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How much will people pay for high-speed connections?

June 5, 1998
Web posted at 3:15 p.m. EDT

by Michelle V. Rafter

(IDG) -- Internet users agree that a faster and more reliable Net connection would be a good thing Ğ but no one knows how much people will pay for it.

Enter the Internet Demand Experiment, a $1.3 million study launched last month at the University of California at Berkeley. Conducted by economists and computer scientists, it's the most ambitious study of bandwidth economics ever undertaken.

The Berkeley study is looking at the question of how much people will pay for a higher class of Internet connection. Supporters believe that the Quality of Service guarantee of faster and more reliable connectivity will be critical to the Internet's long-term development, especially for applications like multicasting that require a huge amount of network capacity.

"Until now there's been this one-quality-fits-all access, and now companies are experimenting with [tiered] services. There's been a lot of engineering work, but nobody's looked at the economic side," says Hal Varian, project codirector and dean of Berkeley's School of Information Management and Systems.

Tiered services will be especially attractive to businesses that want to charge extra for premium services like videoconferencing, according to Sam Lamonica, an executive at Northpoint Communications who's familiar with Varian's research.

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"Companies could demand higher bandwidth to support video conferences, then lower the bandwidth and lower the costs when they're finished. It would be a beneŞt because you wouldn't have to pay for the huge pipeline all the time," Lamonica says.

As part of the university's research, as many as 150 faculty, students and staff will pay to use the school as their ISP, connecting to the school's Ethernet network through ISDN lines. Subjects may choose to connect at speeds of up to 128Kbps and can change speeds at any time. Prices will change frequently to measure how the charges affect demand.

At some point during the project, subjects will be charged for access by the byte to determine how such a plan affects demand. Researchers are using a custom-built billing gateway at the network operations center to control prices and bill subjects. Other software will simulate the network congestion and anomalies that might lead users to pay for more speed or better access.

Though the project is less than two months old, researchers have already found that people will pay more for a steady, high-quality connection.

"We change prices on Sundays and I get mail from people complaining, but one person used to not having to pay for access is finding himself more willing to pay as time goes on. He's getting used to having control over quality," says Richard Edell, a Berkeley grad student working on the experiment.

The Berkeley research team received $800,000 from the National Science Foundation and more than $500,000 in equipment and services from Cisco Systems and Pacific Bell.

Varian has already presented reports on the project to the Federal Communications Commission and Bell Labs. He expects that by year-end the university will begin posting raw data from the experiment on the Web, so other researchers can use it to come up with their own price-demand estimates.