In Depth On The Math: Net Neutrality
The Market Ticker - Commentary on The Capital Markets
2017-11-27 07:00 by Karl Denninger
in Technology , 7575 references Ignore this thread
In Depth On The Math: Net Neutrality
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Math-challenged people******me off, and Net Neutrality is one of the bigger ones -- so here we go.

Let's assume I'm an ISP.

We'll use nice round numbers to make this easy.

Let us assume I have 1Gbps of transport available to me on my network.  I sell service with "speeds" of 10 Mbps and put connections through a "traffic shaper" that delivers "up to" 10Mbps for each customer.

I sell 500 of these connections in your neighborhood.  I do this because I know, with a good degree of certainty (because I modeled it over the period of several months or years) that your average use as a home user will be under 2Mbps all the time, with occasional higher bursts.

Since 2Mbps x 500 = 1Gbps, I can support this userbase.  If you run a "Speed Test" you will usually get the full 10Mbps that you bought.  In rare circumstances you may not.  If I have my traffic shaper implement a "fairness algorithm" I can prevent anyone from being "starved" entirely -- but it is simply impossible for me to deliver 5Gbps (that is, 10Mbps to every one of my 500 customers at once) as that's 500% of what my network is capable of doing!

All is well for quite a while.

Then along comes some new and innovative service.  The "new and innovative service" charges $10/month (my Internet service to you costs $50/month, so I am collecting a total of $25,000 a month in revenue.)

But, that "new and innovative service" requires that you pull down 5Mbps for the entire time you are using it, and it requires that there be no jitter at all to work (in other words the 5Mbps has to be delivered from the time you start using it until you finish without exceptions, or your user experience will be unacceptable.)  In addition the rest of your household use will still be there, so that 5Mbps requirement is additive to the 2Mbps I already modeled on an average basis.

Now let us assume this "new and innovative service" becomes wildly popular and half the people on my network subscribe to it.

Suddenly my 2Mbps model is no longer any good.  It is now, for 50% of my customers during the 6:00 PM to 11:00 PM hours, 7Mbps.

My former network build-out required that I be able to deliver 1Gbps reliably.

Suddenly I need to deliver (250 * 7) + (250 * 2) or 2Gbps -- twice as much -- or everyone screams and calls me a schmuck, swear that I run a terrible ISP and more.

The facts are -- and I am speaking as a former ISP CEO and guy who has built networks for a living for roughly 30 years -- that attempting to "over commit" a network by 100%, that is, demand twice what it is capable of delivering, doesn't cause everyone to get half of what they want.  Due to how TCP works and the retries that are generated when buffers overflow everyone (not just the people who want to watch streaming) will get very close to nothing at all.  Some modern operating systems will attempt to "throttle back" their demanded bandwidth in an attempt to maintain operation but not all, and consumer devices such as cellphones, tablets, desktop and laptop computers, especially older ones, are some of the worst in this regard.

Let's assume (for simplicity) the following breakdown of my expenses monthly (simplified but good enough to make the point):

  • $10,000 is spent on bandwidth provision (directly proportional to that 1Gbps)
  • $10,000 is not proportional to the bandwidth provision (building, staff, power, routers for the most part, etc.)
  • $2,500 goes to promotion and marketing (attracting new customers, advertising, etc)
  • $2,500 is my profit (10% of sales -- not really all that good, but about right for a mature business.)

Your "demand" for that "new an innovative service" just doubled that first $10,000 line; it goes to $20,000.  In order to prevent you from destroying my network's performance for everyone I must spend the additional $10,000 yet "net neutrality" says I cannot charge those who caused this expense more money nor can I "rate-shape" or block the source -- even though they are in fact economic and network terrorists in that they know that they're stealing their infrastructure costs from others and in fact designed their business model to do so on purpose.

I am now losing $7,500 a month.  I have been forced to spend the $10 large by an outside firm I have no contract with or control over because if I don't my network has unacceptable performance for everyoneAgain, that outside firm solicited people to buy their service knowing that this would happen because they believe they can force me to EAT that additional $10,000 in cost.

Worse, the faster I grow my customer base or the more people adopt this "new service" the more money I lose because my loss is a percentage, not a dollar amount!

I thus have only the following options available to me if I wish to remain in business: 

1. Charge the "new and innovative service" for the performance it demands from my network that is beyond what was reasonably engineered for.  In other words they get charged a "tariff" to the extent they force network operation beyond engineered limits, and if they refuse then I shape their traffic so it conforms to both what my network was designed for and what nearly all other services on the Internet fit within.  This is something said "new and innovative" service might be able to mitigate.  For example Netflix could be "unlimited" to the customer only if you queued what you wanted to watch the night before, allow it to transfer the data to your computer or phone when everyone is sleeping on a rate-limited basis and thus there's no excess load impact on me as an ISP.  If you instead demand to watch now, and "now" is in the evening hours, you pay a buck an hour to Netflix (and Netflix pays the ISP that, less the handling costs) for your decision to impose the load at that particular time.  Note that if I charge back the $10,000 then Netflix is forced to raise its prices to $50 from $10 since the additional $40 in hard cost they tried to shove off on me per-customer gets thrown back at them.  How many customers does Netflix have at $50/month?  NONE!

2. Charge the user directly for the "burst" traffic on a metered basis.  In other words you have a 10Mbps link but if you consume a lot of data during "busy" periods you will get hit with a "demand" charge.  This is how the electric utilities work for commercial customers; you have a base charge and then a "demand" charge that applies to your heaviest power demand during periods of heavy use.  That charge is large because it is intended to recover the expense of being able to meet your extraordinary demand for electricity.  The market has deemed #2 unacceptable, period; note that the government is able to force this billing paradigm in the commercial power delivery market (and in a few areas in the residential market too) because electrical service is a government-granted monopoly.

3. Charge everyone irrespective of their use of said new service -- or not.  In other words I now have to be able to deliver the 2Gbps as an ISP but I can't charge on a differential basis for it based on who's making me purchase the additional capacity so I am now forced to charge everyone 25% more whether they use the new and innovative service or not.  In this case you pay for your neighbor's decision to subscribe to Netflix.  As a cable company I might get that from you in higher internet prices or higher cable TV prices but I have to get another $20/month from you somehow.  If you're wondering why $200 cable+internet monthly bills are now rather common and it's damn hard to get both under $100 a month even with basic cable, maybe you will finally realize that you screwed yourself with all your insane screaming because this is why it happened.

Net Neutrality effectively forced the ISP to do #3 -- Hastings got his $200 stock price because you have been robbed whether you are a Netflix subscriber or not.

Oh by the way, it's not just Netflix.  It's also Amazon (with their Prime Video), Hulu (their subscription service), Youtube "Red", Disney's newly-announced service coming online soon, MLB's "streaming" service and hundreds of new services yet to be developed and marketed.

Since nobody subscribes to all of these services yet all of them (plus the ones to come that are bandwidth hogs outside of the expected norm) will wind up in this position the odds are that even if you are a Netflix subscriber you're going to get robbed in order to subsidize someone else's subscription to something.

There are serious monopoly problems with "last mile" data provision, especially in America.  They were present in the 1990s (in places where we had multiple DS-1 providers in the 1990s, for example, the price was usually 1/2 to 1/5th of that where there was only one "choice"!) and are worse today for broadband where for most consumers there is exactly one option of like kind and quality.  But Net Neutrality does not address that problem because it can't; it instead imposes a forced-subsidy model on those who don't want a given service and makes the monopoly problem worse.

If you want an example in another "market" have a look at Health Care, where EMTALA (mandating "neutrality" of treatment of all emergency patients) is arguably one of the biggest causes of the last three decade's worth of 500+% increases in the "cost" of health care and "insurance", never mind the complete inability in many cases to get a price at all prior to services being rendered.  Tell me again about how "affordable" said "insurance" actually is if you don't qualify for some sort of subsidy....

Like this piece?

Click here -- it's available from Sarah -- called "The Other Side"
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James56287
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#2 is a great example in the utilities / commercial market. I worked with a client in the steel industry once. They used a tremendous amount of electricity to melt their steel in their furnace. (Imagine a couple of large electrodes creating a large open arc inside the crucible)

Guess what? Since utilities billed them higher rates during peak times, they primarily only turned that furnace on in the middle of the night. Problem solved.

If we allowed it, through differential billing for excessive utilization, the market could solve this problem. Really the only thing I think I'd like to see ISPs do is actually market their services to me as what they're designed for. In the above example, I'd like them to market it to me as something to the effect of "unlimited 2MBps, speeds up to 10 MBps on a metered / premium fee schedule". I figure if we were more honest about what the service really was, that'd go a long way.
Uwe
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Seems to me there's another ISP pricing model that would solve this. A base plan that caps the total transfer per billing period at some reasonable level that covers "normal" use. Go beyond that because you're using some new, bandwidth-hogging service and you get seriously throttled, or pay an overage, or buy a bigger plan. The mobile carriers do that, why shouldn't the land-line ISPs?

The guy who uses several TB per month should pay more than his neighbor who only uses a few GB, no?

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Tickerguy
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The problem with that James is that THE LAW has to ENFORCE everyone doing so honestly or the ISP that does will be out of business in an afternoon because everyone else will lie and slander them as being "terrible" when in fact they have at least the same capacity and maybe more!

Without the rule of law impartially coming down on those who scam there CANNOT be honesty in the market because refusing to lie leaves you bankrupt!

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Tickerguy
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Quote:
The guy who uses several TB per month should pay more than his neighbor who only uses a few GB, no?

Yes.

But the only way to do that is for there to be a means to hammer those who lie.

Until that's the case there is NO MARKET for such a service.

Which would YOU buy?

1. "50Mbps for $50!" The truth is that while you CAN burst to 50Mbps the ISP can only deliver 3Mbps to EVERYONE at once, and if you try to actually USE 50Mbps in the middle of the evening when everyone is streaming Netflix you'll get 5 -- maybe.

2. "3Mbps for $50, burstable to 50Mbps, single-service limit of 3Mbps with a 2 minute burst up to 50." This would actually be FASTER than the first service for everyone EXCEPT the Netflix customer, for whom it wouldn't work at all beyond SD. It is the same back end engineering as #1 but with a "fairness filter".

The problem is that nobody will buy #2 because the guy selling it will be called all sorts of names and slandered by the people selling #1 despite the fact that seller #1 can't deliver what he IMPLIED but didn't actually promise. Unless Seller #1 goes to JAIL for that #2 will never appear in the market because he can't stay in business for an hour by telling the truth.

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Mekantor
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With most of the damage already baked in, what will grow faster going forward, bandwidth capacity or video bitrate? H265 is squeezing pixels a lot more than h264, 3D was a dud. Can't really add more fps or pixels beyond 4k since no one can tell the difference. Will the need for extra capacity plateau while bandwidth grows?

Aquapura
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My spouse loves her streaming entertainment and I'm not going to change her mind on that. As for the costs I'm perfectly fine with a demand charge (example #2) to cover the ISP's costs. The convenience of streaming a movie "on-demand" is nice and I'm ok with paying a premium to save a trip to the Redbox or similar. My ISP (Xfinity) has a cap on monthly data after which I do get charged additional. Never had it happen but not opposed to that upcharge. Assume it's allowed per net-neutrality rules. Granted it isn't a true demand charge but it's something to help the ISP recover costs, no?
Jfms99
Posts: 224
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Msumelle, Ar
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Karl I appreciate this factual indepth explanation on Net Neutrality and how it works along with all it's implications.

Now, assuming the changes at the FCC go through, the big question is just how long will it take the ISP's to start changing the terms of contracts and offering new options to consumers. In that also is the wild card of what will companies like Netflix, Hulu, and Amazon do on their pricing?

How long can these companies continue to charge and try to absorb their costs as they are now? I can only assume that the implications for say Netflix and Hulu are that eventually they will have to adjust their pricing and that will have a huge impact on their subscriber base?

Amazon will be interesting to watch. As you have pointed out Karl, AWS is pretty much subsidizing and propping up Amazon as a whole. How is Amazon going to handle Amazon Prime. They already lose on Fullfillment alone, do you think they will have to break out and charge separately for their streaming service or do they raise the price of Amazon Prime?

The bottom line is those of us that use any of the main steaming services may well have to make one choice and that is it. Lots of questions and possibilities. It will be the Wild West coming I think.
Tickerguy
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Quote:
My ISP (Xfinity) has a cap on monthly data after which I do get charged additional. Never had it happen but not opposed to that upcharge. Assume it's allowed per net-neutrality rules. Granted it isn't a true demand charge but it's something to help the ISP recover costs, no?

No, that won't work because the data transport issue is quite a bit like electricity. You have 200A service into your house but I assure you that you CANNOT draw 200A * 240V (48kw) along with every one of your neighbors at once without the transformers and distribution lines coming into your neighborhood all tripping on overcurrent. The reason businesses have demand charges is that the parts of the grid that serve them ARE built to allow that, but boy-oh-boy does the user pay for it if they actually use it! We HATED this, by the way, at MCSNet because there was literally no way for me to shed load during the middle of the hot summer day without melting my computer gear. Unlike a guy running an arc furnace I couldn't choose to have all that stuff on only during the night shift!

At 3:00 AM nobody cares. At 8:00 PM (5:00 PM for electric power, especially on a 95 degree summer day!) everyone does.

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Johnnyb
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While this would be wildly unpopular, I think a better choice is to get rid of unmetered broadband access. This would make everybody better citizens. It is an exact mirror of the healthcare debate.

It would also mean that services would need to think about bandwidth before starting, because their customers would know that they have to pay for the bandwidth. It would also get rid of obnoxious web design, because no one wants to go to sites that cost them money.
Tickerguy
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Yep.

But the problem is that until you start enforcing the law when it comes to wildly untrue commercial claims NO SUCH MODEL CAN WIN IN THE MARKET.

It was bad in the 1990s. It's 100x worse now.

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Vernonb
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East of Sheol
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Amazing what people now expect for convenience. Makes me wonder if metered broadband will bring back the video rental store once people get a real cost of services bill tailored to their usage.

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Dhall1414
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DFW, Texas
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The crux of this issue is entirely due to the general ignorance (willing or not) of the general population regarding ISPs. Too many people think we all have a magic box that connects everything and they just don't care about the nuts and bolts. The people that aren't ignorant to the situation and are supportive of net neutrality argue that "all bits are equal" and they've bought into the fear-mongering that without NN there's nothing to protect the consumers from the big bad ISPs.

It would seem that, in the public forum, they've successfully been able to push the debate away from the cost shifting aspect (read communist) of it and focus on the possibility of the ISP blocking a source for the purpose of maintaining service, which they've extrapolated and twisted into surveillance and censoring by the government. A general rule of debate is you can't let your opponent shape the discourse, but unfortunately the entirety of the lame stream media is backing NN and those against NN and in a position to argue against and inform the public are not doing a good job.

Another thing I've noticed, and it may be different for y'all but of the people I know that support NN I've found their positions on similar topics to be out of sync. They say the internet is a utility but they won't consider charging like one for heavy users. They also are very supportive of increasing gas taxes, implementing a mileage based tax, and making 18 wheelers pay more to use the roads. It's almost as if to be a liberal you have to abandon consistency and completely embrace the "ends justify the means" mentality.
Tirant
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And had you not been intentionally deceptive in your advertising and over-committed your network, this wouldn't be a problem for you.

I agree that, as written, Net Neutrality is a horrible regulation, but I've absolutely zero sympathy for an industry built to leverage the ignorance of its customers.
Tickerguy
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Quote:
And had you not been intentionally deceptive in your advertising and over-committed your network, this wouldn't be a problem for you.

Oh really?

You have a reading comprehension problem and this is your first and last post. You come in here to run horse**** and your account typically has a half-life of MINUTES.

You're not the exception.

Your POWER FEED is overcommitted. So is your WATER TAP. Both "promise" you what cannot be delivered; you have a 200A power tap, but you AND ALL YOUR NEIGHBORS cannot draw 200A. Yet the UTILITY COMPANY sold you 200A of service.

If you and ALL YOUR NEIGHBORS all open all your water taps in the house at once you will have pressure COLLAPSE. Yet a few of you can do it. But not all at once.

So who was "intentionally deceptive"? You CAN have 50Mbps -- just not all at the same time, all the time.

Second, AS SOON AS YOU START LOCKING UP THE PEOPLE WHO MAKE FALSE CLAIMS LIKE ****ING TESLA, LIKE ****ING SPAMAZON, LIKE ****ING FACE****ER, LIKE ****ING GOOGLE, THEN you can talk to me about people making claims WITHOUT proper language to delineate the REAL limits of same. But only when you have JAILED OR EXECUTED all of the billionaires who have done this REPEATEDLY and with wild abandon, because if you DON'T do that first then NOBODY who has LESS resource can put all those facts in front of you AND REMAIN IN BUSINESS.

YOU -- you, specifically, you piece of ****, since you raised this, have sat back for THIRTY ****ING YEARS and let EVERYONE rip everyone off and done NOTHING about it.

NOW you bitch when it finally gets YOU.

Well, go suck it -- you can't cheat physics!


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Flyanddive
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Detroit
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That's only part of the issue, Comcast still intends to cost shift if NN falls. Into places they hold monopolies, obviously.

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Tickerguy
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Well, of course.

That's the point -- monopoly problems CANNOT be addressed by NN. They can be and have been, however, be made materially worse.

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Triddle
Posts: 14
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Oklahoma
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Hopefully Tirant wasn't the user that I've been in the "spirited debate" with that I mentioned to you on Twitter as I've linked not only the old NN article but this one as well. If so, he/she still doesn't get service utilization/optimization and likely never will. The world needs ditch diggers too though I guess...
Tickerguy
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Well I don't give a **** if he was or is. I know what ISP he was on, but that doesn't tell you much.

Let me point out that he was posting from an ISP he claims to detest. So how's that working out for him?

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Triddle
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Oklahoma
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LOL, sure do love a good old fashioned hypocrite. I'm a patient man, but I sure do lack it when it comes to willful stupidity.
Jfms99
Posts: 224
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Msumelle, Ar
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I was out a bit ago and turned on Rush Limbaugh and heard a sliver of the show. His topic today was Net Neutrality, my brief time listening told me that Rush as well a most of his callers have Zero Idea what Net Neutrality is, how it works, or the implications therein. I turned it off.

The MSM has totally misrepresented the facts on this whole thing and as a consequence few people have made any real attempt to understand it.

Perhaps if they understood they are subsidizing their neighbors internet for Streaming while they don't in the form of ever rising Internet Access rates they might get a clue.

It boils down to wanting something for nothing but in this case we are all paying for it. I tend to look at this as something Akin to Socialism/Communism.
Tickerguy
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Well, it would be "socialism" if the government ran the access (e.g. it was a public utility and thus there was no profit motive.)

Instead it's worst of monopoly behavior with an explicit government cudgel used to enforce it upon you.

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Click
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Incept: 2017-06-26

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Kick-ass post!

Really, no matter where I look I see the same racket. SSI, banking, stock market, politics, immigration and you name it. Big business. Yes. It's all rackets and frauds. Take banking, for example, what if 20% of depositors went down to their bank and attempted to withdraw all of their money? --- in cash? What a ****-storm that would create. And what about SSI? That's just one massive Ponzi scheme. Right? And all of those political big shots who promise to "end poverty" or "win the war on drugs" or "bring democracy to the Middle East" or " fix healthcare" or " make America great again!"...

Amazon, Walmart, Netflix and dozens of other companies all operate in cooperation with the Washington Doomsday Machine...

Here's the bottom line: I am going to die in a foreign country and so are you, because that's what America has been turned into. In fact, the America I grew up in is no more. It's totally gone. It's been replaced by a United Swamp. And the mostly free market and small government that my great grandpa grew up in was buried before I was born.

As a practical means of survival I'm stockpiling whatever I can for a little SHTF insurance. Also, as a practical way of life I'm going to enjoy the deflationary race to the bottom because once the bottom is reached a massive default is waiting. In other words, there's going to be a von Mises moment whereupon a Crack-up Boom occurs. And nobody really knows when that's going to happen. But when it does it's going to be epic beyond belief...

Uwe
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KD wrote..
Your POWER FEED is overcommitted. So is your WATER TAP. Both "promise" you what cannot be delivered; you have a 200A power tap, but you AND ALL YOUR NEIGHBORS cannot draw 200A. Yet the UTILITY COMPANY sold you 200A of service.

Absolutely. Up in PA, my house and the one next to it both have 200A service, for a nominal total of 96 kVA. Both are fed from single transformer. Guess what the transformer's rating is? 50 kVA.



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"I am free, no matter what rules surround me. If I find them tolerable, I tolerate them; if I find them too obnoxious, I break them. I am free because I know that I alone am morally responsible for everything I do." -- Robert Heinlein
Kgmqt
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Minnesota
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Most of this is caused by American's lack of understanding of basic math and economics. Many believe that NN will somehow give them the all you can eat buffet of internet for a fixed cost, but don't realize that that fixed cost is much higher than it should be, and they really don't need the service being provided.

This is the same with health care and the 'free' birth control issue. Because it is 'free' more end up getting it than really need it, or get a more expensive option. Because of the layers and everybody getting their cut it cost more in your premiums than if you just paid for it. Oh, and now everybody has a BC excise cost baked into their premiums if you want it or not.

The thing that pisses me off is getting my bill, and then seeing the 12 month promo pricing from my cable company. If they would just meet me in the middle I would be happy.
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