­tral­i­ty debate

I’m shocked that I need to explain this, but prices are deter­mined by sup­ply, demand, and sell­ers’ deci­sions about the best ways to opti­mize sup­ply and demand. Over time they are deter­mined by noth­ing more than these.

Are there pro­duc­tion costs? Of course. But these are also gov­erned by the bal­ance of sup­ply, demand, and sell­ers’ deci­sions about the best ways to opti­mize sup­ply and demand. Wages are deter­mined by work­ers’ will­ing­ness to work for wages ver­sus the oth­er options they have, mate­ri­als costs are deter­mined by the will­ing­ness of oth­ers to buy.

Are there oth­er fac­tors? No, not real­ly. There are facts that com­pli­cate these equa­tions, and those are impor­tant facts. One is the «stick­i­ness» of prices, where the mar­ket prices take time to adjust to changes in sup­ply or demand. Anoth­er is lack of trans­paren­cy, where parts of trans­ac­tions are hid­den from par­tic­i­pants in the vol­un­tary trade of goods and ser­vices. That lack of trans­paren­cy might be fraud, but isn’t nec­es­sar­i­ly.1

Fur­ther­more all trade takes place between humans, and humans are some­times irra­tional.2 They make choic­es based on faulty assump­tions, bad infor­ma­tion, and often with­out regard to con­se­quences of their choices.

Sup­ply, demand, and prices are linked to one anoth­er. When demand increas­es and sup­ply stays the same, prices will tend to rise. If prices do not rise, there are short­ages. Short­ages are bad because the peo­ple who get the goods are the peo­ple who arrive first, not the peo­ple who are most will­ing to pay most for them.

Con­sid­er the dif­fer­ences between taxis, pub­lic trans­porta­tion (like trains and bus­es) and ride-shar­ing ser­vices like Lyft or Über. Dur­ing times of high­er demand (such as rush hour, or before or after an event like a con­cert or a base­ball game) the num­ber of taxi­cabs does not increase, and nei­ther does the num­ber of bus­es or trains.3

Dur­ing these times, the bus­es and trains become crowd­ed to the point where rid­ing them becomes increas­ing­ly unpleas­ant. Demand is high­er than dur­ing the rest of the day. While at two o’clock you might be able to find a seat on a bus, at five-thir­ty the bus or train will be stand­ing-room only, and com­muters may be packed so close­ly togeth­er that they can’t move from the spot. It may not even be pos­si­ble to board the bus.

Taxi­cabs sim­i­lar­ly lack the abil­i­ty to respond to increased demand, but with immutable prices the short­ages take anoth­er form: lengthy wait times. A taxi­cab across town costs the same no mat­ter what time of day it is, but at peak usage times you may have to wait an hour or more before one shows up.

With rideshar­ing ser­vices where vari­able prices are depen­dent on demand, a ride across town might cost two or three times more dur­ing peak times than oth­er times. The increase in price turns off many peo­ple. The con­ve­nience of the ride is not worth the price to them. To oth­ers, peo­ple for whom get­ting across town is more impor­tant, more urgent, or sim­ply who have more mon­ey (mak­ing the rel­a­tive val­ue of mon­ey less) the trade­off is worth­while. There is still some demand, but less demand in terms of the num­ber of cus­tomers will­ing to pay that price. There­fore those who are will­ing to pay the high­er price don’t have to suf­fer crowd­ing or wait times.

Decreas­ing prices has the same effect, but in the oppo­site direc­tion. More peo­ple will be will­ing to pay one dol­lar for an ice cream cone than will be will­ing to pay five dol­lars, assum­ing the qual­i­ty of the ice cream is the same. If the shop with the five-dol­lar ice cream cones finds itself sell­ing very few ice cream cones, they might drop their prices and find that they have to resup­ply faster to keep up with all the extra cus­tomers. If they drop the price to a nick­el, even peo­ple who had­n’t planned to get ice cream will stop in because the price is such a low barrier.

The prob­lem with low prices is that all the peo­ple who walk past the shop might come in and buy ice cream, caus­ing the shop to run out of ice cream. Then the per­son who real­ly wants a cone comes by and is turned away. Prices should be set so that the peo­ple who have access to a finite resource are the ones who want it the most.

Tele­phone com­pa­nies used to all price their ser­vice based on the amount of time that was used. The longer the dis­tance the call was, the high­er the rate. This reflect­ed the cost of man­u­fac­tur­ing the net­work infra­struc­ture over long distances.

Dur­ing the ear­ly rise of the Inter­net, Inter­net Ser­vice Providers used to sup­ply their con­nec­tions with a finite num­ber of hours, reflect­ing the cost of the phone lines and the net­work access they need­ed to pro­vide those ser­vices. If you want­ed more hours of con­nec­tiv­i­ty, you had to pay more. As a result, that con­nec­tion time was treat­ed as an expen­sive resource. Peo­ple checked their email only once a day, or con­nect­ed to the ’net to do some spe­cif­ic tasks such as research, then dis­con­nect­ed. If one want­ed to down­load a very large file, one might decide to obtain it some oth­er way rather than spend the nec­es­sary time online.

When broad­band became com­mon, con­nec­tions start­ed to be always on, but at rough­ly the same price. Peo­ple could now down­load or upload as much as they liked as often as they liked. Ser­vice providers may have assumed that usage would increase some, but they did­n’t count on the amount in increase. Many of the ser­vices which are com­mon today sim­ply did­n’t exist then.

The prob­lem with flat-rate «unlim­it­ed» Inter­net ser­vice is that when the price goes to zero, demand will go to infin­i­ty. There was still a month­ly price, but once that month­ly price was set it cost the same whether you looked at your email once a day or once an hour. It was the same price whether you chat­ted with peo­ple on IRC at a few dozen bits per word, or had a voice con­ver­sa­tion at a few thou­sand bits per sec­ond. In fact, it was the same price even if you made a video call at a few mil­lion bits per second.

Instead of just down­load­ing low-band­width text files (eg web pages) peo­ple more often start­ed to down­load music. After they start­ed down­load­ing music, they start­ed down­load­ing videos. And then they start­ed stream­ing all of the tele­vi­sion and movies that they watched instead of using an over-the-air anten­na or cable TV con­nec­tion. Watch­ing a video online went from see­ing a chop­py postage-stamp sized image on a screen to ultra-sharp 4k video, the equiv­a­lent of six­ty eight megapix­el images every sec­ond.

Once band­width (after the ini­tial base cost) became free, peo­ple set up web­cams, even point­ing at noth­ing in par­tic­u­lar, just because they could. They stopped get­ting as angry when they went to a web­site and saw a video adver­tise­ment start to play auto­mat­i­cal­ly. They start­ed stor­ing their music and videos «in the cloud» mean­ing they down­loaded their favorite album again and again, every time they lis­tened to it. A decade ago these things would have been seen as com­i­cal­ly waste­ful. Two decades ago they were sim­ply not possible.

But as the old say­ing goes, there’s no such thing as a free giga­byte. Some­one is pay­ing for that data to from place to place. The cost per giga­byte has been going down steadi­ly, but it still requires equip­ment, and peo­ple to keep that equip­ment run­ning. Promis­ing unlim­it­ed access means the demand for that access will con­tin­ue ris­ing at an out­ra­geous and irre­spon­si­ble pace. The peo­ple respon­si­ble for pro­vid­ing that band­width aren’t the same ones decid­ing to use it.

This is not to say that it’s bad or wrong that these ser­vices have become avail­able. The progress made has been won­der­ful. Dig­i­tal ser­vices are abun­dant. But there’s a dif­fer­ence between abun­dance and actu­al lim­it­less sup­ply. So long as ser­vice providers promise sup­ply with­out lim­it, demand will con­tin­ue increas­ing. Peo­ple will find ways to use band­width in ways we might find as ridicu­lous today as peo­ple found the idea of stream­ing movies twen­ty years ago. Just as our soft­ware gets more com­pli­cat­ed to use up the resources of ever-more-capa­ble proces­sors so too will we use up what­ev­er band­width is avail­able as it is created.

  1. One should not for­get exter­nal­i­ties, where ben­e­fits or costs are spread out­side the con­fines of a trans­ac­tion. It’s not what this post is about, but you real­ly should­n’t for­get about them. And when not for­get­ting about them, also don’t for­get that attempts to lever­age or ame­lio­rate exter­nal­i­ties will also be sub­ject to laws of sup­ply and demand and may cre­ate their own exter­nal­i­ties. OK, I’m not for­get­ting that and nei­ther should you. Let’s con­tin­ue on. 
  2. Please note that «irra­tional» here does not mean «emo­tion­al». If a trade pro­vides plea­sure, such as mon­ey exchanged for a movie tick­et, the trade can still be ful­ly ratio­nal even if the ben­e­fit isn’t. Dif­fer­ent peo­ple have dif­fer­ent things they val­ue. That’s a fea­ture, not a bug. 
  3. This is not always true in real life. Most munic­i­pal bus and train sched­ules have more fre­quent stops and addi­tion­al com­mute-time-only routes. But the increase in sup­ply is usu­al­ly a small frac­tion of the increase in demand dur­ing these times and the described effects are com­mon. 

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