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).

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.

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?

(This post was also published in U.S. News & World Report.)

But the fact that we astonish ourselves everyday with the latest jaw-dropper in wireless telecommunication doesn’t mean it will always be thus. Nobody has a crystal ball when it comes to predicting how wireless media will be used down the road.

But we do know that legislators and regulators in Washington will have a big impact on the pace and direction of wireless innovation through their management of electromagnetic spectrum—what was called the “airwaves” long before Apple or Google or Verizon were on the scene.

Spectrum is scarce—that is, the amount of information that can be pushed through those metaphoric airwaves is limited by economics and the state of technology. So most economists support auctioning spectrum to the highest bidder in order to make sure it ends up in the hands of those who value it most. Indeed, many have favored it ever since Nobel laureate economist Ronald Coase came up with the idea a half-century ago.

But the market for wireless networks, while competitive, has two clear industry leaders—Verizon and AT&T. And some telecom analysts argue that consumers would be better off if the auctions were set up to favor smaller companies, perhaps keeping the two industry leaders out of the game entirely.

We think the potential costs of such discrimination against the giants outweigh any plausible benefits. In fact, it’s hard to think of a market in which the old saw—don’t fix it if it ain’t broke—fits better. Usage on wireless networks has been exploding—including usage by low-income groups and minorities. At the same time, charges for both voice and data use have been falling even as reliability and geographic coverage have been improving.

The risk here is that freezing the industry leaders in place while giving competitors indirect subsidies (in the form of less-than-competitive prices for spectrum) would slow innovation. Indeed, both of the industry leaders are racing to acquire the spectrum to broaden access to “4G” service—the sort needed to watch video without hiccups and to seamlessly manage a host of other sophisticated smartphone and tablet functions.

But the Federal Communications Commission, which has the last word on most mobile regulation (unless Congress pulls rank), has other priorities. It is apparently inclined to throw sand in the gears of Verizon and AT&T in the name of increasing competition.

In response, the House Republicans have introduced a bill that would limit the FCC’s discretion on spectrum auctions, giving everybody equal opportunity to participate in any auction. That strikes us as a reasonable place to start, since it makes sense to place the burden of proof on those who think discrimination against large firms in spectrum auctions would do more good than harm. Moreover, the “proof” in question should be practical, not theoretical—actual experience in which discrimination in auctions of government resources has served the interests of consumers.

Spectrum allocation—like so many issues that falls under the rubric of economic regulation in Washington—is excruciatingly boring for almost everybody except the policy wonks who toil in the blogosphere and the lawyers/lobbyists/consultants who build country homes on the proceedings. But ignorance here is not bliss. We’ve all had a great ride on wireless technology over the past few decades. Some bad decisions now, though, could take much of the wind out of its sails.

(This post was first published on U.S. News & World Report.)

The AT&T deal drew the wrath of both the Justice Department and the FCC, which ultimately proved fatal. Does a similar fate await Verizon?

Ah, you say – there’s no real comparison. Unlike the proposed AT&T/T-Mobile merger, Verizon’s acquisition doesn’t involve the acquisition of millions of subscribers from a competitor, increasing market concentration in the wireless market.

But the deals do have one big thing in common: In both, the primary objective was to cope with the looming scarcity of spectrum. For without more bandwidth, neither carrier will be able to deliver on the promise of whiz-bang wireless broadband services such as high definition movies anytime, anywhere.

To be sure, the problem here is not precisely a shortage of spectrum per se, but a shortage created by the wasteful allocation of spectrum today. If Washington were so inclined, it could free up a ton of spectrum for more valuable uses. That includes spectrum now warehoused by government for low-value tasks and spectrum assigned to commercial interests – notably local TV stations – that no longer make much use of it. The process would be pretty simple: auction the spectrum to the highest bidders (perhaps with a share of the proceeds going to legacy holders), and then allow it to be traded like any other valued resource.

This is an old, but important, idea, one first suggested by Nobel economics laureate Ronald Coase back in 1959. And it’s one that has taken on greater urgency in recent years, both because the technology of spectrum-hungry broadband mobile has arrived in the form of tablets and smartphones, and because Washington desperately needs revenue. (We’re talking tens of billions here.) But the politics of spectrum allocation remain gridlocked, as competing interests push and shove for advantage.

So AT&T and Verizon, the number one and two players in the American wireless market, resorted to end-runs around the problem – that is, to buying spectrum from other carriers or merging to make more efficient use of the partners’ combined holdings. If the AT&T/T-Mobile combination had survived the legal gauntlet, it could have become the largest U.S. wireless provider, with as much as one-third of the market. But the emphasis here is on the word “theory.” The merger might or might not have reversed T-Mobile’s sinking fortunes – which is why its parent company, Deutsche Telekom, has signaled its intent to leave the U.S. market, with or without a merger deal.

The upshot is that it’s far from self-evident that AT&T would have remained first in subscribers for long in a post-merger market. Verizon’s rollout of 4G, the holy grail of mobile excellence, is expected to cover more than 200 million Americans by the end of this year — compared with roughly 70 million for AT&T. Moreover, the proposed Verizon deal includes cross-marketing with the cable companies’ retail stores, yet another advantage in this most visible of consumer markets.

But the merger succumbed to implacable opposition from the trustbusters at Justice and the micromanagers at the FCC. Both agencies argued that the merger would give AT&T more latitude to raise prices. And neither apparently put much weight on AT&T’s need for additional spectrum if it is to offer viable competition for Verizon in a 4G world.

If this were 1951 instead of 2011, a time when self-satisfied American mega-companies like GM set the pace for global industrial innovation, we’d have more sympathy for the government’s tilt against market concentration. But as the Verizon gambit makes clear, this is anything but a static contest. AT&T and Verizon are living in uncertain times in which they must run to stay in place. That doesn’t mean the risk of monopoly power is as dead as the Oldsmobile. But it does mean that discretion in managing markets really has become the better part of valor.

As we see it, Washing has three options. The first is to drastically limit what firms like Verizon and AT&T can do to improve their service offerings, with obvious short-term consequences in terms of slowing the roll out of 4G. The second is to break through interest-group gridlock and leaven competition in the wireless market with a lot more spectrum – the best option, surely, but probably a political non-starter at the moment. The third option, and the probably the best under the circs, is to look favorably upon telecom deals that promise more efficient use of currently available spectrum on the premise that the vitality of innovation means more to consumers than the potential downside of greater market concentration.

Does that mean giving free passes to the telecom giants? Hardly. But it would mean a change in priorities at Justice and the FCC in which the agencies used their legal leverage to minimize concentration in regional wireless market without undermining the potential for more efficient use of spectrum.

The Department of Justice has come out with guns blazing in an effort to stop the $39 billion AT&T/T-Mobile USA merger. But is it really in the interest of either the antitrust bureaucracy—or the consumers they are supposed to represent—to put the kibosh on this one?

There’s a legitimate dispute here. On one side are folks (like us) who believe that the merger’s likely benefits—faster introduction of new technology to meet the exploding demand for mobile broadband—far exceed the risks associated with greater market concentration. On the other side are those who believe that moving from four big national carriers to three would mean the end of serious price competition in the wireless industry.

Before engaging in a full-blown legal battle, we think it would serve the interests of the Justice Department to see if its concerns could be met without a trial. For one thing, there’s a real possibility that the trustbusters could lose —the judge in the case has shown in the past that she is no rubber stamp for the government. For another, a trial means that both company’s plans will be put on hold, a prospect that could prove costly to consumers, workers and the telecoms.

T-Mobile USA is running just to stay in place. It lost almost a half-million contract customers in the first quarter of 2011. And though it managed to replace most of them, the bulk of the newcomers were less lucrative subscribers recruited though resellers. Moreover, T-Mobile’s corporate parent, Deutsche Telekom, isn’t about to bankroll a rescue. The German communications giant has made it plain that it won’t invest more to sustain its American presence. Indeed, by the time a trial is over, a much-weakened T-Mobile may simply be unviable as a standalone entity.

Does AT&T have anything to give to satisfy the government? AT&T’s CEO Randall Stephenson is on record that the company is prepared to divest some assets, reducing its share of the business in some markets. That ought to open the door for a deal. The top 25 local wireless markets, served by all the major carriers along with smaller wireless companies eager to buy market share with low prices, are already so competitive that the merger would have little material effect. But divestitures in smaller markets ought to go a long way toward assuaging genuine concerns about market concentration.

We think serious settlement discussions are the way to go. Duking it out in court could lead to a winner-take-all outcome in which the only certain loser is the public.

(This post was also published on Forbes.com.)

But Netflix can’t succeed without a lot of help from its partners in the digital supply chain. The company is only as good as the programming it offers. And content owners are apparently inclined to drive a harder bargain these days: Netflix paid a whopping nine times as much for streaming rights in the second quarter of 2011 as it did the same quarter a year earlier.

More relevant here is Netflix’s rapid shift from being a supplier of rental DVDs by mail to video-streaming delivery on demand. The company last month separated its DVD-by-mail service from its streaming business by creating a DVD-only subscription and raising the base price for the combined service by nearly 60 percent, a move that raised the ire of many subscribers.

Netflix increasingly depends on the telephone companies and cable companies to deliver entertainment via broadband Internet to computers, TVs, and mobile devices such as the iPad. Indeed, at some periods of the day, Netflix video streaming constitutes almost 30 percent of all Internet traffic in the United States during peak periods. So it’s not surprising that the company is butting heads with Internet service providers—think everybody from Verizon Communications to Cox Communications to Time Warner Cable—over the issue of how the costs of streaming are covered.

To date, suppliers of wireline (as opposed to wireless) broadband have generally used the salad bar model: consumers pay a fixed monthly fee for all they choose to download. But that’s changing. AT&T and Comcast are now charging according to usage above monthly caps.

Netflix is crying foul: the last thing it wants is for subscribers, who buy their entertainment from a dozen vendors, to be counting bytes. But can the company make a case for regulatory intervention?

In principle, maybe. But it’s not easy to demonstrate that broadband caps are anticompetitive. More precisely, it is far from obvious that the shift away from flat-rate pricing reflects an attempt to increase revenues that would not be possible if there were more competition among Internet service providers.

Most of the cost of providing Internet services reflects the cost of building the massive networks of cables and switches that carry the digital traffic. When a network isn’t fully utilized, the cost of delivering another e-mail message—or, for that matter, all 86 episodes of “The Sopranos”—is next to nothing. Hence flat-rate pricing, in which users share the network costs with fixed monthly payments but pay nothing extra to watch another hour of James Gandolfini making mayhem, is easy to justify in economic terms.

Well, it’s not that simple. Internet providers must design their systems to deliver high-quality signals at peak-use periods. Indeed, no form of content is more sensitive to congestion slowdowns than streaming video. So the most efficient pricing system would be one that charged extra for service at periods of peak demand, reflecting the reality that a good portion of network capacity is only intermittently needed.

Internet providers haven’t tried peak-load pricing, most probably because they believe that residential customers would find it both confusing and unfair. In fact, they fear that alienating subscribers by using any approach to tying prices to how much system capacity is used (or when). And while we can’t say for sure why they’re just now moving toward “two-part” pricing in which customers pay a flat rate for the first big dollop of bytes and then pay extra for greater use, our best guess is that the alternatives look worse. They must somehow find ways to pay for explosive increases in use by some customers as they join the rush to entertainment via video streaming—but without increasing monthly bills for more modest users.

That’s not how David Hyman, Netflix’s general counsel, sees it. He argues that competition in Internet service is inadequate and that the providers are using the growing demand for video streaming as an excuse to raise total charges.

That’s a hard case to sell. If ISPs really have market power and are itching to exploit it, why switch to a pricing structure that’s sure to draw the attention (and ire) of a deep-pockets, high-profile company like Netflix?

A more plausible argument is that Netflix’s success has led the ISPs to covet a piece of their streaming-video business, and they’re using discriminatory pricing to gain a competitive advantage in selling entertainment. Hyman notes that the systems of AT&T and Comcast exempt their own video-streaming programming from bandwidth caps, giving users a financial incentive to avoid third- party vendors such as Netflix.

Should this be allowed? The policy debate about Internet discrimination has focused on access—allowing outside content providers to use the network without paying discriminatory fees to the service provider—which is not in question here. The issue is really whether a broadband provider should be permitted to charge users by the byte but waive the fee for viewing content it is selling in competition with Netflix (or Hulu, You Tube, or others.).

Much, we think, turns on the practical impact on competitors and consumers, which under current pricing schemes doesn’t appear large. For example, AT&T is charging $10 for 50GB, which amounts to less than 20 cents for a typical standard-definition movie. And that cost only kicks in beyond the 150GB cap per month, which is enough for roughly 300 hours of programming via the Internet. (High-definition programming uses more bandwidth; just how much more depends on the degree of digital-code compression.)

Of course, caps could be reduced, and fees for use above the cap could be raised, which would have a greater impact on competitors. So it makes sense for the Federal Communications Commission to keep an eye on Internet providers’ pricing schemes. But there’s a cost to intervention—at best, the hourly fees for battalions of regulatory lawyers, at worst deterrence to innovation. Therefore, we think that the bar should be set pretty high. In particular, price discrimination should only be the government’s business, if other content providers are put at a significant disadvantage, and consumers (as opposed to content providers) suffer as a result.

Netflix, we’re rooting for you—but not at the expense of hobbling innovation on the Internet.

(This post was also published on CNET.com.)

The FCC Chairman explained that the ruling would “spur investment in mobile broadband and promote competition.” We’re unconvinced. There is always a significant price to pay for this sort of detailed regulation: Rate-setting is a messy business that is guaranteed to keep an army of lawyers, lobbyists and economists fully employed. And that may be only the beginning.

Consumers might enjoy lower rates in the short run, if they’re lucky – but face a real major risk of lesser service in the long run. If the tariffs prescribed are below the levels needed to cover the fully allocated costs of maintaining the networks, the smaller carriers would have an incentive to free-ride on the majors’ existing investments rather than making their own. What’s more, the obligation to share the wealth in the future would reduce the larger carriers’ incentives to add capacity – in the end, actually undermining competition.

True, there’s always the chance that, left on their own, the big guys will abuse their dominant position. But as The Economist recently pointed out (and as we recently echoed), such hypotheticals are better addressed by the antitrust laws if and when they arise.

Remember when you mostly used the Internet for shopping, email and looking up stuff like the name of Sandra Bullock’s coolest movie (Speed, co-starring Keanu Reeves)? Maybe you still do. But if you’re young, or anxious to have something to talk about with your teenager, chances are you now spend a lot of time on sites like YouTube, Facebook and Skype. What’s more, most of the content (measured in bytes) is bandwidth-hungry video “streamed” in real time — not words, music and photos downloaded for perusal at your leisure.

A sea change in Internet use? More like a tsunami that’s reshaping how, where and when we get our entertainment. But it’s going to take a lot of capital, along with some fresh thinking about how to recoup that investment, to make it happen. More ominously, it’s going to take a lot of self-restraint on the part of policymakers, who will be caught in the crossfire as content providers, telecom companies and consumers fight for bigger slices of the pie.

The long heralded, but long delayed, integration of TV and the Internet is finally upon us. In the two hours between 8:00 and 10:00 PM, Netflix streaming movies and TV shows account for one-fifth (not a misprint) of all the Internet bandwidth being used in the United States. And that’s not the half of it. True Internet TV is about to go mainstream.

One reason is that the technology is catching up with the vision: TV manufacturers are introducing sets with easy access to the Internet built in. Want to watch The Devil Wears Prada? Tonight’s network shows? Or maybe a cricket match, live from New Delhi? All that programming is available on the Internet. And with the new TVs, you’ll be able to buy it on demand just as easily as you buy clothes and books on your PC. Indeed, it will soon be practical for anyone with a broadband connection to bypass cable and satellite TV entirely, watching whatever they want, when they want it, via the Internet.

Burgeoning access to video on wireless devices promises to be equally disruptive, since most of the streaming video available on computers can also be seen on smartphones and tablets. The only constraint is access to fast wireless networks. And that probably won’t remain a constraint for long: Morgan Stanley predicts that video usage will rise 66-fold between 2008 and 2013 in the United States, by the latter year representing two-thirds of all wireless data traffic.

So, what stands between consumers and video nirvana? For starters, Internet capacity will have to keep up with demand. When 20 percent of the Internet is being hogged by Netflix, fewer than one million Netflix subscribers are online. Imagine how many terabytes of data per minute will have to pass through Internet switches when 100 million Americans are watching TV (or playing high-definition video games) online.

What’s more, those terabytes will have to flow seamlessly: Nobody knows or cares if iTunes hiccups occasionally on music downloads. But a bottleneck lasting a few seconds could mar the experience of Avatar for tens of thousands.

Wireless system operators face the biggest challenges. In part that’s because they have so much further to go in building broadband capacity, in part because the all-you-can-eat data plans now favored by most customers will not work well as use becomes more skewed. That’s why AT&T and Verizon have switched to tiered pricing plans, and why every other wireless carrier in the U.S. will be dragged in the same direction.

Now, from technological and economic perspectives, keeping the Internet ahead of the video curve is surely manageable. There will no doubt be growing pains, as consumers face additional charges for bandwidth use and premium programming and content providers duke it out with the carriers over how to split revenue from Internet-based video. But there’s no good reason to believe the market won’t sort itself out.

No good reason, but maybe some bad ones. In particular, the government could easily be drawn into interest group battles masquerading as high-minded debates over the principles of telecommunications policy.

Should content providers be allowed to charge Internet service providers, the way they now charge cable TV and satellite companies? Or look at the carrier-content relationship from the other direction: Should service providers be allowed to charge content providers for premium video quality? Then, there are the questions raised by the fact that the lines between carriers and content providers are blurred. For example, should a wireless carrier that sells a lot of voice services be allowed to block (or charge) Internet phone companies that piggyback on their systems? Finally, should there be rules on how Internet service providers and wireless providers can charge you, the consumer, to recoup their huge investments?

No doubt, consultants in search of second homes will discover a zillion reasons for believing that, without intervention, the new, video-dominated Internet will generate windfalls for somebody. But we think the proper test is different: Are regulators likely to do a better job in promoting efficiency and growth in an industry characterized by rapidly changing technology and a need for tens of billions of dollars in capital to stoke the engine of progress?

The answer may turn on how markets evolve – in particular, whether any of the players manage to find ways to build durable barriers to competition. What does seem clear, though, is that the burden of proof should be on those who want regulation now, because the Internet TV revolution has finally arrived at your doorstep and could soon be in the palm of your hand.

(This post was also published on Forbes.com.)

Some consumers have long complained about Apple’s practice of locking iPhones so that they could only work on AT&T’s network, and Apple’s practice of deciding what applications could and could not be installed on the phone. They argue that the arrangement minimizes competition and limits their choices. But, as Bob Hahn and Hal Singer documented in a study published last fall [Download Here], the exclusivity agreement has likely spurred others to accelerate their own innovations and provided consumers with a wide range of smartphone alternatives, some of which are arguably superior to the iPhone.

If we’ve learned anything from the technology marketplace of recent years–change happens overnight and apparent dominance ends fast. Or, perhaps you’ve forgotten that AOL once seemed to have an iron grip on Internet access, Microsoft was the favorite target of antitrust zealots, Google was once just a mathematical expression, and Apple was a struggling afterthought in a computer market dominated by the Wintel partnership.

As Hahn and Singer wrote in September 2009: “Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers.”

And, from personal experience in the U.K. where the iPhone is sold by multiple carriers, we can tell you that having a choice in carriers does not deliver iPhone nirvana. There is something of an iPhone price war that makes the phone more affordable, but the user experience once you own the phone is not all that rosy. Reception is quite spotty in the countryside when traveling on trains, and dropped calls from London to Manchester are the rule rather than the exception. And that’s with a provider that’s reputed to have a very good network.

Still, our personal experience is not the key issue. What counts for decision makers is the relative benefits and costs of exclusive agreements. The primary benefits of banning an exclusive iPhone-type agreement would be greater price and non-price competition in the mobile device market. But competition in this market is already intense. From BlackBerry to Droid, new smartphones are coming out all the time. Even Google has produced its own branded phone. Are consumers better off with identical iPhones from every carrier or from a wide variety of smartphone models competing to distinguish themselves with an expanding array of capabilities, applications and designs?

Barring exclusive agreements carries significant costs. Carriers would have weaker incentives to aggressively promote new devices and ensure network quality. They would also have fewer incentives to innovate, such as developing new and better networks, like the “4G” networks that are coming online now to handle exploding data demands by consumers and businesses.

The real question for policymakers and the courts is the underlying structure of the market and whether a dominant player forecloses competitive choice or new entrants. In the smart phone market, it is hardly the case that the iPhone is dominant. Apple is a major player, but Research in Motion (BlackBerry) and Nokia outsell it. A long view of this market shows that competitors have risen and fallen over time–exactly what one would expect in a market that is changing rapidly. And the available choices are enough to make your head spin.

The mobile device marketplace in the U.S. is remarkably robust. That dynamism makes it easy for regulators to pick the right economic policy: namely, a light-touch regulatory approach that allows device makers and networks to innovate. Consumers will be better off if the courts appreciate the fundamental economics of the market and follow regulators’ lead. If they want continued innovation and expanding choices, this class action against Apple and AT&T is one that consumers should pray that they lose.

(This blog post was published earlier on Forbes.com.)

In 2007, Comcast, the giant cable company and Internet service provider, faced a marketing problem. A relatively small number of subscribers were hogging huge swaths of bandwidth, as they traded movies and music with others. (Some of the exchange was legal, some of it probably not.) Comcast responded by limiting upload speeds for customers using peer-to-peer networks.

After an investigative reporter from the Associated Press caught the company blocking a transfer of the King James Bible using BitTorrent (leading one blogger to ask, “Why does Comcast hate Jesus?” a couple of advocacy groups, Free Press and Public Knowledge, filed a complaint with the FCC. The agency ordered Comcast to stop.

Three years later, in Comcast v. FCC (PDF), a federal appellate court reversed the FCC’s order. But the court simply ruled that the FCC had overstepped its jurisdiction; it never addressed the legality of Comcast’s behavior.

Comcast, it’s worth noting, could have dealt with its peer-to-peer problem by switching to a pricing model that charged according to use. But the company feared that customers were wed to salad-bar-style pricing and would bolt at the change. Thus, apparently for competitive reasons, Comcast chose instead to block the offending traffic.

Now we can see why. Verizon, which is about to roll out its version of 4G high-speed wireless-data service, says it is planning to charge according to use. Verizon is worried that 4G will make it so convenient to move huge video files over wireless links that it would face a Comcast-like problem, if it didn’t charge by the bucket of data.

Meanwhile, AT&T has beaten Verizon to the punch, announcing that new iPhone customers will pay by the megabyte. (Existing customers with all-you-can-eat plans will be allowed to keep them.)

Verizon’s admission immediately brought forth criticism from the blogosphere. And the FCC wasn’t far behind: it is already preparing new regulations to prevent “bill shock“–you know, when dad finds out that little Jennifer has downloaded every episode of “True Blood” and “The Vampire Diaries,” and stuck him with a $400 cell phone bill.

The irony, of course, is that Comcast ran afoul of the FCC, in part, for failing to use tiered pricing to ration bandwidth. Now, apparently, Verizon has caught the FCC’s attention by deciding to charge according to usage.

The FCC may do no more than require carriers to notify customers when they’ve exceed their allotted megabytes–something AT&T is apparently planning to do, even without a nudge from Washington. Still, we’d much prefer that the FCC stay out of data-service-pricing decisions altogether, letting the carriers adjust to changing technology and market conditions.

Telecommunications markets don’t always get it right. But we doubt that the regulators could do better.

(This blog post was published earlier on CNET.)