Flat: The Minimalist Price

An early issue with networks was the rapid expansion of the Internet as a consumer medium - particularly as it was delivered over networks established to handle intermittent voice traffic as opposed to the constant bit stream of the Internet.

This led to the development of different kinds of network, and different network protocols, to handling larger amounts of data. One example is IDSN, which was sold at a higher price than modem access - not because it was significantly more expensive to provide, but because consumers were willing to pay a premium price for a marginal increase in bandwidth.

The tariffs charged to voice carriers for use of shared wires was much like those charged in the railroad industry: to mandate universal service, legislation forced companies that operated networks to provide access to competitors (rather than require them to create a redundant network of their own). To control costs, legislators mandated that a network provided could charge no more to external users than it did to its own internal business units.

This led to the division of telephone carriers' services into to separate companies, the B2B company that provided network access to institutions that require high-bandwidth access directly to the backbone, and B2C companies that provided access to the hub for consumers in a geographic area.

This also led to the rush of network access providers, companies whose sole business was providing the B2B product. These rose of their own accord, or were split off from local access providers as a subsidiary or separate business.

It also led to the division of services within companies, such that a company that offered only voice service could pay the cost of bandwidth to accommodate that service (and price its products accordingly) and another that offered only Internet access (hence, higher needs for bandwidth) could do likewise.

To the market, the result was a second-level price discrimination: instead of pricing by use, companies priced by bandwidth provided: modem users pay a flat fee, ISDN subscribers a slightly higher (but still flat) fee, T-1 subscribers pay yet a higher flat fee, etc.

The prices were set not according to actual use, but to the perceived value to the customer. Collectively, this proved to be an effective defense against arbitrage (third-parties who resell service at a mark-up) as it placed considerable risk upon the ISP who collected a fixed amount from its customers and paid a variable amount to its vendor for network access: new competitors, especially small businesses without the financial resources to face the risk, were effectively discouraged from entering the market.