We knew it was always come down to the question of what to do about online video.  Although the overwhelming majority of broadband customers still take some sort of video package (or simply don’t care enough about television to get one in the first place), there is a small, but growing number of people who are dispensing with video packages from cable and relying entirely on broadband video services to watch network and cable programming.

Hulu and Joost, along with limited fare from the major American networks, as well as video offerings from the CBC and BBC exclusive to residents of those countries, create the potential for a major problem for cable operators — what happens if people stop buying video packages.

Comedy Central's Video Streaming - Will it be available to non-cable subscribers for long?

Comcast and Time Warner, the nation’s largest cable operators, have plans to put a stop to the erosion in video subscribers before it gets serious — by seeing to it that they don’t get to watch free online video any longer.

Comcast’s On Demand Online and Time Warner’s TV Everywhere services are either in operation or will begin trials later this year.  Both seek arrangements with cable programmers (coincidentally many of which they also have an ownership interest in) to create a new authentication system to block non-video subscribers from accessing video content aired on those channels.  Cable subscribers who do take a video package will get in for free.

The video programming would still exist on various cable network websites.  Comedy Central would still have clips on comedycentral.com and CNN would still have their news clips at cnn.com.  But under the cable operators’ proposals, those clips would no longer be available to individuals who cannot prove they have a video subscription.

Currently, some 90% of Time Warner’s broadband customers also take a video package, and Time Warner can easily authenticate those subscribers with a type of “authorization key” which an online video player would seek for permission to play the programming.  Time Warner is also contemplating whether live streams of cable channels would also be a good idea.  Currently, cable operators routinely insist on prohibiting live streaming of the cable networks they carry.

Of course, the problem will come down to those who subscribe via satellite dish services or a smaller cable operator or telephone company video package.  Does this enforcement only occur on Time Warner and Comcast’s own broadband networks, or would it be widespread?

Multichannel News covered the Time Warner TV Everywhere trial:

Time Warner Cable is working with two major programming partners on its “TV Everywhere” initiative to make sure the Internet-video service is easy to use and scalable, said Peter Stern, the operator’s executive vice president and chief strategy officer.

Stern, speaking on a panel here at the Cable Show ’09, said the MSO is already working closely with two programmers — Turner Broadcasting System and another he did not identify — that will involve authenticating consumers “in a very straightforward way so they can get access to content.”

“To be honest, we’re still working it out in terms of the user experience,” Stern said.

The concept, which is being Comcast and Cox Communications, is to reinforce the cable TV subscription model, by providing that programming to paying customers over their Internet devices.

Stern pointed out that 90% of Time Warner Cable’s broadband customers are already paying for multichannel video.

“Those people are already entitled to watch this programming,” he said. “The big risk we have is, if we don’t offer this programming to them the way they want it, they’ll turn to piracy.”

Alternatively, if that programming is provided to them for free over the Internet, the risk is they’ll cancel their subscription service – with such “cord cutters” obtaining their media online.

Some basic principles Time Warner Cable is following in developing TV Everywhere are that consumers should “have choice in terms of the sites they can have access on,” he said. “That will be dictated by programmers, not the cable operators.”

Stern continued, “Not to say we’ll not have content on the [Time Warner Cable] RoadRunner site, but we’d be kidding ourselves if we thought we were the only site consumers should be able to access.”

Cable operators have always been concerned about “leakage” of valued cable programming to online streaming or piracy.  Cable programming currently charge subscription fees to cable operators for carriage on those systems.  Some, like C-SPAN or Current, amount to pennies per month per subscriber.  But others, particularly for sports programming, Fox News, basic movie channels, and other high-rated channels command enormous fees amounting to several dollars a subscriber per month each, whether the subscriber wants to watch the programming or not.  These costs are continually increasing.  Fox News, for example, leveraged very strong price increases for its news channel, as well as forcing a number of cable systems to pick up the low rated Fox Business Channel to receive discounts.  Viacom also routinely demands cable operators take additional networks they may not want to carry in return for discounts on the networks those operators do want.

It all gets passed on to cable subscribers in the form of rate increases every year.  With the increasing number of channels on a cable lineup, when a bunch demand rate increases, rates can spike significantly from year to year.  Nearly all have carriage contracts that forbid the cable operator from selling their network(s) on an a-la-carte basis.

With cable video pricing increasing, many subscribers downgrade their subscriptions to save money.  If a cable programming is giving away their content online, that creates a greater incentive for viewers to stop paying for video packages, and rely on their Internet connections instead.

Earlier this week, Time Warner CEO Glenn Britt reiterated that although the erosion of video subscribers isn’t a problem today, it could easily become one tomorrow.  He cautioned programmers who give their shows away for free online that a day of reckoning may be coming, when a cable operator is no longer willing to pay for networks that give everything away online.

Rupert Murdoch, chairman of News Corporation, which owns Fox News, supports the concept, according to Multichannel News:

News Corp. chairman Rupert Murdoch said that cable networks have to find a way to monetize the Web, before consumers begin to expect to get their content for free.

“The fact is with free content, people are used to it being free on the Internet,” Murdoch said. “Nobody is making any real money from the Web except search. We have to monetize it.”

The other controversy involves cable operators trying to limit video viewing by imposing usage caps or tiered pricing on consumers, limiting the amount of video they can consume online.  At the lower end of the caps proposed by Time Warner, viewing Hulu or Joost programming would be akin to “pay per view,” with fees of 50 cents or more per show in broadband costs, once one’s usage allowance expires.

Despite the propaganda campaign underway in the domestic broadband marketplace, especially among cable operators, the NY Times reported today that profits remain high for broadband service while costs for bandwidth, and the level of investment by those companies to provide it, is on the decline.

This comes in marked contrast to the public relations campaigns underway at some broadband companies, which seek to impose punitive caps, limited tiers, steep overlimit fees, and increase prices on residential broadband service.  As late as last week, Time Warner Cable sought to effectively triple the rate for their broadband customers in five cities for an equivalent level of service.  Road Runner subscribers paying $39.95 per month for service would now, under last week’s proposal, have to pay $150 a month for the same service.

The resulting firestorm of customer protest, and the involvement by Congress, temporarily sidelined Time Warner’s tiered pricing scheme, but company officials in the Triad region of North Carolina hinted strongly tiered pricing was coming back after a “customer education campaign” had been completed.

These plans to charge for above-average Internet use “are unjustifiable for almost everywhere in the country except for rural America,” Richard F. Doherty, the research director of the Envisioneering Group, a consulting firm that studies cable technology.

The Times report by Saul Hansell found that network engineers plan their networks based on peak potential traffic loads.

“All of our economics are based on engineering for the peak hour,” said Tony Werner, the chief technical officer of Comcast. “Just because someone consumes more data doesn’t mean they drive more cost.”

This belies Time Warner’s claims that light use customers might be effectively subsidizing heavier users.  In fact, the Times reports that the actual costs for Time Warner are identical whether a consumer watches 50 movies or doesn’t even use their connection that day.

The costs for upgrading networks is declining at an even steeper rate than StoptheCap! realized.  Comcast’s own reports to its shareholders now reveals the upgrade cost to manage the Internet growth Time Warner officials have been worrying about is an average of $6.85 per home to provide double the speed of existing service.  That’s a far cry from a 300% rate increase, per month, that Time Warner was seeking in lieu of punitive caps with substantial overlimit fees.

Costs are dropping even more rapidly with the implementation of DOCSIS 3, a new technology that increases capacity, dramatically raises speeds, and actually reduces expenses for cable systems, who currently have to face sub-dividing traffic congested neighborhoods.  In fact, Comcast told investors it will actually cost them less to provide 50 megabits per second connections than to continue the current level of service, at around 6 megabits per second.

This raises an even larger number of questions about why Time Warner, among other providers, needs to overcharge customers and penalize them for using their Internet connections with enormous overlimit fees that are possible with a tiered rate system, when their own bottom line would benefit from completing the upgrades without making any changes to customer’s bills or level of service.

Hansell also hints domestic broadband providers may be charging too much now.

Comcast has introduced a new 50-megabit-per-second service at $139 a month, compared with its existing service that costs about $45 a month for 8 megabits per second. Time Warner just announced it will charge $99 for 50 megabits per second [Editor’s Note: This service was to be capped at 150GB per month minimum, as per TWAlex].  By contrast, JCom, the largest cable company in Japan, sells service as fast as 160 megabits per second for $60 a month, only $5 a month more than its slower service.

Samuel Greenholtz, a retired manager from Verizon, offered this absolutely impenetrable thinking on why broadband providers needed to impose caps on customers and were forced to charge way too much for them:

While a tiered pricing structure may have been inevitable in the long run, if the corporate bashing horde stayed out of the way, the vast majority of users would have avoided paying more for additional capacity.  Time Warner Cable does give the politicians what they are looking for – more bandwidth availability for all of its subscribers.  Still, the lowest speed package is not going to be enough for most of the consumers – and so they will have to take the higher tier offerings — along with the new overage charges.  Had the MSOs been allowed to just cap excessive users, most of the subs would have continued to receive a reasonable amount of bandwidth at the same flat price.

Ironically, all of the illogic obsession with net neutrality will result in even more of a usage-based pricing scheme.  There will now be several layers of capping.  The anti-ISP crowd has actually created a more beneficial pricing system for these companies.  And there is certainly nothing unfair about this development.  But the clamoring for so-called equality resulted in an acceleration of the removal of the all-you-can-eat advantage for consumers.

What in the world is this man talking about, and why is he part of some so-called “expert network,” Gerson Lehrman Group?

Broadband Providers: How Low Can They Go?

The history of usage capping actually goes back into the earliest days of Internet service providers, providing both dial-up and broadband service in areas where network capacity simply didn’t allow customers to utilize unlimited bandwidth.  Some Time Warner customers in the midwest and central part of the country lived under “limits” for years, mostly due to lack of any viable competition.  The imposition of caps on customers has always been driven by the capacity argument, never by a more honest claim that lack of competition discourages significant upgrades, and allows a provider to limit usage to ensure a higher rate of return. Where competition exists offering similar types of service, caps and limits are much rarer, speeds are higher, and pricing is lower.  A provider that doesn’t regularly invest in upgrades to his network in a competitive marketplace will soon no longer be a part of that marketplace.

Today, a handful of major broadband providers are now colluding in a version of telecommunications limbo, with several watching each of the others “experiment,” to see how low a cap they can set before subscribers and public officials rebel.  Multichannel News columnist Todd Spangler literally wrote that “Time Warner is taking one for the team.”

The “corporate bashing horde” argument, which Greenholtz casually tosses out without any examples or proof, doesn’t hold water.  No group I am aware of has ever bashed the widespread deployment of broadband service from multiple providers.  Oh wait, there is one.  Those providers themselves when they attempt to squelch community cooperative broadband services or municipally-run wi-fi networks, run for the benefit of residents.

Greenholtz completely ignores the fact broadband service is almost entirely unregulated, and providers have always been free to set terms and prices.  Someone draw me a map where corporate critics have developed the leverage to force operators to impose usage caps and tiered pricing.

The net neutrality issue that comes into his argument stems from the Comcast controversy a few years ago, when the nation’s largest cable operator attempted to manage traffic on its network by “throttling,” or limiting the speed of customers using certain bandwidth intensive applications.  Comcast claimed they were primarily targeting peer-to-peer software, which allows users to exchange files with one another, during peak usage of their network.

But this came about at the same time several large corporate broadband providers were advocating for a new distribution system for the Internet, one that would potentially no longer provide an equal level of priority for data traveling across the Internet.  Opponents feared that broadband providers could discriminate or even throttle traffic that didn’t pay their asking price.  And then Comcast provided the net neutrality opponents with a real-world example of bandwidth throttling in action.

Comcast abandoned, at least for now, the bandwidth management approach that included throttling, and instead imposed a simple 250GB “limit” on residential accounts.  Those exceeding that amount of usage risked having service suspended.

Mr. Greenholtz fails to connect this event with any cogent argument or evidence that suggests multiple capped tiers were borne as a result of this controversy.  Indeed, until Time Warner “took one for the team,” other domestic broadband providers simply upgraded their networks to handle capacity issues and imposed no caps, or have simply asked residential users to limit their usage, mostly between 150-250GB per month.  Customers seeking more than that can purchase another account, move to a business plan, or switch to another provider, where available.  Curiously, the imposition and testing of lower limits has often been in areas where competitors either do not exist or cannot offer an equivalent level of service at the same price across an entire community.

But Greenholtz does say one thing that has been obvious to all of us: the Internet service provider is using this as an excuse to create a “more beneficial pricing system.”  Of course, it’s only beneficial to them, not to consumers.  The latter routinely object in overwhelming majorities to the concept of usage caps and the elimination of the existing flat rate pricing which has always been profitable for the broadband industry.  Any other connection, particularly with the absence of any evidence, is tenuous at best.