Why Metered Bandwidth Pricing Is Inevitable
Time Warner Cable is taking one for the team.
The cable operator is catching heat for daring to suggest that it’s fairer to charge for a shared resource — high-speed Internet access — based on how much of it you use.
As heard (misheard?) by populist politicians, anticable bloggers and ordinary consumers, that sounds like: Big Bad Cable Corp. wants to (a) gouge you and/or (b) ensure you never cut the cable TV cord by making it economically unattractive to watch online video.
Fundamentally, though, it’s a bad idea for ISPs to continue charging a single rate for all customers regardless of how many bytes they eat.
Why? Because usage is trending to currently unsustainable levels, as Internet video drives a huge explosion of traffic.
Global IP traffic will increase by a factor of six from 2007 to 2012, when different forms of video will account for nearly 90% of all bandwidth, according to Cisco’s Visual Networking Index research project. But Internet networks built 10 years ago were not designed for high sustained bit rates. The architectures back then assumed bursty access to Web pages (text and images) and e-mail traffic.
So massive upgrades are indeed going to be needed in the coming years to meet demand. Something has to give.
As Insight CEO Michael Willner wrote in his blog yesterday: “Opponents [of TWC’s billing plan] hang their hat on the argument that they deserve flat rate billing just because they always had it. That’s how companies — no — that’s how entire industries become obsolete. Refusing to change with the times is a recipe for disaster. Just ask the auto industry.”
Here’s where we come to the part where it’s fairer to reallocate pricing for tiers based on usage. Time Warner Cable COO Landel Hobbs has offered the lunch metaphor: “When you go to lunch with a friend, do you split the bill in half if he gets the steak and you have a salad?”
In other words, as customer usage profiles start to diverge dramatically, spreading costs across all subs is a very bad value for those who don’t use the Internet as much.
(As a side note, this rationale sounds similar to the case for a la carte programming: Why should I pay to subsidize my neighbor’s ESPN habit? Expect to see this issue continue to smolder or flare up in the next few years.)
TWC, to be sure, has made mistakes in handling what was already going to be a dicey issue.
For one thing, the multiple tiers and caps are much too confusing. They should have started with two plans: One capped at whatever, and a higher-priced unlimited plan. Instead it’s making customers do the math — not the friendliest way to do this, as Pali Research’s Rich Greenfield has pointed out.
Also, the company divulged its plans to expand consumption-based billing through BusinessWeek, rather than making a formal announcement, and customers were left without any info directly from the company about what to expect and when.
That’s because the MSO wanted the latitude to modify the tiers and terms as the tests evolved — as it did, in fact, do on Thursday. (See Time Warner Cable Tweaks Bandwidth-Billing Plans.)
But some of these P.R. pitfalls are an inevitable part of shifting to new pricing models. Which means every broadband provider in the United States, and even other countries where the norm is flat-rate all-you-can-eat broadband, owes Time Warner Cable a debt of gratitude.
JHAmelia commented:
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John Q commented:
I agree with dws. I was literally going to say exactly what he said. simply put the internet is not a resteraunt it is an all you can eat buffet. So if there isnt enough meat for everyone then that buffet chain should make more chains in the area or expand whats available. Why should we have to pay for something the companies didnt forsee like an increase in bandwith and an increase in video streaming. Technology is constantly changing and if they cant keep up they gotta pay for thier own shortcommings not the consumer.
dws commented:
To respond to the lunch comment made by TWC\’s COO…
If 2 people go to an all you can eat buffet and one of them chooses to just eat from the salad bar portion and the other spends the entire time at the meat carving station eating cuts of steak and prime rib (or whatever) and the buffet costs $10 per person, should the person that ate steak and prime rib be forced to pay more than their $10 share of the bill when it comes?
The choices are available to everyone equally to eat whatever is available to them, you should not be charged any diffently based on what you choose to eat or even how much you choose to eat…say if (using the same 2 people) one has 2 plates of food and one has 4…
Now I understand that if more people go to this buffet and choose to just eat at the carving station (or eat more plates of food) that the price may need to go up to cover the increased amount of more expensive food that is being consumed…but to have that price increase by almost 300% (for the same exact buffet, with the same quality, amount, and choices of food) would certainly put the place out of business…
TWC is going from an unlimited bandwidth package for $40 and is going to raise that to $150 ($75 + $75 capped overage fees) which is nearly 300% higher…
Corey commented:
Japan (jcomm) Using the same technology time warner uses has upgraded their systems at a one time $60-80 per home .. yet time warner wants an average of $100 or more per home (edit:PER MONTH!!:edit feature would be nice:) (to get the same unlimited service we have now) Also Time warner cable Made 4.2 Billion Dollars in 2008 on high speed data alone..and only spent 164 million to upgrade/maintain their networks.. that is a profit of 4 Billion Dollars… Please explain why we need to give them more money.
Michael commented:
@rk: TWC has always had tiered bandwith “capsâ€. These are the RR Lite, Standard RR, and RR Turbo. This hasn’t created any problems…..we’ve been fine with that. But why must these evidently rare internet bits be conserved? The internet is not some finite resource in which we all need to conserve the number of bits we use from the internet “poolâ€. You just can’t compare it to a natural resource utility like water, gas, or oil. In fact, I postulate the opposite. We shouldn’t be conserving our consumption of knowledge, entertainment and creativity, but rather find all means possible to utilize the internet for just such activities.
If bandwith is a problem then offer tiered speeds, throttle peak-time hogs, and build up your infrastructure, but don’t try to sell us on information tariffs as a solution. That we will NOT stand for!
Brian commented:
Proponents of Net Neutrality who mostly fall into this same camp as those against metered bandwidth argue from the position that the internet is the ultimate democratizing force to the masses. That this is the peoples' internet to which one of the commenters alludes. That private enterprise should not be allowed to infringe on that "right" to an open internet. Is not charging per usage ultimately the most equitable means of distribution? How do we expect to continue to attract capital needed to invest in building out tomorrow's internet if we don't allow those making the investment to seek optimizing their business models to recoup the costs? Does anybody really want the government to get involved in anything other than ensuring fair competion in the marketplace so that the operator whose price is out of line loses subsribers? This is a game of who blinks first. TWC just blinked. Others will too.
Pam commented:
They (TWC) have already had an \’unadvertised\’ two tiered service right along. I know of several people who have Roadrunner Accounts with a capped usage for much less than the $40. per month. The only way you can/could get it was to call and specifically ask for it. Raise the price of salad $2.00 per month and steak $7.00 and have done with it.
Eggman commented:
Cable operators do not charge according how much TV I watch. If they were logically consistent in their policy, they would not charge me for the amount of bandwidth I use. Their own TV legacy undermines their broadband pricing arguments.
Something else to think about: the same operators (e.g., TWC) are pushing their cable network programming online for their TV subscribers to view, all of which is free of charge and positioned as an \”entitlement\” for those who already pay for their TV service. But what if viewing online cable TV programming causes me to exceed my usage caps - will I be charged? If not, the operators are violating the principles of net neutrality (giving their own pnline content preference over other providrers). If so, the oerpators are violating the principle of entitlement on which they are so proudly building their next-gen online presence.
Interesting times….
Berbs9 commented:
Since we, the public, paid for the creation of the internet and should own a portion of it through our federalist government (that tries to act like its capitalist). We built the foundations, thus we should have a firm investment in the internet.
That makes it different from an AIG/Chevrolet situation, which is a company that built itself up and we are \”bailing\” it out, yet it seems we have more say in those companies than in the infrastructure we helped build. Why don\’t we charge internet providers for all the years the internet has existed and in return we will gladly all pay a $5 monthly fee to keep their servers up to date.
nando commented:
As everything becomes digital and docsis 3.X makes it the public I find it hard for TWC to claim that they need to make charge more. Currently twc already has governors on modems restricting abusers and HSD subscribers have peaked. Once analog is removed bandwidth will also be increased in system. Cablevision boost is a great model of how to create revenue; tier pricing in this case is just the best way to gouge the customer without improving services. To use Todd’s example this is one of reasons the auto industry failed - overcharging for goods with bad or no improved services. Another is poor planning why did TWC only build their plant to support so little?
rk commented:
Of course metered internet is coming - no different than other business models. Verizon and Sprint used to have unlimited datacards - now they limit at them at 5Gig per month with charges for excess. No one was able to stop the changes there.
When reclaimed water came to my subdivision, they had more than they knew what to do with and it was all you could use for a flat rate. Now as water is in short supply, they changed to metering for reclaimed water. Times change. So do pricing packages.
Furthermore, as Dish, Directv and other (such as Netflixs) have gone to web delivery of VOD cutting into the sub base of cable, of course, they need to limit the amount of data, figuring that their cable subs will not be downloading as much as the aforementioned others will be. That is most likely the real reason for limits.
Ashwin commented:
Dear Todd,
I don\’t agree with a lot of your comments
1. Is it a coincidence that TWC is introducing it only in areas where there is no (or little) competition?
2. Cable companies (and Telcos) have been claiming massive investments in their networks over the last three-four years inorder to get us really great broadband. Don\’t you see any dichotomy in companies claiming to have ten-year old networks, blazing new speeds, more money from consumers and high profits all in the same breath?
3. I fail to understand the basic math. If I have a 10MBPS down connection, and a 100GB limit (after TWC\’s revision - $75), I can use my connection for 22.22 hrs in a month at its rated speed before my cap runs out(downloading anything at 10MBPS constantly - 10000/(8 bits) = 1250Kbps. 100,000 MB/1.25Mbps = 22.22 hrs). If you offer such a speed, shouldnt you offer a higher limit as well. I understand if people download stuff for the entire month, it will be too much - but this is not even a day!
How can online video survive? Isnt this anticompetitive?
Todd Spangler commented:
@ bb: If you are familiar with the economics of bandwidth, you know the cost of backbone interconnectivity is only one component factoring into the total cost of delivering last-mile service. As I noted in the original post, Internet access networks were designed for low-bandwidth, asynchronous data types (web pages, images, email) and not for high-bandwidth, latency-sensitive applications like video. Upgrading the access networks will require ongoing investment as demand increases.
Tim commented:
what you fail to realize is that amount total downloaded is meaningless to time warner if I download 1 million gigs of data at .5 k a sec its a drop in the bucket its not the total amount downloaded that is capped by the infrastruture its the amount that can come down at the same time.
bb commented:
Good article except for the fact that everything in it is not true. US Internet growth has declined into the 40-60 percent per year range (which TWC\’s own numbers confirm), well below the 100 percent per year numbers used to generate some of the scariest predictions of doom.
Even as traffic increases, traffic costs on major Internet backbones have been decreasing by 50 percent a year—an obvious market signal that capacity is plentiful at the core and in no danger of \”unsustainable levels\”
Todd Spangler commented:
@ Tim: Yes, but multiply the usage of 1 million users and you get some very large numbers.
