Why Mobile Data Plan 'Throttling' Is Actually a Good Thing

There's just no way the carriers will stay ahead of demand without raising revenues and pricing by the byte-to-ration capacity.

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Robert Hahn is director of economics at Oxford's Smith School, chief economist at the Legatum Institute, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute in Santa Monica and the editor of its quarterly economic policy journal, The Milken Institute Review. They co-founded Regulation2point0.org, a web portal on economic regulation.

It's official: The era of salad bar style mobile data plans is almost over. AT&T has joined Verizon and T-Mobile in slowing download speeds for its remaining customers with unlimited data plans, once they reach set (albeit generous) limits. Among the national mobile carriers, only Sprint, which is struggling to compete with its larger rivals, is still playing the salad bar game—and Sprint, too, may yet think better of it.

A rip-off, you say? A conspiracy to squeeze bigger bucks out of the nice folks who regularly watch Hulu and stream Pandora on their smartphones? The policy change may, indeed, cost a relatively small number of data guzzlers some inconvenience (when they are "throttled") or some cash (if they step up to metered plans designed for heavy users).

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But the change was inevitable: With demand for bandwidth growing at an astounding pace, the carriers simply don't have enough capacity to satisfy everybody inclined to watch Modern Family or NFL highlights on their iPhones during their lunch breaks. Meanwhile, next-generation tablets like the brand new iPad 3 with 4G LTE are bound to make mobile video a reality for millions more. What's more—and this is the part you're not going to like—it's a good thing. Pricing based on usage is vital, if mobile wireless is to deliver on its remarkable promise.

Not very long ago, wireless was mostly used for phone calls, text messaging, and an occasional peek at Yelp.com to find the closest pizza parlor. But wireless broadband opened the door to streaming video anywhere anytime, and everybody under age 35 seemed to get the message at the same time. The mobile carriers are now racing to keep up with demand for 4G service that can deliver gorgeous HD. And while they will likely get some help from Congress's initiative to auction off a big swath of spectrum now controlled by over-the-air TV broadcasters, it's going to cost a large fortune and take years to have an impact. Over the next few years, there's just no way the carriers will stay ahead of demand without raising revenues and pricing by the byte-to-ration capacity.

[Read: FCC Should Allow Verizon, AT&T a Fair Bid for Wireless Spectrum]

Limits on download speeds for heavy users in the remaining unlimited data plans—the equivalent of those long lines for almost-free bread in the long-since-collapsed Soviet Union—will probably be gone in a few years because unlimited data plans will be gone. But as long as the government cooperates by selling spectrum to the highest bidders, the variety and quality of mobile wireless services will keep on expanding.

The impact on mobile wireless bills will depend on both demand and supply. On the demand side, mobile video will likely put significant upward pressure on prices. On the supply side, the FCC could alleviate supply constraints by getting spectrum out there more quickly and allowing secondary markets in spectrum to operate with a minimum of regulatory oversight.

Average mobile wireless bills may well go up, but only because the growth in use of ever-more-indispensable mobile services will more than offset the decline in the price of a gigabyte. Would you really prefer to go back to the good old days, when the most valuable use of a cell phone was to tell your spouse you were stuck in traffic and would be late for dinner?

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