Time Warner Cable has laid the foundation to eventually begin charging broadband customers usage-based pricing, raise the modem rental fee originally introduced last fall, and continue to offer customers unlimited broadband service if they are prepared to pay a new, higher price.

Time Warner Cable CEO Glenn Britt spoke at length at this week’s Bank of America/Merrill Lynch Global Telecom and Media Conference in London about how Time Warner Cable intends to price its broadband service going forward. The moderator peppered Britt with questions as investors looked on from the audience about if and when the cable company can raise prices for its broadband service or start a usage pricing plan that will generate higher revenues based on metering customer usage.

Britt

Britt repeated his earlier assertions that Time Warner Cable has no interest in capping customer usage. In fact, the company sees fatter profits from increased usage, as long as customers are willing to pay for it.

For the first time, Britt admitted customers seeking unlimited service should be ready to pay a higher cost for that option, telling the audience Time Warner would set a premium price on the unlimited tier and offer discounts to customers seeking downgrades to comparatively cheaper, usage-based pricing plans. The company hopes this new approach will limit political opposition and customer push-back.

Britt also said there is room to grow Time Warner Cable’s monthly modem rental fee ($3.95 a month), comparing it against Comcast’s current rental fee, which is $7 a month.

Britt complained that increasing usage and demand for broadband speed was requiring the company to invest more in its broadband service, something not clear on the company’s quarterly balance sheets. Real investment, except for expansion by the business/commercial services division, has been largely flat or in decline for several years. Time Warner Cable’s broadband prices have increased over the same period.

Britt also admitted that the costs to offer the service remain comparatively minor.

“In broadband there are the costs of connectivity and peering and all that sort of stuff, but they are pretty minor compared with (video) programming costs so it appears that broadband is usually profitable versus video.”

Britt also admitted the cable industry in general is increasingly dependent on broadband revenue and the profits it generates to shore up margin pressure on the industry’s formerly lucrative video service. As programming costs increase, pressure on profits increase. Yet the cable industry remains profitable, primarily because broadband earnings are making up the difference.

The meter is lurking

“I think if you look at the U.S. cable companies the EBITDA margins have been remarkably stable over a long time period,” Britt said. “The mix has [recently] changed. The video gross margin is getting squeezed, the broadband gross margin is larger and we are growing broadband so that is helping. The voice gross margin is higher than video and a little less than broadband and until recently that has been a growing part. And then we have business services which are growing rapidly and have a high gross margin.”

Additional Quotes:

Cable Modem Equipment Rental Charge: “It was received with a minimum of push-back and we’re still actually charging less than Comcast ($7/month), so I think there is room to charge more going forward. People can buy their own if they want and a small percentage of customers have chosen to do that which is fine with us.”

Usage-Based Pricing: “In order to keep up with the demand for throughput and speed which is going up every year, we are going to have to keep investing capital which we do on a regular basis, so we are going to have to figure out how to get paid for that. I think inevitably there is going to be some usage dimension, not just speed within the package, so what we have done is to put in place pretty much throughout our footprint, with a few exceptions, the idea that you can buy the standard service that [includes] unlimited usage and that costs whatever it costs, but if you want to save $5 (and that is the first thing we put in place) you can agree to a consumption limit, and we can start expanding on that.”

“I think the key to this — there has been push-back against caps in the past — I think the reason for the push-back is it was perceived in a sort of punitive, coercive fashion. The usual rhetoric is, ‘gee 20 percent of the people use 80 percent of the bandwidth or some number like that — we need to make them stop using so much.'”

“My feeling is we actually want everybody to use more, we want to invest the capital, we just want to get paid for it. So I think we should always have an unlimited offering and that should probably cost more than it costs today as the usage goes up and then people who don’t use as much should have the opportunity to save money. They don’t have to but they can, so I think that is a much more politically and consumer-acceptable way to do it than a sort of punitive thing people talk about.”

Cablevision will maintain unlimited Optimum Online broadband service to all of its customers and will not introduce usage-based pricing, according to Gregg Seibert, chief financial officer.

“I don’t see usage-based billing as something that we have plans for at this time,” Seibert told investors attending this week’s Bank of America/Merrill Lynch Global Telecom and Media Conference in London. “I think it would take a broader industry shift for that type of metered pricing to come in. At this point we don’t see that in the future.”

Cablevision has a long history opposing usage pricing or caps. In 2009, Jim Blackley, Cablevision’s senior vice president of corporate engineering and technology, said usage caps were not in the cable company’s plans:

“We don’t want customers to think about byte caps so that’s not on our horizon,” he said. “We literally don’t want consumers to think about how they’re consuming high-speed services. It’s a pretty powerful drug and we want people to use more and more of it.”

Cablevision’s announcement may also be in response to its biggest competitor. Verizon earlier this year repeated it had no plans for usage-based pricing for FiOS customers either.

Cablevision continues to attract new broadband customers, primarily from customers canceling DSL service but not moving to FiOS.

More than a year ago, Comcast temporarily suspended its nationwide 250GB usage cap to study its impact and consider what to do about increasing broadband traffic.

For the majority of Comcast customers, this means the provider has ditched its usage cap altogether, allowing customers to use their broadband service without limits.

“This is the way it should have been all along, especially considering how much I spend every month for Comcast broadband,” says Comcast customer Geoff Cox. “I think usage caps at these prices are unacceptable. If Comcast stops antagonizing me, I will reward them with more of my business.”

For Cox, that meant one week after the cap was lifted, he upgraded his service from Performance to Blast. His usage did not immediately increase that much and Comcast now gets more of his money.

“We do about 280GB a month today between me, my wife and our four kids,” Cox tells Stop the Cap! “When the third one becomes a teenager, we will probably upgrade again to Extreme because of all the streamed media being used in this house.”

But if Comcast brings back the cap, Cox will downgrade his service back to where he started.

“AT&T U-verse isn’t much competition for Comcast broadband because U-verse is slower and their 250GB cap I can see getting enforced when AT&T smells money,” Cox tells us. “As I have told my family, usage caps are not acceptable and we have to take a stand somewhere and let them know caps will cost them business, not earn them more money.”

Whether Comcast will listen remains unknown. The company has said little about its usage cap program since suspending it May 17, 2012. At that time, Comcast did say they had not given up on usage caps in principle — they just wanted a more flexible approach while managing those caps.

Last May, the company announced two trials to test which direction Comcast would take with respect to limiting broadband usage.

In Nashville, Comcast increased the usage allowance for all tiers to 300GB per month and planned to sell additional gigabytes in increments of $10 per 50GB;

In Tucson, Comcast adopted variable usage allowances depending on the type of service a customer selected:

• Economy 300GB
• Economy Plus 300GB
• Internet Essentials 300GB
• Performance Starter 300GB
• Performance 300GB
• Blast 350GB
• Extreme 50 450GB
• Extreme 105 600GB

The rest of Comcast customers get to test unlimited service, at least until the company determines whether it actually needs caps at all. Cox does not think the company does.

“Cable broadband upgrades have really made neighborhood congestion a non-issue and while the company keeps raising the price of broadband service, their costs keep dropping.”

All Arcadia, N.Y. town supervisor Dick Colacino wanted was for Time Warner Cable to consider using some of their profits to expand their cable system by one or two roads a year to offer service where it has earlier refused to go.

Time Warner Cable’s response? No.

But Time Warner might turn that “no” into “yes” if customers offer to cover the cable company’s estimated cost of $22,000 per overhead mile to extend cable service down ignored rural roads. Underground wiring costs much more.

Every year, elected officials in just about every small town and village get an earful of complaints from bypassed residents who cannot get cable broadband service.

Arcadia (pop. 14,900) is a small community in Wayne County, east of Rochester. Time Warner Cable dominates western and central New York, with cable service from Albany west to Buffalo. In Wayne County alone, Time Warner is the only cable provider in the 23 largest municipalities. But the company has routinely skipped over potential service areas it considers not worth a wiring investment. That leaves bypassed residents with one choice for broadband — Verizon Communications, which has not expanded DSL service in the area for some time.

The New York Public Service Commission has mandated that cable service must be available to any area where 35 homes per mile are located within 150 feet of the road.

Time Warner representative Chris Mueller says the cable operator has already cut that benchmark to 20 miles per home, but areas remain that do not meet even that reduced standard. Without an appropriate return on investment within a certain time frame, Time Warner Cable won’t wire those areas for service.

Colacino told Mueller he was very unhappy with that decision and intended to pursue the matter at franchise renewal time, possibly in coordination with other communities that also have a number of bypassed residents. A community can negotiate for changes during franchise renewal talks, but in almost every case, the incumbent cable operator holds the strongest position, knowing a community looking for another provider will be unlikely to find one willing to serve.

Colacino has battled with the cable company since at least 2010 because of complaints from area residents and businesses who cannot get service.

That year, a Time Warner Cable government affairs representative offered Colacino a novel solution to the problem — agree to refund collected franchise fees to Time Warner Cable, after which the company would consider using the money to expand service to more roads in Arcadia.

The only problem with that solution is that it is illegal.

“You can’t do that,” town attorney David Saracino responded. “It’s an unconstitutional gift of public monies.”

Despite efforts to improve their reputation, cable companies are hated so much the industry now scores lower than any other according to the American Customer Satisfaction Index (ACSI).

The only reason the industry’s average score or 68 out of 100 ticked higher are some new competitors, especially Verizon’s FiOS fiber optic network, which scores higher than any other provider.

The cable companies you grew up with still stink, ACSI reports, with Comcast (63) and Time Warner Cable (60) near the bottom of the barrel.

At fault for the dreadful ratings are constant rate increases and poor customer service. As a whole, consumers reported highest satisfaction with fiber optic providers, closely followed by satellite television services. Cable television scored the worst. Despite the poor ratings, every cable operator measured except Time Warner Cable managed to gain a slight increase in more satisfied customers. Time Warner Cable’s score for television service dropped five percent.

Customers are even less happy with broadband service. Verizon FiOS again scored the highest with a 71% approval rating. Time Warner Cable (63) and Comcast (62) scored the lowest. Customers complained about overpriced service plans, speed and reliability issues. Customers were unhappy with their plan options as well, including the fact many providers now place arbitrary usage limits on their access.

The best word to describe customer feelings about their broadband options: frustration, according to ACSI chair Claes Fornell. “In a market even less competitive than subscription TV, there is little incentive for companies to improve.”