The following is an extract from the article, GOLIATH AT BAY, which was first published in Forbes ASAP, February 26, 1996. It is a portion of George Gilder's book, Telecosm, which will be published in 1996 by Simon & Schuster, as a sequel to Microcosm, published in 1989 and Life After Television published by Norton in 1992. Subsequent chapters of Telecosm will be serialized in Forbes ASAP.
"Perhaps most important, as Nathan Myhrvold explains, is the extension of the computer model of flat-rate pricing into the field of communications. When you buy a PC, you purchase its MIPS and bits essentially at a flat rate. The average cost per MIP or bit of memory you use is determined by how much you use the machine. The marginal cost is zero. As a result, people have a powerful incentive to use computers as intensively and creatively as possible."
"This flat-rate pricing effect--where incremental costs are essentially zero--largely explains the huge success of the general-purpose PC and the companies supplying it with software and peripherals. Faced with a zero marginal cost of incremental use, PC owners channel as much of their information processing, education and entertainment as possible through the PC. Flat-rate pricing makes the PC a dire threat to all contiguous industries and related functions."
"Similarly, on the Internet model, you will pay a flat rate for bandwidth. Again marginal costs will be zero. Average cost will respond to the extent of usage rather than to a Public Utilities Commission tariff or some per-minute charge. As Myhrvold points out, this approach will give you a tremendous incentive to exploit bandwidth as fully as you can, channeling as much communication as possible away from systems that charge incrementally and toward flat-rate systems. In the end, nearly all communications will gravitate toward the Internet model, and companies will prosper to the extent that they can ally themselves with this tremendous force of creativity and economy."