‘Disloyal Cablevision customers looking for discounts are dead to us.’

Cablevision is fed up with disloyal customers bouncing between the cable company and other providers when promotional discounts expire.

After losing 13,000 broadband, 18,000 voice, and 37,000 television customers, Cablevision CEO Jim Dolan said the company has stopped offering any further discounts to customers that received them once before.

“The customer that has been bouncing from one company to another on promotional/repetitive discounts has hit a dead-end with us,” Dolan told Wall Street analysts during a conference call.

All customers with promotions will now be tracked to prevent extensions or further discounts once the special rates expire. Dolan confirmed the ban will also extend to customer retention offers.

Customers who shop primarily on price in Cablevision’s service area have traditionally flipped between AT&T U-verse, Verizon FiOS and the cable company every few years, usually switching after a promotion expires or rates are increased. Because of fierce price competition, new customers can receive a triple play package of broadband, phone, and television service — including equipment, for less than $85 a month for at least one year. Regular prices are considerably higher.

Cablevision lost most of its departing New York and New Jersey customers to Verizon FiOS, but has been more successful fending off competition in Connecticut, where AT&T has the least capable broadband network among the three providers.

All three companies have attempted price increases over the last few years with mixed results. Cablevision’s eight percent rate hike on broadband this year may have been too much for some customers who shopped around and found a better deal with the phone company.

Despite the loss in customers, Dolan remains firmly committed to more rate hikes, especially for broadband service, noting its speed and features (including an extensive Wi-Fi network) deliver enough value to sustain further price increases.

Cablevision clearly hopes competitors follow its lead and end promotional rate double-dipping as well. If they do, customers will find themselves locked in with regular pricing regardless of the provider they choose.

Some analysts are skeptical Cablevision’s hard-line will last, especially if subscriber losses mount. Cable operators have attempted to restrict promotions in the past but tend to ease them if market share suffers. Despite the third quarter customer retreat, Cablevision’s rate hikes delivered $336 million in broadband revenue during the last three months, an increase from $308 million earned the same time last year.

The median bandwidth use slowdown (Image: BTIG Research)

Despite perpetual cries of Internet brownouts, usage blowouts, and data tsunamis that threaten to overwhelm the Internet, new data shows broadband usage has leveled off in North America, undercutting providers’ favorite excuse for usage limits and consumption billing.

Sandvine today released its latest broadband usage study, issued twice yearly. The results show a clear and dramatic decline in usage growth in North America, with median usage up just 5% compared to the same time last year. That is a marked departure from the 190% and 77% growth measured in two earlier periods. In fact, as Richard Greenfield from BTIG Research noted, mean bandwidth use was down 13% year-over-year, after the second straight six month period of sequential decline.

Companies like Cisco earn millions annually pitching network management tools to providers implementing usage caps and consumption billing. For years, the company has warned of Internet usage floods that threaten to make the Internet useless (unless providers take Cisco’s advice and buy their products and services).

“Demand for Internet services continues to build,” said Roland Klemann from Cisco’s Internet Business Solutions Group. “The increasing popularity of smartphones, tablets, and video services is creating a ‘data tsunami’ that threatens to overwhelm service providers’ networks.”

Providers typically use “fairness” propaganda when introducing “usage based pricing,” blaming exponential increases in broadband usage and costly upgrades “light users” are forced to underwrite. A leveling off in broadband usage undercuts that argument.

A Cisco White Paper intended for the eyes of Internet Service Providers further strips the façade off the false-“fairness” argument, exposing the fact usage pricing has little to do with traffic growth, pricing fairness, or the cost of upgrades:

In 2011, broadband services became mainstream in developed countries, with fixed-broadband penetration exceeding 60 percent of households and mobile broadband penetration reaching more than 40 percent of the population in two-thirds of Organisation for Economic Co-operation and Development (OECD) countries.

Meanwhile, traditional voice and messaging revenues have strongly declined due to commoditization, and this trend is expected to continue. Therefore, operators are now relegated to connectivity products. The value that operators once derived from providing value-added services is migrating to players that deliver services, applications, and content over their network pipes.

As if this were not enough, Internet access prices are dropping, sales volumes are declining, and markets are shrinking. The culprit: flat rate “all-you-can-eat” pricing. Such a model lacks stability—sending service provider pricing into a downward spiral—because it ignores growth potential and shifts the competition’s focus from quality and service differentiation to price.

While Klemann was spouting warnings about the dire implications of a data tsunami, Cisco’s White Paper quietly told providers what they already know:

Maximum Profits

“[Wired] broadband operators should be able to sustain forecasted traffic growth over the next few years with no negative impact on margins, as the incremental capital expenses required to support it are under control.”

If usage limits and consumption billing are not required to manage data growth or cover the cost of equipment upgrades, why adopt this pricing? The potential to exploit more revenue from mature broadband markets that lack robust competition.

“In light of the forecasted Internet traffic growth mentioned earlier and competitiveness in the telecommunications market, Cisco believes that fixed-line operators should consider gradually introducing selected monthly traffic tiers to sustain [revenue], while a) signaling to customers that “traffic is not free,” and b) monetizing bandwidth hogs more sustainably.”

Cisco makes its recommendation despite knowing full well from its own research that customers hate usage-based pricing.

“The introduction of traffic tiers and caps—especially for fixed broadband services—is not welcomed by the majority of customers, as they have learned to ‘love’ flat rate all-you-can-eat pricing. Most customers consider usage-based pricing for broadband services ‘unfair,’ according to the 2011 Cisco IBSG Connected Life Market Watch study.”

Cisco teaches providers how to price broadband like trendy boutique bottled water and blame it on growing Internet usage.

But with competition lacking, Cisco’s advice is to move forward anyway, as long as providers initially introduce caps and consumption billing at prices that do not impact the majority of customers… at first. In uncompetitive markets, Cisco predicts customers will eventually pay more, boosting provider revenue. Cisco’s “illustrative example” of usage billing in practice set prices at $45 a month for up to 50GB of usage, $60 a month for 50-100GB, $75 for 100-150GB, and $150 a month for unlimited access — more than double what customers typically pay today for flat rate access.

Usage billing arrives right on time to effectively handle online video, which increasingly threatens revenue from cable television packages.

Sandvine’s new traffic measurement report notes the increasing prominence of online video services like Netflix, YouTube, Hulu, and Amazon Video.

“As with previous reports, Real-Time Entertainment (comprised of streaming video and audio) continues to be the largest traffic category on virtually every network we examined, and we expect its continued growth to lead to the emergence of longer form video on mobile networks globally in to 2014,” Sandvine’s report noted.

Sandvine found that over half of all North American Internet traffic during peak usage periods comes from two services: Netflix and YouTube. YouTube globally is the leading source of Internet traffic in the world, according to Sandvine.

An old excuse for usage caps on “data hogs” – peer-to-peer file-sharing, continues its rapid decline towards irrelevance, now accounting for less than 10 percent of total daily traffic in North America. A decade earlier, file swapping represented 60 percent of Internet traffic.

Cisco’s answer for the evolving world of popular online applications is a further shift in broadband pricing towards “value-based tiers” that monetize different online applications by charging broadband users extra when using them. Cisco is promoting an idea that well-enforced Net Neutrality rules would prohibit.

Citing the bottled water market, Cisco argues if some customers are willing to pay up to $6 for a liter of trendy Voss bottled water, flat rate “one price fits all” broadband is leaving a lot of money on the table. With the right marketing campaign and a barely competitive marketplace, providers can charge far higher prices to get access to the most popular Internet applications.

“Research from British regulator Ofcom shows that consumers are becoming ‘addicted’ to broadband services, and heavy broadband users are willing to pay more for improved broadband service options.”

Wharton School professors Jagmohan Raju and John Zhang concluded price is the single most important lever to drive profitability.

The political implications of blaming phantom Internet growth and manageable upgrade costs for the implementation of usage caps or usage-based billing is uncertain. Even the “data hog” meme providers have used for years to justify usage caps is now open to scrutiny. Sandvine found the top 1% of broadband users primarily impact upstream resources, where they account for 39.8% of total upload traffic. But the top 1% only account for 10.1% of downstream traffic. In fact, Apple is likely to provoke an even larger, albeit shorter-term impact on a provider’s network from software upgrades. When the company released iOS7, Apple Updates immediately became almost 20% of total network traffic, and continued to stay above 15% of total traffic into the evening peak hours, according to Sandvine.

Some other highlights:

• Average monthly mobile usage in Asia-Pacific now exceeds 1 gigabyte, driven by video, which accounts for 50% of peak downstream traffic. This is more than double the 443 megabyte monthly average in North America.
• In Europe, Netflix, less than two years since launch, now accounts for over 20% of downstream traffic on certain fixed networks in the British Isles. It took almost four years for Netflix to achieve 20% of data traffic in the United States.
• Instagram and Dropbox are now top-ranked applications in mobile networks in many regions across the globe. Instagram, due to the recent addition of video, is now in Latin America the 7th top ranked downstream application on the mobile network, making it a prime candidate for inclusion in tiered data plans which are popular in the region.
• Netflix (31.6%) holds its ground as the leading downstream application in North America and together with YouTube (18.6%) accounts for over 50% of downstream traffic on fixed networks.
• P2P Filesharing now accounts for less than 10% of total daily traffic in North America. Five years ago it accounted for over 31%.
• Video accounts for less than 6% of traffic in mobile networks in Africa, but is expected to grow faster than in any other region before it.

Comcast is introducing its 300GB usage cap in Atlanta on Dec. 1:

The cable company is currently sending e-mail notifications to affected customers. Comcast has tested usage caps in several markets, mostly in the southern United States, to measure customer response.

Notice the e-mail suggests Comcast is “increasing the amount of data” included in the customer’s allowance. In fact, Comcast rescinded usage limits for most customers across the country in May 2012.

Last week, Neil Smit, president and CEO of Comcast Cable Communications told Wall Street analysts customers are not pushing back hard against capped Internet.

“We have a number of trials in place in markets,” Smit said. “We’re testing different types of usage-based pricing offerings. Thus far the consumer response has been neutral to slightly positive. We’ll continue to monitor it.”

If customers do not want their Internet usage capped, they must vocalize complaints with Comcast and consider taking other steps such as organizing protests in front of local Comcast offices, inviting the media to attend.

In 2009, a similar effort to introduce usage caps and consumption billing by Time Warner Cable failed after customer backlash forced the company to shelve the idea.

Wheeler

Incoming Federal Communications Commission chairman Tom Wheeler believes competition can be a more effective regulator of telecom industry practices and pricing than “micromanaging” the companies selling service.

“The first goal ought to be to make sure there is effective competition,” Wheeler told the Wall Street Journal in an interview Wednesday. “But I also know competition isn’t something that happens all by itself. We very much have a responsibility to make sure that there is access, at reasonable prices, to competitive broadband services. The way you do that is go back to competition.”

But Wheeler refused to share his views on whether Americans now enjoy his definition of “effective competition” from a wireless industry dominated by AT&T and Verizon and wired broadband service available from only one cable and telephone company in most communities.

“The reason why the U.S. is the world leader on the Internet is because we have the home-field advantage,” Wheeler said. “We want to keep that home-field advantage. One of the ways to do that is to keep the environment competitive, so it’s not the regulators determining what companies do.”

But the United States is not a broadband leader in speed, price, or penetration according to the OECD.

Wheeler seems reluctant to intervene in the market unless he is convinced competition is lacking. As a former lobbyist for the same companies he is now tasked with overseeing, a key test will be if Wheeler adopts the industry view that broadband is already a fiercely competitive and highly regulated business, or the one held by many consumer groups that a consolidated telecommunications marketplace retards competition, leading to higher prices and more restrictive service.

In an article posted on the FCC website, Wheeler described the philosophy governing his chairmanship of the FCC:

During my confirmation hearing I described myself as “an unabashed supporter of competition because competitive markets produce better outcomes than regulated or uncompetitive markets.” Yet we all know that competition does not always flourish by itself; it must be supported and protected if its benefits are to be enjoyed. This agency is a pro-competition agency.

We stand for the things that are important regardless of the network technology being used:

• To promote economic growth – technological innovation, growth and national economic leadership have always been determined by our networks; competition drives the benefits of those networks; and we have a responsibility to see to the expansion of those networks, including the appropriate allocation of adequate amounts of spectrum.
• To maintain the historic compact between networks and users – a change in technology may occasion a review of the rules, but it does not change the rights of users or the responsibilities of networks.
• To make networks work for everyone – it isn’t just that we expand high-speed Internet, but what we will be doing with that capacity. How networks enable a 21st century educational system, enable the expansion of capabilities for Americans with disabilities; and assure diversity, localism and speech are basic underpinnings of our responsibility.

One surprising appointment announced by Wheeler was Public Knowledge’s Gigi Sohn, who will become special counsel for external affairs. Sohn has been a frequent critic of the FCC and its former chairman, Julius Genachowski. She is also a strong advocate of Net Neutrality.

Frontier Communications’ new simplified pricing with no equipment fees or surprise contracts was well-timed for the phone company as it picked up a growing number of disgruntled Comcast and Time Warner Cable customers fed up with increasing modem rental fees.

Frontier depends a great deal on its residential broadband service to win back revenue the company has lost from years of landline cord-cutting. The company reported slowing revenue losses, now down to less than one percent for the quarter ending Sept. 30. Frontier’s profits reached $35.4 million this quarter, reduced by increased investment in broadband upgrades and pension fund-related expenses.

The independent phone company is still losing residential and business phone customers, but those losses have begun to stabilize. Frontier has 2.82 million residential customers and 275,000 business customers. While Time Warner Cable lost customers during the recent quarter, Frontier picked up 27,000 new ones. For all of 2013, Frontier added 84,500 new broadband customers. Nearly 84 percent of them added broadband as part of a bundle, which leads analysts to suspect most of Frontier’s new broadband customers are located in rural areas that never had access to broadband speeds before.

Frontier’s greatest opportunity is in the rural residential broadband business, and the company’s investment in improved broadband speeds has made a major difference in growing market share especially where it has a cable competitor. Currently, Frontier has 20-25 percent market share in most of its service areas. It wants 40%, but is unlikely to achieve it selling broadband speeds that often top out at around 10Mbps. Winning customers back to a landline provider has also proved difficult without an attractive bundled offer. In all but a few cities, Frontier bundles landline service with DSL broadband and a satellite television package.

Wilderotter

In rural markets, Frontier has had better success, particularly in areas formerly served by Verizon.

With help from the federal government’s Connect America Fund (CAF), Frontier invested over $21 million to expand rural broadband service in 2013. In the third quarter, the company expanded service to another 37,000 possible homes and businesses, with 30,000 more on the way in the fourth quarter. The company applied for $71.5 million in CAF funding for 2014.

Broadband speeds have also gradually increased in an expanding number of communities. As of today, 45 percent of homes can receive 20Mbps or better, 58 percent are capable of 12Mbps. A year-end commitment to offer at least 3Mbps speeds to 85% of customers in the most rural areas also appears within reach. Customers can upgrade to the next speed level in $10 increments.

But not every customer has gotten speed upgrades. In their largest legacy market — Rochester, N.Y., DSL speeds have remained unchanged in many areas. At the headquarters of Stop the Cap!, Frontier pre-qualified us this afternoon for the same 3.1Mbps DSL speed they offered in 2009, despite being blocks away from the city line.

Those increasing speeds have led to more traffic on Frontier’s broadband network, but the company says it has enough capacity to handle it.

“The average usage of all our customers across both fiber and the copper has grown to about 24GB per month at this point, and we see that increasing and people are comfortable with [our] facilities as well as our backhaul to support that growth,” said chief operating officer Dan McCarthy. “We’ve seen that grow virtually every month as we move forward.”

Frontier analyzes what customers do with their broadband connection and found 30 percent of customer usage is online video. That number is growing. Customers upgrading to the fastest speeds are often telecommuters or have a home full of avid broadband users.

“On the residential side [these high-end customers] are usually working at home, they are VPNing, they are gamers, and they are very active on video services and social media as well,” said CEO Maggie Wilderotter.

The average Frontier DSL customer still subscribes to 6Mbps service, which Wilderotter said was adequate for Netflix, web surfing, and e-mail. But the company is preparing to market speed upgrades to these customers to earn extra revenue.

So far, Frontier’s broadband growth has gone relatively unnoticed by their cable competitors.

“We really haven’t seen any sustainable programs that cable has put against us in the market and we do know that several cable operators have said they’re going to do more in those areas,” said Wilderotter. “We are very well prepared for that. We are giving everyday low pricing to the customer that’s simple and predictable and there are no add-on fees or modem rental costs.”

Most Frontier customers are offered $19.99 or $29.99 broadband pricing that can be bundled with other products for discounts. There is no term contract.

“Time Warner Cable has increased their modem fees [to] between $6 and $9 a month,” said Wilderotter. “That’s a huge price increase for a lot of customers. You compare that with Frontier which has no modem cost and customers understand where price value lies.”

Wilderotter noted Comcast has raised rates as well. Frontier intends to remind cable customers they have a choice, and will tailor offers to continue to increase market share.