Tragedy of the Modern Commons and 90 9 1

The Tragedy of the Commons is an old and still insightful parable of the incompatibility of human self-interest and shared resources.

90 9 1 is a so-called “law of social media” and  as such didn’t exist for all intents and purposes even a decade ago.

These two elements provide a powerful combination for the new broadband providers in South Africa shaking up the market with relatively affordable uncapped internet access.

Tragedy of the Commons

This story is rooted in feudal times, but applies in many situations today. It is taught in introductory Game Theory courses and in some economics courses. The insight is simple and obvious.

Some farmers would have a piece of land to which they were entitled sole use. This could be used for crops and also some grazing.  An additional piece of land was available for “common” usage by a group of farmers. Farmers would graze their cattle on the common. If one farmer had more cattle than another, that farmer would get greater benefit from the common. If a farmer chose to graze his cattle on the common rather than his (practically probably not “her” in these days) own land, he would get more value from the common and keep his own land available for more crops.

Self-interested, rational farmers would use the common as much as possible since there was no additional cost to using it over their own land. Without restrictions, the land would be very likely be overgrazed. Once the overgrazing become extreme, the land would be damaged and could take several seasons  to be useful again. Collectively, the group of farmers gained less value from the common through the self-interested choice of individual farmers making decisions in isolation and without a mechanism to enforce fairness.

The Tragedy is that individuals making rational, utility-maximising decisions result in a suboptimal result for everyone. Further, it only takes a few farmers to overgraze the common to damage the prospects of all farmers, even those practising self-restraint in order to preserve the common.

The Tragedy of  Uncapped Broadband

Uncapped broadband relies on cross-subsidies. Since data transfer has a marginal cost, it is not possible for all users of a service to use truly unlimited  data for a fixed price. The economics are not viable for an ISP to survive.

Light users subsidise heavier users. Users who are very active one month are subsidised by users who are relatively inactive that month. The users are, in effect, in it together.

The problem is that we have a “common use asset”. There is no marginal cost to downloading more data, therefore the incentives to download are great for each individual. Unnecessary downloads of content that will likely never be used, or multiple downloads of the same content through reluctance to use local storage (which has a small cost, but a cost greater than zero) will result in a poorer internet experience for all.

Worse, when a small number of users download several hundred gigabytes a month, the experience of the majority of users is negatively affected to the benefit of a small minority. The price of the packages may also need to increase to finance the internet usage of the small minority, making the overall package unattractive for lighter users. As the number of light users decreases, the “dependency ratio” of heavy users to light users increases, with a spiraling deterioration in internet experience and increased prices.

90 9 1

In social media (which is a fancy term for newer forms of online interaction such as myspace, facebook and twitter, but also applies to long-in-the-tooth online forums such as MyBroadBand) there is a rule about participation.

  • 90% of your users are observers – the Audience. They don’t participate or contribute at all, but their eyeballs take in the available content.
  • 9% are Editors. They will respond to a thread on an online forum, they may tweak or change or edit something that exists, but they won’t take the initiative and create new content or a new thread.
  • 1% are real Content Creators. They set the tone of the medium, driving themes and content and ideas.

Creators are fantastic in that they drive the experience and content for everyone. Without them social media wouldn’t exist. However, 1% of your users, an extreme minority, are setting the tone of the conversation and the themes for discussion for the wider audience. This can be extremely for your brand or service offering if you are not aware of this.

The most vocal lobby groups and letter-writers are likely to be more extreme in their views than your base. Political parties would do well to set their policies well to the centre of the most vocal supporters. In providing a service, you need to pay careful attention to user patterns and access in addition to the vocal requests for new features on the forums. Actively seeking the input of users through surveys and customer care calls is vital to ensure that the sample you see for feedback isn’t self-selected to be different from your primary user base.

The vocal, self-interested and blind minority

If you read the MyBroadBand forums, you would be justified in getting the sense that there is widespread outrage at the very thought of Acceptable Use Policies around the excessive use of uncapped broadband  accounts. Comments like “if  I can’t download 600GB of data a month it’s not truly uncapped” are arguably technically accurate, but reflect an immature, self-interested viewpoint willfully blind to the broader  issues  of sharing of a common resource, cross-subsidies and the economics of the business.

Fortunately, this is probably only 10% (9% + 1%) of an already selected target market. (Not all broadband users are aware of MyBroadBand let alone read the forums.)  The ISPs as a whole all seem to realise this and have politely worded acceptable use policies explaining the primary concern for the internet experience of all.

The rise of co-operative internet pools?

I don’t want to share an uncapped internet pool with users who feel 600GB a  month is reasonable. My tongue is only very slightly in cheek when I ask what sort of social life a user must have if he or she is using 600GB of content per month.

I wonder whether there is potential for co-operative broadband pools to exist. An ISP would charge a fee for service, billing,  support, infrastructure  setup and so on, and seek to achieve the lowest cost bandwidth for the expected volumes for each month (or other period  as appropriate to negotiate bandwidth and data transfer arrangements). Users would share in the bandwidth pool, earning credits for low usage which  can be used to offset periods of higher usage. This would allow users to have heavy months, provided they also had  lighter months. On average, all users should get a similar deal. This might require the pool to have several smaller, homogenous  sub-pools.

In many respects this is similar to how medical schemes in South Africa operate (but not how medical  schemes are perceived to operate). It is also similar to the idea of a mutual insurers, where there are no shareholders taking profits but rather all policyholders collectively share in the fortunes of profits of the company as a whole. Islamic Finance has an insurance-alternative called Takaful – under the most direct model, the operator takes an expense charge and asset-based  performance fees, but does not participate in the insurance profits or losses resulting from claims experience.

The service  and  ISP offers should not be primarily about buying small amounts of bandwidth, overselling it and hoping it isn’t all used. The model should be about providing internet services, and charging a fee (including a  good profit margin) for services, and trying to provide  a balanced internet experience for all users in line with their expectations and willingness to pay.

I think these internet co-operatives would accept few 600GB per month members. It’s easier in the digital age to stop your neighbour’s cows eating all the lucerne.

Show me where to sign up. I’m in.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

Join the conversation

1 Comment

  1. I have been thinking about this post for the last 2 weeks. I think there a huge parallels between “uncapped” bandwidth and electricity supply (and the need to load shed when demand exceeds supply)

    The main difference is that electricity did not start as “capped”, so everyone assumes that there is no social need to moderate electricity consumption. The primary lever that ESKOM then has is economic (the price we pay) and then draconian (load shedding). During the crisis, where there were direct consequences of over-use, I am sure electicity wastage was front of mind. But it seems load shedding is a thing of the past, and human memory of suffering is short!

    My idea for the electicity crisis was to use social peer pressure: For each suburb, post a list (on the internet, at the police station) listing the last month’s electricty usage by street address, sorted from highest to lowest. The stigma of being a semi-social outcast because of continuos excessive demand should drive average consumption down. Not too different from a co-operative structure.

    A different approach would be needed for industrial users although forcing publication of MWH usage in annual financial statements as part of triple-bottom-line reporting could achieve a similar effect

Leave a comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.