The Business Cases for Bandwidth Caps


Broadband Internet providers are slowly but surely phasing out the all-you-can-eat buffet.

But they’re using usage-based billing mechanisms for two distinct purposes: one’s a carrot, the other’s a stick.

Comcast’s approach falls in the latter bucket. As of Oct. 1, most of the operator’s customers in Tucson, Ariz., will be capped at 300 Gigabytes per month -- an increase over Comcast’s previous 250 GB ceiling -- while those on higher-speed tiers will get more to play with. What’s new is that customers who bust the caps will be charged $10 for every 50 GB they use beyond their limit.

It’s the MSO’s second market test for usage-based pricing, after Comcast initiated a 300-GB cap for all users in Nashville, Tenn., as of Aug. 1.

Only 1% or so of Comcast’s users are even close to nearing those limits, according to the MSO. So what’s the point?

Here’s the stick part: As bandwidth consumption continues to climb, driven by Internet video, ISPs need a way to keep a lid on overall traffic usage. Hitting users with fees if they’re way over the norm is one way to do that.

The FCC’s Net Neutrality Order not only explicitly gives the go-ahead for usage-based pricing -- it will actually accelerate the move to metered broadband, according to Sanford Bernstein senior analyst Carlos Kirjner.

“By preventing broadband service providers from discriminating by type of traffic, the order leaves them few alternatives to introduce differentiated services, and discriminating by amount of traffic, that is, caps and metered broadband, seems to be one of the few alternatives left,” Kirjner wrote in a Sept. 7 research note.

Comcast has used thresholds "simply to ensure that all of our customers were treated fairly and had a consistent and superior experience while using our high-speed data service," Cathy Avgiris, Comcast's executive vice president and general manager of Communications and Data Services, wrote in a blog post in May about the new data-usage management tests. But, she added, “We've never had any intention to limit the lawful use of the Internet or restrict our customers' ability to view online video.”

Now for the carrot: The second way ISPs are wielding usage-based pricing is to reach price-sensitive consumers without cannibalizing their current broadband businesses.

This is what Time Warner Cable -- which was stung by its stumble in usage-based pricing three years ago -- is doing with the optional cap-and-surcharge plans in Texas, offering a $5-per-month discount for plans capped at 5 GB.

Granted, 5 bucks off your cable bill isn’t a very sweet carrot. But it shows, directionally, where usage caps will play at the low end of the market.

As broadband growth plateaus, “we expect broadband service providers, cable and telcos, to increase feature- and price differentiation of their offers in an effort to drive further penetration,” Kirjner wrote. “In other words, they will introduce lower-priced offers to try to attract the last 30% or so of households who do not have broadband because they are price sensitive.”

Continued Kirjner, “To prevent existing customers from migrating to a lower-price, lower-margin plan, these lower-price offers will likely come with limited features, and we expect usage caps and metered usage will be among the limitations imposed by service providers.”

But back to the conspiracy theorists: Are broadband usage limits designed to thwart Internet video usage, because online video competes with pay-TV providers’ own packages?

No way -- in fact, Netflix is a great selling point for operators to upsell customers on faster tiers. Time Warner Cable features Netflix prominently in a new upgrade promo to broadband-only subs, offering them free TV for a year if they upgrade to 50-Mbps service.

Either way, you will pay some sort of premium for the privilege of ultra-fast and unlimited broadband video.