When Will the Internet be Cheaper?

Price relief may come, but it isn't inevitable.

Kacper Pempel / Reuters

In 1970, it cost 70 cents to make a three-minute long-distance call in the United States—that’s the equivalent of $4.31 in today’s dollars. Today, however, long-distance calling barely exists. Not technically, and not culturally.

Area codes, now linked to cellphones, routinely represent geographic regions in which a person no longer lives. And telephone calls themselves are increasingly conducted via Internet connections—if at all—with voices transmitted over data networks, rather than along telephone lines.

These days, long-distance calling comes up as one of those little emblems of the way things were—surreal as looking back at a $730 CD player in 1982, or a $1,500 camcorder in 1990. Wait long enough, and the price you pay for various technological marvels will fall. So it follows that Internet connections and mobile-data plans will be far cheaper in the future, just the way long-distance prices evaporated. But is that right?

“It's a very natural question to ask, but the metaphor fails for a number of reasons,” said Shane Greenstein, a professor of business administration at the Harvard Business School. “First, in telephony, the Federal Communications Commission of the United States had direct regulatory authority over long-distance prices. There is nothing equivalent for the Internet today for long-distance data transmission [in the United States].”

In the mid-20th century, the FCC set the price of long-distance calls, which in turn helped subsidize cheaper service for local phone lines. But that eventually changed. “It was a couple things that made the price of long distance go down,” said Gerald Faulhaber, a professor emeritus at Wharton who served as the FCC’s chief economist in the early 2000s. “It was bringing competition to long distance. But the other part of it was we began to stop the concept of regulating long-distance prices. We said, ‘Okay, you can charge what you want.’ What happened then was, in response to competition, long-distance rates went down.” What people sometimes forget, though, is that as long-distance prices fell, the price for local calls went up. (Then, of course, people abandoned landlines for cellphones, only complicating the economic picture—a paradigm shift the FCC didn’t fully grasp when it ditched long-distance regulation.)

Though higher long-distance prices were created through a mix of  federal regulation and market dominance by a few companies, there really was a cost for those firms that first set out to crisscross the country with telephone lines. And likewise, Internet infrastructure requires plenty of capital to build, but once it’s in place, several companies actually deliver webpages.

Content delivery networks—third-party systems of local servers that deliver the web to people in close geographic proximity to those servers—have already mitigated much of the cost burden associated with carrying information across great distances. “You can put most, not all, but a substantial majority of content into these mirror servers and eliminate the need for the transmission of long-distance data,” Greenstein told me. For example, Akamai, one of the best-known content delivery networks, is responsible for delivering up to 30 percent of the web’s overall traffic, Reuters reported.

Here’s where things get complicated, though: At the same time as it’s become technologically easier to access data, demand is spiking. And even though the United States is known for having relatively little competition among Internet Service Providers—in many cities, consumers are forced choose between one or two unpopular companies like Comcast or Time Warner—the uptick in mobile wireless access may represent an emerging field of competitors. But that doesn’t mean prices are going to fall sometime soon.

“Long distance went away in part because it was alway as political construct,” Scott Wallsten, an economist and the vice president for research at the Technology Policy Institute. “Within a state line versus across a state line: that part of Internet pricing doesn’t exist, so to that extent, there isn’t that weird regulatory obstacle to overcome. But then: What is an equilibrium price? It’s really hard to say because every year we do more online, which means we’re willing to pay more.”

Wireless, it must be pointed out, has limitations of its own. There’s only so much wireless-spectrum availability out there—which is part of why wireless carriers try to offload their consumers back onto wi-fi networks. The spectrum scarcity is also how the FCC, even without regulating Internet prices the way it regulated long-distance telephony, continues to politicize the cost of a connection.

“There is no question at all that we have been very laggard in getting new spectrum into the market for wireless companies,” Faulhaber, the former FCC economist, told me. “Physics only lets us get so far. The issue is we need more spectrum and that’s a technological issue. The political issue is: It’s the FCC that allocates it... It just moves so damn slowly. Most people don’t understand it very well, so politicians have very little interest in it.”

Limited competition, infrastructure that’s costly to build, growing demand for services, and only a sliver of spectrum availability left: For all of these reasons, the comparison to long-distance rate drops just doesn’t work.

Instead, we might ask: How are we already doing all of the things we do online for so relatively little? (“People will think you’re crazy if you put it that way,” Wallsten acknowledged.)

Greenstein says it helps to take even a bigger step backward: “What is a price? This is really the essence of what you’re asking. Just think about it for a minute: The price to a user of getting a video has defacto declined... But expenditure on Internet access is going up. It's kind of amazing, but then the question that makes it really hard is, well, what did you used to spend that money on? Is it effectively a price decline after all? From a consumer price index standpoint, that is actually a really hard question to answer.”