Usage-based pricing, once a dirty word in the broadband business, is inching closer to reality as bandwidth-gobbling services continue to proliferate.
If the move lets operators tack on an extra monthly charge, that could help offset subscriber losses by bringing in new revenue and maybe opening up new ways to market to lower-income homes.
It also could raise the ire of regulators that don’t want to see broadband providers do anything to disadvantage online video services that compete against pay TV services.
Online video providers like Netflix, which grew its U.S. subscriber base to 43 million in the second quarter, and Hulu, as well as new over-the-top services like Sling TV and Sony’s PlayStation Vue, have driven growth in broadband usage, prompting responses from broadband providers.
And usage is growing. The top 15% of cable broadband users consumed 147 GB of data per month in 2013, rising to 389 GB per month by 2018 and to 1,520 GB per month by 2020, according to data from the Government Accountability Office.
CAPS, FEES ON THE RISE
Cable operators have already begun experimenting with usage-based pricing and caps. MoffettNathanson principal and senior analyst Craig Moffett, who produced an Oct. 13 report on the subject, estimates that 23% of pay TV subscribers are currently under plans that impose caps and overage fees.
Most of those subscribers are attributable to AT&T, but Moffett said another 36% of pay TV customers are in plans that impose caps but no additional fees, while 41% are in flat-rate unlimited plans.
The highly concentrated nature of broadband — about 55% of the market is held by three companies, Comcast, AT&T and Time Warner Cable — means those totals could quickly shift, according to Moffett.
Most operators with usage caps have set the bar high, at about 300 Gigabytes per month, a limit that originally no customer was ever expected to exceed.
But today that limit — the equivalent of watching five hours of online video per day — doesn’t seem to be far out of reach.
Time Warner Cable, for example, has said its mean average national data usage per customer is about 150 GB per month. For Comcast, that usage is about 40 GB per month, more than double the figure in 2013. But Comcast said about 8% of its broadband customers exceed the 300 GB limit, four times the number that exceeded the cap in 2013.
Comcast is testing overage fees — a $10 per month charge for an additional 50 GB of capacity or an extra $30 per month for an unlimited plan — in 14 different states, or about 12% of its footprint (including Alabama, Arizona, Florida, Georgia, Illinois, Indiana, Kentucky, Tennessee, Louisiana, Mississippi, Arkansas, South Carolina, California and Maine).
“If Comcast were to shift the rest of its customers to this new structure, another 21% of U.S. broadband customers would face overage fees, bringing the total to 44%,” Moffett wrote.
Comcast isn’t the first to implement overage fees, but it is so far the largest. Suddenlink Communications, Cable One and Mediacom Communications all have implemented caps and overage fees in the past.
Combined, those three companies have about 3 million basic-video subscribers, compared with 22 million for Comcast. Suddenlink earlier this year agreed to be purchased by Altice earlier this year, the European telecom firm that in September also inked a deal to buy Cablevision Systems (which does not have caps or overage fees). Whether Suddenlink drops its caps or Cablevision implements them — adding another 2.6 million video customers to the mix — remains to be seen.
THE COMCAST FACTOR
Moffett said he believes Comcast’s decision to test the usage-based pricing waters is significant.
“Comcast’s steps here are admittedly cautious and provisional,” Moffett wrote. “But its involvement at all is a sea change. For years, Time Warner Cable was left alone to do the heavy lifting, and without Comcast’s help, its early efforts came to naught. For investors, it is at last time for serious consideration.”
It also comes just as Time Warner Cable markets are set to abandon their usage-based pricing plans. As part of its $78.7 billion merger agreement with Charter Communications, which began backing away from usage caps in March, Charter has agreed not to implement those pricing plans for at least three years.
Not every analyst is convinced that usage-based pricing is inevitable.
Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said he has a mixed opinion of widespread usage-based pricing, primarily because of Charter’s stance and because he believes it’s simpler just to raise prices as speeds increase.
“Given cable’s ability to raise speeds quite significantly, even if they take pretty aggressive rate hikes, the price per Megabit of speed offered is likely to continue to plummet,” Wlodarczak said. “Where usage-based pricing does make sense is when operators want to offer a lower-speed, lower-priced [service] to reach lower per capita income households and having a very high usage cap for the rest of subscribers to capture the few percent of the people that tend to hog up massive amounts of bandwidth. I also think, if a lot of people run into caps and see their bills skyrocket, you run the risk of regulator intervention.”
The government is clearly paying attention. Moffett noted that the regulatory heat across the whole industry has intensified since Comcast withdrew its purchase of Time Warner Cable after it determined it would not receive FCC approval. Usage-based pricing also played a role in the decision to move toward Title II regulation of broadband. While the FCC has declined to take an exact stance on usage-based pricing, it has said it would look at the matter on a case-by-case basis.