Finance

Next Fear: Regulators Nix Usage Pricing

Analysts See Uncertainty in the Face of Title II Reality 5/11/2015 8:00 AM Eastern
TakeAway

Pay-as-you-use broadband pricing is seen by some as inevitable, by others as unlikely under Title II.

Even as online video threatens to clog broadband pipes as more and more users turn to Netflix, Hulu, Amazon and any other number of over-the-top offerings, regulatory pressures could keep cable operators from pricing high-speed Internet service based on the level of customers’ usage.

 

Usage-based pricing has always been a controversial issue. Time Warner Cable created a firestorm in Texas in 2009 by merely suggesting the notion of charging customers based on their bandwidth consumption (the company reconsidered). The cable company worked around the controversy a few years later, offering lower bandwidth users the opportunity to save money while keeping charges constant, a practice that other MSOs adopted as well.

 

But as the number of devices has increased — consumers don’t just watch video on their laptops anymore as smartphones and tablets are becoming the preferred vehicles for watching video on the go — so has the demand for bandwidth.

 

Netflix alone chewed up about 35% of all Internet traffic in 2014, and usage is growing, according to Sandvine. To keep up with demand, cable and telco providers have had to invest heavily in infrastructure to keep the data pipes humming.

 

SEEN AS AN EVENTUALITY

 

Operators have always contended that it’s only fair that users who eat up the most bandwidth should pay for it. And analysts have been counting on the eventual move toward usage-based pricing as a means to counter losses from a declining video subscriber base.

 

BofA Merrill Lynch senior media & entertainment analyst Jessica Reif Cohen, speaking during the “Money Models and Media: Financial Analysts on the New Digital Economy” panel discussion at last week’s INTX in Chicago, said usage-based pricing is “inevitable,” and broadband providers would eventually go the way of electric and water utilities, charging customers based on the amount of bandwidth they consume.

 

“How can you use broadband and not charge for it like electricity or water?” she said. “Now with all the open devices, you have to have some sort of usage-based pricing.”

 

Wells Fargo Securities managing director Marci Ryvicker added, “As more video goes OTT, the only thing to off set the loss of video revenue is to increase high-speed data fees.”

 

Evercore ISI Group media analyst Vijay Jayant also said he believes usage-based pricing is coming, but that it will be used as a last resort by operators.

 

Jayant said he thinks usage-based pricing will be reactive rather than proactive. “When things get bad enough on the video side, you will have this arrow in your quiver,” he said. “I don’t think it will be Comcast.”

 

But MoffettNathanson principal and senior analyst Craig Moffett cautioned that while usage-based pricing may be inevitable, it may not be possible based on the current regulatory regime. With Title II regulation of Internet service expected to take hold in June, operators may be hamstrung in their ability to increase rates on their most profitable, and some say most essential, service.

 

“Title II is pretty clearly a price regulation framework,” Moffett said, adding that the question isn’t whether broadband prices will be regulated but to what degree.

 

Moffett noted the Federal Communications Commission has said it would look at usage-based pricing on a case-by-case basis so that it is not harmful to the over-the-top video business. But by its nature usage-based pricing would penalize heavier users of bandwidth, who are typically OTT video users. That, he said, proves the agency is “predisposed to reject usage-based pricing plans.”

 

FCC chairman Tom Wheeler has been steadfast in his determination to keep the Internet open and has said he would not tolerate any action that would appear to limit access to broadband.

 

He noted that during the process of reviewing the Comcast-Time Warner cable merger, the industry had shifted, with broadband subscribers finally outnumbering video subscribers in the second quarter of 2015.

 

“We recognized that the industry had changed and we saw concrete evidence of the new business models made possible by high-speed data,” Wheeler said in a speech at INTX. “We recognized that broadband had to be at the center of our analysis; video was an application that flows over networks supplied by owners of facilities and others that use the networks. That has far greater implications for the industry at large.”

 

Wheeler wouldn’t say it, but many analysts believe that what killed the Comcast-Time Warner Cable merger in the eyes of regulators was the fear that with the added bulk of Time Warner Cable, the combined company could crush other ISPs and content providers.

 

FEAR OF ISPs CRUSHING RIVALS

 

“It didn’t really matter if Comcast ever demonstrated any intent; it was sufficient that they had the capability,” Moffett said. “That’s a telling framework. It’s clearly about the interconnection market.”

 

Moffett added that he doesn’t think regulators would have the same concerns with the AT&T-DirecTV merger, expected to pass muster in June. But it may have an effect on any future deals Charter Communications attempts.

 

“It presents a really interesting antitrust challenge,” Moffett said of possible Charter combinations. “It’s not clear that [the merger] wouldn’t have been a problem for the FCC if it was smaller than it is today. They can’t allow someone to get as big as Comcast already is. It really is a di_ cult antitrust conundrum for the DOJ. My guess is that they will have to approve a combination to someone materially smaller than Comcast.”

 

Time Warner Cable, which has about 10.8 million customers compared with Comcast’s 22 million, has been a target of Charter in the past. And Charter has expressed an interest in Bright House Networks, which it offered to buy for $10.4 billion in April. That deal was contingent upon the Comcast-TWC deal getting approval, but CEO Tom Rutledge has said part of its purchase agreement was that it negotiated in good faith with Bright House if the TWC deal was scuttled.

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