A green light for usage-based billing at Time Warner Cable.

Time Warner Cable announced its intention to expand its usage-based billing system for broadband beyond southern Texas, and is now considering new pricing tiers that will emphasize usage levels over broadband speeds, according to CEO Glenn Britt.

Appearing at the industry-sponsored Cable Show in Boston, Britt suggested consumers can “save money” opting out of unlimited broadband with its Internet Essentials program, which provides a $5 discount for customers who agree to keep their usage below 5GB per month.  The company is now also considering additional service tiers that will offer different usage allowances at progressively higher prices.

Britt insisted the company will retain the option of unlimited use service, but did not specify whether that would be sold at the same price customers currently pay for the cable company’s Internet service.

Federal Communications Commission chairman Julius Genachowski yesterday told cable industry executives he supports usage-based pricing, making it unlikely the FCC will intervene if companies substantially raise broadband pricing.

In 2009, consumers and elected officials protested the cable company’s earlier experimental foray into usage pricing which would have tripled the price of unlimited broadband service to $150 a month. The company quickly relented after customers picketed the cable operator in Rochester, N.Y., and Greensboro, N.C., in a campaign coordinated by Stop the Cap! The cities of Austin and San Antonio, Tex. also made their opposition clear through public meetings and input from local officials.

Phillip "Is this 'innovation' or more 'alienation' from Big Cable" Dampier

While Federal Communications Commission chairman Julius Genachowski pals around with his cable industry friends at this week’s Cable Show in Boston, observers could not miss the irony of the current FCC chairman nodding in repeated agreement with former FCC chairman Michael Powell, whose bread is now buttered by the industry he used to regulate.

The revolving door remains well-greased at the FCC, with Mr. Powell assuming the role of chief lobbyist for the cable industry’s National Cable and Telecommunications Association (and as convention host) and former commissioner Meredith Attwell-Baker enjoying her new office and high priced position at Comcast Corporation, just months after voting to approve its multi-billion dollar merger with NBC-Universal.

Genachowski’s announcement that he favors “usage-based pricing” as healthy and beneficial for broadband and high-tech industries reflects the view of a man who doesn’t worry about his monthly broadband bill. As long as he works for taxpayers, we’re covering most of those expenses for him.

Former FCC chairman Powell said cable providers want to be able to experiment with pricing broadband by usage. That represents the first step towards monetizing broadband usage, an alarming development for consumers and a welcome one for Wall Street who understands the increased earnings that will bring.

Unfortunately, the unspoken truth is the majority of consumers who endure these “experiments” are unwilling participants. The plan is to transform today’s broadband Internet ecosystem into one checked by usage gauges, rationing, bill shock, and reduced innovation.  The director of the FCC’s National Broadband Plan, Blair Levin, recently warned the United States is on the verge of throwing away its leadership in online innovation, distracted trying to cope with a regime of usage limits that will force every developer and content producer to focus primarily on living within the usage allowances providers allow their customers.

“I’d rather be the country that developed fantastic applications that everyone in the world wants to use than the country that only invented data compression technology [to reduce usage],” Levin said.

Genachowski’s performance in Boston displayed a public servant primarily concerned about the business models of the companies he is supposed to oversee.

Genachowski: Abdicating his responsibility to protect the public in favor of the interests of the cable industry.

“Business model innovation is very important,” Genachowski said. “There was a point of view a couple years ago that there was only one permissible pricing model for broadband. I didn’t agree.”

We are still trying to determine what Genachowski is talking about. In fact, providers offer numerous pricing models for broadband service in the United States, almost uniformly around speed-based tiers, which offer customers both a choice in pricing and includes a worry-free usage cap defined by the maximum speed the connection supports.

Broadband providers experimenting with Internet Overcharging schemes like usage caps, speed throttles, and usage-billing only layer an additional profit incentive or cost control measure on top of existing pricing models.  A usage cap limits a customer to a completely arbitrary level of usage a provider determines is sufficient. But such caps can also be used to control over-the-top streaming video by limiting its consumption — an important matter for companies witnessing a decline in cable television customers.  Speed throttles are a punishing reminder to customers who “use too much” they need to ration their usage to avoid being reduced to mind-numbing dial-up speeds until the next billing cycle begins. Usage billing discourages consumers from ever trying new and innovative services that could potentially chew up their allowance and deliver bill shock when overlimit fees appear on the bill.

The industry continues to justify these experiments with wild claims of congestion, which do not prevent companies like Comcast, Time Warner Cable, and Cox from sponsoring their own online video streaming services which even they admit burn through bandwidth. Others claim customers should pay for what they use, which is exactly what they do today when they write a check to cover their growing monthly bill. Broadband pricing is not falling in the United States, it is rising — even in places where companies claim these pricing schemes are designed to save customers money. The only money saved is that not spent on network improvements companies can now delay by artificially reducing demand.

It’s having your cake and eating it too, and this is one expensive cake.

Comcast is selling broadband service for $40-50 that one research report found only costs them $8 a month to provide. That’s quite a markup, but it never seems to be enough. Now Comcast claims it is ditching its usage cap (it is not), raising usage allowances (by 50GB — four years after introducing a cap the company said it would regularly revisit), and testing a new Internet overlimit usage fee it literally stole from AT&T’s bean counters (a whopping $10 for an anti-granular 50GB).

In my life, all of the trials and experiments I have participated in have been voluntary. But the cable industry (outside of Time Warner Cable, for the moment) has a garlic-to-a-vampire reaction to the concept of “opting out,” and customers are told they will participate and they’ll like it.  Pay for what you use!* (*-at our inflated prices, with a usage limit that was not there yesterday, and an overlimit fee for transgressors that is here today. Does not, under any circumstances, apply to our cable television service.)

No wonder Americans despise cable companies.

Michael Powell, former FCC chairman, is now the host and chief lobbyist for the National Cable & Telecommunications Association's Cable Show in Boston. (Photo courtesy: NCTA)

For some reason, Chairman Genachowski cannot absorb the pocket-picking-potential usage billing offers an industry that is insatiable for enormous profits and faces little competition.

Should consumers be allowed to pay for broadband in different ways?  Sure. Must they be compelled into usage pricing schemes they want no part of? No, but that’s too far into the tall grass for the guy overseeing the FCC and the market players to demand.

Of course, we’ve been here and done this all before.

America’s dinosaur phone companies have been grappling with the mysterious concept of ‘flat-rate envy’ for more than 100 years, and they made billions from delivering it. While the propaganda department at the NCTA conflates broadband usage with water, gas, and electricity, they always avoid comparing broadband with its closest technological relative: the telephone. It gets hard to argue broadband is a precious, limited resource when your local phone company is pelting you with offers for unlimited local and long distance calling plans. Thankfully, a nuclear power plant or “clean coal” isn’t required to generate a high-powered dial tone and telephone call tsunamis are rarely a problem for companies that upgraded networks long ago to keep up with demand. Long distance rates went down and have now become as rare as a rotary dial phone.

In the 20th century, landline telephone companies grappled with how to price their service to consumers.  Businesses paid “tariff” rates which typically amount to 7-10 cents per minute for phone calls. But residential customers, particularly those outside of the largest cities, were offered the opportunity to choose flat-rate local calling service. Customers were also offered measured rate services that either charged a flat rate per call or offered one or two tiers of calling allowances, above which consumers paid for each additional local call.

Consumers given the choice overwhelmingly picked flat-rate service, even in cases where their calling patterns proved they would save money with a measured rate plan.

"All you can eat" pricing is increasingly common with phone service, the closest cousin to broadband.

The concept baffled the economic intelligentsia who wondered why consumers would purposefully pay more for a service than they had to. A series of studies were commissioned to explore the psychology of flat-rate pricing, and the results were consistent: customers wanted the peace of mind a predictable price for service would deliver, and did not want to think twice about using a service out of fear it would increase their monthly bill.

In most cases, flat rate service has delivered a gold mine of profits for companies that offer it. It makes billing simple and delivers consistent financial results. But there occasionally comes a time when the economics of flat-rate service increasingly does not make sense to the company or its shareholders. That typically happens when the costs to provide the service are increasing and the ability to raise flat rates to a new price point is constrained. Neither has been true in any respect for the cable broadband business, where costs to provide the service continue to decline on a per-customer basis and rates have continued to increase for consumers. The other warning sign is when economic projections show an even greater amount of revenue and profits can be earned by measuring and monetizing a service experiencing high growth in usage. Why leave money on the table, Wall Street asks.

That leaves us with companies that used to make plenty of profit charging $50 a month for flat rate broadband, now under pressure to still charge $50, but impose usage limits that reduce costs and set the stage for rapacious profit-taking when customers blow through their usage caps. It also delivers a useful fringe benefit by keeping high bandwidth content companies from entering the marketplace, as consumers fret about their impact on monthly usage allowances. Nothing eats a usage allowance like online video. Limit it and companies can also limit cable-TV cord-cutting.

Fabian Herweg and Konrad Mierendorff at the Department of Economics at the University of Zurich found the economics of flat rate pricing still work well for providers and customers, who clearly prefer unlimited-use pricing:

We developed a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their own future demand. We showed that loss-averse consumers are biased in favor of flat-rate contracts: a loss-averse consumer may prefer a flat-rate contract to a measured tariff before learning his preferences even though the expected consumption would be cheaper with the measured tariff than with the flat rate. Moreover, the optimal pricing strategy of a monopolistic supplier when consumers are loss averse is analyzed. The optimal two-part tariff is a flat-rate contract if marginal costs are low and if consumers value sufficiently the insurance provided by the flat-rate contract. A flat-rate contract insures a loss-averse consumer against fluctuations in his billing amounts and this insurance is particularly valuable when loss aversion is intense or demand is highly uncertain.

Applied to broadband, Herweg and Mierendorff’s conclusions fit almost perfectly:

1. Consumers often do not understand the measurement units of broadband usage and do not want to learn them (gigabytes, megabytes, etc.)
2. Consumers cannot predict a consistent level of usage demand, leading to disturbing wild fluctuations in billing under usage-based pricing;
3. The peace of mind, or “insurance” factor, gives consumers an expected stable bill for service, which they prefer over unstable usage fees, even if lower than flat rate;
4. Flat rate works in an industry with stable or declining marginal costs. Incremental technology upgrades and falling broadband delivery costs offer the cable industry exceptional profits even at flat-rate prices.

Time Warner Cable (for now) is proposing usage-based pricing as an option, while leaving flat rate broadband a choice on the service menu. But will it last?

Time Warner Cable (so far) is the only cable operator in the country that has announced a usage-based pricing experiment that it claims is completely optional, and will not impact on the broadband rates of current flat rate customers. If this remains the case, the cable operator will have taken the first step to successfully duplicate the pricing model of traditional phone company calling plans, offering price-sensitive light users a measured usage plan and risk-averse customers a flat-rate plan. The unfortunate pressure and temptation to eliminate the flat rate pricing plan remains, however. Company CEO Glenn Britt routinely talks of favoring usage-based pricing and Wall Street continues to pressure the company to exclusively adopt those metered plans to increase profits.

Other cable operators compel customers to adopt both speed and usage-based plans, which often require a customer to either ration usage to avoid an overlimit fee or compel an expensive service upgrade for a more generous allowance.  The result is customers are stuck with plans they do not want that deliver little or no savings and often cost much more.

Why wouldn’t a company sell you a plan you want? Either because they cannot afford to or because they can make a lot more selling you something else. Guess which is true here?

Broadband threatens to not be an American success story if current industry plans to further monetize usage come to fruition. The United States is already falling behind in global broadband rankings. In fact, the countries that lived under congestion and capacity-induced usage limits in the last decade are rapidly moving to discard them altogether, even as providers in this country seek to adopt them. That is an ominous sign that destroys this country’s lead role in online innovation. How will consumers react to tele-medicine, education, and entertainment services of the future that will eat away at your usage allowance?

Even worse, with no evidence of a broadband capacity problem in the United States, Mr. Genachowski’s apparent ignorance of the anti-competitive duopoly’s influence on pricing power is frankly disturbing. Why innovate prices down in a market where most Americans have just one or two choices for service? Economic theory tells us that in the absence of regulatory oversight or additional competition, prices have nowhere to go but up.

To believe otherwise is to consider your local cable operator the guardian angel of your wallet, and just about every American with a cable bill knows that is about as real as the tooth fairy.

Genachowski

On Tuesday, Federal Communications Commission Chairman Julius Genachowski said that he generally supports data caps and tiered broadband pricing plans. The chairman’s comments came during an interview at the Cable Show with former FCC Chairman Michael Powell, now the top lobbyist with the National Cable and Telecommunications Association.

Genachowski has remained consistent in his cautious support for “industry innovation” that includes usage-based pricing, with a caveat providers should not exploit that at the expense of consumers.  But consumer groups like Free Press already believe usage caps, particularly on wired broadband services, are already bad for consumers, exploit a marketplace duopoly, and are worthy of investigation by the agency.

“All the evidence shows that caps on wired broadband platforms like cable make no sense. They don’t affect network congestion, even in the rare instances where congestion actually exists on these systems,” says Free Press policy director Matt Wood. “Cable companies use them to penalize their subscribers and discourage them from using innovative services that compete with cable TV.”

Free Press reminded Genachowski of Comcast’s recent actions which exempted its own video content from usage caps, while leaving them in place for competitors.

“Comcast’s recent actions show both the harms of these caps and the lack of any legitimate reason for them,” noted Wood. “[Now] Comcast changed course and suspended caps temporarily in all but a few markets — but promised to start overcharging any users there who exceeded these arbitrary limits.”

“The FCC has turned a blind eye to this competition problem. If it wants to see experimentation in pricing that actually benefits consumers, we need a competition policy that creates more experimenters.”

Verizon encourages customers to pig out on wireless-delivered streaming video.

Despite claims of a looming data usage crisis created by insufficient wireless spectrum, Verizon Wireless is introducing a new app that will encourage customers to find and watch streaming video on their mobile devices.

Viewdini premiers today on the Android platform, and Verizon hopes customers will use it to hunt down their favorite videos from Netflix, Hulu Plus, mSpot, and Comcast Xfinity, all from the Verizon Wireless app.

“We are just seeing a hunger for people wanting to watch video,” Verizon Wireless CEO Dan Mead said in an interview with AllThingsD. “I think this will capture the audience’s imagination.”

If customers use it to stream bandwidth heavy video on a tiered data plan, Verizon will also have the customer’s attention when the bill arrives.

Viewdini, considered one of Verizon’s “key product launches” for the year, does not amount to much on examination. The service does not host videos, it merely indexes them from other videocentric websites. The app will be exclusive to Verizon Wireless, but is not the company’s first foray in the competitive video streaming marketplace.

The Verizon Video app offers streamed video entertainment, but with a twist. Many titles offered by Verizon Video cannot be accessed while on Wi-Fi and require the company’s 3G or 4G network to watch, which counts against your usage allowance.

Mead

There is no indication yet whether Viewdini will have similar restrictions.

While Mead claims the company has several early warning indicators for customers approaching their monthly usage cap, he admits the company hopes to make additional revenue from customers who choose to exceed their allowance and buy additional data.

“We look at it as great flexibility for customers,” Mead called that choice.

While Verizon joins other wireless carriers in calling urgently for additional wireless spectrum, its marketing department does not recognize any wireless data shortage, and continues to introduce new products that encourage their customers to use an increasing amount of data, from which Verizon admits it will earn an increasing percentage of its revenue.

Foreshadowing Bill Shock?

T-Mobile is suspicious about the value of forthcoming family shared data plans likely to be introduced by its larger competitors AT&T and Verizon Wireless later this year.

Andrew Sherrard, senior vice president of marketing for T-Mobile announced the company would not jump on the family data bandwagon, preferring to leave the current model of individual data plans for each device in place:

Some of our competitors are backing away from simple, unlimited data and moving to family shared data plans. But would this approach actually deliver a better value to consumers?  Do families really want to keep track of each others’ data consumption? We don’t think so. Just imagine mom’s email is suddenly unavailable because her teenage son watched an HD movie on his phone, consuming the family’s data allotment.

T-Mobile believes that consumers today do not want a ‘one size fits all’ approach to shared family data plans, nor would they benefit from that model.  So, what is the right way to price data for customers who want affordable, unlimited access to what, unfortunately, is a limited resource?

Here’s how we see it:

Data plans should be flexible and affordable. At T-Mobile, customers have the option of only paying for the amount of data each member of the family believes they will need. Customers can choose affordable no-annual-contract data for tablets and other data-only products they share – paying every month or buying in daily or weekly installments.

Data should be worry-free. With our unlimited data plans, there is no surprise data cap or bill shock. Customers simply pay each month for the amount of high-speed data they select and (in contrast to our competitors) T-Mobile customers can continue to use mobile data on their device at reduced speeds after they reach their limit without incurring overage charges.

Customers who pay more, should get more. T-Mobile smartphone customers with 5GB or 10GB data plans also get our Smartphone Mobile Hotspot feature included. This means, with a capable T-Mobile smartphone (most are), customers can power up to five Wi-Fi enabled devices with fast, 4G data. So rather than needing to account for each device on a shared family data plan, customers can use their existing data plan to power multiple devices, while still saving hundreds of dollars annually.

T-Mobile has adopted a traditional usage cap model that provides a set usage allowance but imposes no overlimit fees. Subscribers who exceed their allowance have their wireless data speeds reduced to levels resembling dial-up for the remainder of their billing cycle.

Verizon Wireless’ recent announcement it would kick customers grandfathered on unlimited use wireless plans to tiered data plans with overlimit fees has created controversy and has angered some Verizon Wireless customers. T-Mobile’s marketing strategy could draw some disaffected customers from larger carriers.

T-Mobile ultimately believes a shared data plan can create havoc on families trying to control their shared allotment of data for each month. Without careful coordination, consumers may find substantial overlimit fees on their wireless phone bills when they exceed their allowance.

FCC Chariman Julius Genachowski spent the day hobnobbing with cable industry executives at the Boston Cable Show. In an interview with CNBC, Genachowski defended usage-based pricing, claiming it will bring lower prices to light users, spur “innovation” and enable consumer choice. Verizon Wireless customers on the cusp of being thrown off their grandfathered unlimited data plans may have a bone to pick with the FCC chairman about how innovative and enabling such policies have on them. Genachowski also suggests his controversial Net Neutrality policy is working, despite recent attempts by Comcast to exempt its content from the company’s usage cap and the wireless industry toying with toll-free data for preferred partners. Genachowski had little to offer consumers in the interview, instead suggesting his deregulatory stance on “innovation” will eventually benefit them.  (5 minutes)

Netflix and consumer groups like Free Press are unimpressed with Comcast’s announcement they plan to experiment with an increased usage cap in some markets and temporarily eliminating it in others.

A Netflix spokesperson issued a statement that says the company has dodged the real issue: discrimination against its traffic, which counts towards whatever Comcast usage cap the company eventually settles on, and doesn’t count towards Xfinity TV, which the cable company owns.

“Increasing the data cap is a small step in the right direction, but unfortunately Comcast continues to treat its own Internet delivered video different under the cap than other Internet delivered video,” says the Netflix statement. “We continue to stand by the principle that ISPs should treat all providers of video services equally.”

Free Press and Stop the Cap! share the belief the company’s usage caps are arbitrary and unnecessary and should be eliminated completely.

“Comcast has never had any legitimate reason to cap its Internet customers, and today’s announcement of new overage charges is just another example of the cable giant’s efforts to discriminate against and thwart online video competition,” said Free Press policy adviser Joel Kelsey. “Data caps are not a reasonable or effective way to manage capacity problems, which are virtually non-existent for Comcast.”

Kelsey also believes Comcast is still trying an end run around Net Neutrality.

“While the move to increase its caps is overdue, the notion that Comcast would charge an exorbitant rate for additional bandwidth — while continuing to exempt its own traffic under its Xbox deal — illustrates that Comcast is really trying to discourage subscribers from experimenting with online video alternatives,” Kelsey said. “We call on Comcast to drop the caps and these exorbitant overage fees entirely.”

Panera Bread installed free Wi-Fi years before Starbucks got around to it, trying to boost customers in between breakfast, lunch, and dinner.  The experiment worked, according to USA Today, but now Panera has a new problem: their Wi-Fi networks are clogged and customers won’t leave to make room for others.

Panera executives say the company connects 2.7 million sessions a month at its 1,565 locations nationwide.  The result is Wi-Fi that slow to a crawl, overloaded with dozens of customers trying to get online at the same time. The problem has gotten even worse since wireless phone companies began usage capping and throttling their customers. That brings data-hungry people to Panera for the free Wi-Fi, but they don’t always stay for the food.

Now Panera is considering rationing its Wi-Fi service and giving priority to its most-frequent visitors who belong to the company’s MyPanera loyalty program, rewarding them with extra time on the network or prioritized traffic that forces non-members onto slower connections.

That could discourage casual visitors and those not purchasing food to look elsewhere.  JiWire, which sells ads on Wi-Fi networks, estimates 55% of those using free in-store Wi-Fi are searching for a faster connection than their wireless phone company provides. If Panera forces them to use slower speed connections, they may go somewhere else.

Panera, like coffee shops and other eateries, all face the same challenge: how to discourage the freeloaders who spend hours occupying tables and seats without buying anything while not alienating the customers that do buy and appreciate the wireless Internet connection as a free perk.

As wireless carriers continue to charge more for less service, those challenges are expected to only grow in the coming months.

USA Today visited Panera Bread to find out whether customers went for the food or the free Wi-Fi.  (2 minutes)

Ben Silverman, founder of Electus and former co-chairman of NBC Entertainment, talks on Bloomberg TV about the migration of entertainment programming delivery to web-based outlets, and how the “big boys” like Comcast will have considerable control about how, where — and how much you will pay to watch. (5 minutes)

Comcast today announced it was incrementally increasing its 250GB usage cap by 50 additional gigabytes per month as part of a new trial, the first allowance increase since the company started the cap in 2008.

But before so-called “heavy users” celebrate, the company is also announcing it will test overlimit fees for customers who exceed the new 300GB cap.

Cathy Avgiris, Executive Vice President and General Manager, Communications and Data Services, Comcast Cable:

We’ve decided to change our approach and replace our static 250 GB usage threshold with more flexible data usage management approaches that benefit consumers and support innovation and that will continue to ensure that all of our customers enjoy the best possible Internet experience over our high-speed data service. In the next few months, therefore, we are going to trial improved data usage management approaches comparable to plans that others in the market are using that will provide customers with more choice and flexibility than our current policy. We’ll be piloting at least two approaches in different markets, and we’ll provide additional details on these trials as they launch. But we can give everyone an overview today.

The first new approach will offer multi-tier usage allowances that incrementally increase usage allotments for each tier of high-speed data service from the current threshold. Thus, we’d start with a 300 GB usage allotment for our Internet Essentials, Economy, and Performance Tiers, and then we would have increasing data allotments for each successive tier of high speed data service (e.g., Blast and Extreme). The very few customers who use more data at each tier can buy additional gigabytes in increments/blocks (e.g., $10 for 50 GB).

The second new approach will increase our data usage thresholds for all tiers to 300 GB per month and also offer additional gigabytes in increments/blocks (e.g., $10 per 50 GB).

In both approaches, we’ll be increasing the initial data usage threshold for our customers from today’s 250 GB per month to at least 300 GB per month.

In markets where we are not trialing a new data usage management approach, we will suspend enforcement of our current usage cap as we transition to a new data usage management approach, although we will continue to contact the very small number of excessive users about their usage.

Tell Comcast to drop the padlock on your broadband connection altogether.

The change comes at the same time Comcast is under fire for allegedly giving preferential, cap-free treatment to its own video content through an Xbox video game console app.

Comcast has followed AT&T’s pricing, testing a new overlimit fee of $10 for each 50GB increment customers exceed their allowance.  While not outrageous on a per gigabyte basis, the minimum charge of $10 is steep, especially considering Comcast pays only pennies per gigabyte to move traffic.

Stop the Cap! urges Comcast customers to use the occasion to demand the company suspend its unnecessary and arbitrary usage cap altogether.

The best approach for consumers is the one Comcast plans for markets not subject to a trial of their latest Internet Overcharging schemes. Namely, leaving the overwhelming majority of Comcast customers alone while informally reaching out to the tiny minority of customers the company feels are consuming data at levels that create significant problems for other customers on their network. With Comcast’s near-universal adoption of DOCSIS 3 technology, those problems are rarer than ever.