Republican FCC Commissioner Ajit Pai has warned forthcoming court rulings on Net Neturality could set the stage for more active oversight of Internet Service Providers, including a possible ban on usage-based pricing and data caps.

Speaking at the 2012 Annual U.S. Telecoms Symposium at the Phoenix Center in Washington, D.C. Dec. 6, Pai said 2013 will be an important year for broadband policy.

“The most important action probably will not occur either at the FCC or on Capitol Hill,” Pai said. “Instead, it will take place in the federal courthouse about a mile away on Constitution Avenue.”

The D.C. Court of Appeals is currently weighing a court challenge from Verizon that argues the federal agency has no regulatory authority to implement and oversee the open Internet policies that are the cornerstone of Net Neutrality.

Republicans have traditionally been hostile to the concept of Net Neutrality, because it restricts private providers from using network management concepts that could open up new revenue streams. Without Net Neutrality, providers could artificially reduce the performance of certain websites while enhancing others, usually based on financial agreements.

Many Democrats and consumer advocates want Net Neutrality to guarantee that all websites are treated equally, and that paying customers deserve a service unfettered by artificial obstacles or additional expense imposed by providers.

Even if the court finds in favor of Verizon, Pai fears the FCC’s Democratic majority will respond by emphatically asserting its oversight powers, reclassifying broadband as a “telecommunications service.” Since the Bush Administration, broadband has been regulated as an “information service,” subject to more restricted oversight.

“Should the D.C. Circuit uphold the FCC’s order, I would expect to see revitalized efforts to expand the Commission’s regulation of the Internet,” Pai said. “In particular, I would not be surprised if the FCC looked into whether we should stiffen our oversight of the network management practices of wireless broadband providers and whether we should begin to regulate usage-based pricing.”

“Under no circumstance will I support […] reclassification,” he added. “I am convinced that grafting the creaky, burdensome common carrier regulations onto the Internet would dramatically slow broadband deployment, reduce infrastructure investment, frustrate innovation, hamper job creation and diminish economic growth.”

Current FCC Chairman Julius Genachowski has expressed repeated support for usage-based pricing in the market as an innovation in Internet pricing. With the chairman and his Republican colleagues in agreement, it seems unlikely the agency will consider curtailing the practice. So far, the FCC has not even responded to repeated requests to further investigate usage pricing and data caps.

While perusing the website of the chief telecom regulator in this country this afternoon, Cassandra, a rural independent telecom industry regulatory analyst, encountered into the misguided, the confused, and the tinfoil hat crowd overrunning the agency’s electronic comment submission system regarding proposed changes to the nation’s Emergency Alert System (EAS) and government policy regarding broadband regulation.

Chief among them was a public comment from a woman named Denise claiming she was being abused by her husband.

“Denise, you do realize you are looking for psychological help with your abusive spouse in a government rulemaking docket about broadband, right,” Cassandra tweeted.

That was just a preview. In the aforementioned EAS docket, the FCC website proudly promotes one recent comment from Debra, who has yet to figure out how to type in the big box or how to get that caps lock off (we deleted some personally identifying information, although the FCC website retains it, warning the public in advance “the filing you are making is a public filing. Any information that you submit will be available to the general public.”):

Amidst filings from broadcasters, cable operators, equipment manufacturers, and various special interest groups, the very wide variety of submissions from John Q. Public ranged from sober and thoughtful to… well-down the rabbit hole.

A sampler, left unchanged from the originals, except to remove the names of the innocent and embarrassed:

The Anti-Government Crowd:

I think it is an Orwellian-type demonstration by the Federal Government to impose a nation-wide test of the EBS. A “test” would be at 2am. This is clearly a demonstration by the powers that be that government can and will seize power of all communications whenever they see fit.  In the event of a national disaster, the one voice that I want to hear certainly isn’t the government’s.

Those Who Watched that whole Jack Bauer “24” box-set in one weekend:

It concerms me that this annoucement gives terroists an opportunity to take advantage of the test, since no one will be looking for a real notice.

The “You Are Scaring Me” Corner:

Why in the world wouldn’t there be newspaper articles and cable and network news information regarding FCC/FEMAs “big plan?” Do you purposefully WANT to scare the living daylights out of senior citizens? Why would you warn only federal agencies? I beleive there is something more sinister going on that is related to this plan. I am going to make sure that everybody knows about it and that your offices are saying it will not say it’s a test. How interesting that it’s happening right now. If I don’t start seeing news about it in the paper and on TV/radio, I am going to raise hell. Do something now. So far, I have notified fire departments that had no clue, old age homes, and city hall. You people are crazy if you think I’m going to allow a panic in MY town.

The Guy With a Landlord Problem:

I must worst file million of complaints against U.S. HUD Park Tower Apartments, in Portland OR, that they tampered my Facebook that I posted my comments that I do not felt safely reside in this danger situation. I must go in the court at requests for bringing me in justice requests that Park Tower Apartments in foe issues involved with their Facebook addresses. […] (bad employees) made in huge banana noses and bad people of employees with Park Tower Apartments address report to the court immediateness. Please tell U.S. Homeland Security pulls me out of this evil housing addresses because of they used Facebook issues as their employees’ Facebook accounts. Please tell Facebook about Park Tower Apartments in bad employees addresses as notifies to U.S. Senators at requests. thank you for pulling me out of this dangerous housing immediateness!

The Man on the Run:

NYPd has informed feds that I’m not on their radar but keep getting stalked from place to place. Last place the fire alarms tripped like today was at 500 pearl, street. nyc aug 3, 2011. depts got caught doing this at 339 west 39th feb 28, 2010 . the eavesdropping device went from the phones to the fdny system because fed attys advised me they botched the police brutlaity case in the fbi . this is in court now

I Copyrighted EAS First and the Feds Violated It So I Am Suing for $87 billion

EAS infringes copyright as asserted in lawsuit: […] The ORDER directs the Clerk to issue summonses and directs the U.S. Marshal to serve the Defendants.

Defendants include twenty-four government agencies, government individuals, including Federal Communications Commission and nine corporations sued in the United States District Court Eastern District of Arkansas. The case cites organized theft of intellectual properties asserting the defendants are responsible for massive piracy of multiple copyrighted works that are generating billions of dollars in illegal proceeds in concert with private enterprises causing more than $87 billion dollars in damages to the legal owners of copyrighted intellectual properties.

[…]This case relates to letters by the Plaintiff requesting the United States Attorney General Eric Holder stop government theft of private intellectual property….

“People: the FCC cannot solve all your problems,” Cassandra tweeted. “They have enough of their own.”

In spring of this year, rural Canadian access to the Inukshuk Wireless system was terminated, forcing many to usage-capped wireless plans from companies like Rogers Communications that cost a lot more.

Kevin, a Stop the Cap! reader dropped us a line this week to remind Canadians they don’t have to pay Bell, Rogers or Telus big dollars for a small wireless usage allowance.

“After a bit of shopping, I signed up for WIND Wireless and it has been a positive experience,” Kevin writes. “Their customers service is leaps and bounds better than the big three and I get 10GB of usage for $35 a month.”

Once Kevin exhausts his usage allowance, he keeps right on browsing because Wind does not charge overlimit fees — they throttle speeds downwards, but not to the punishing dial-up-like speeds of most other providers.

“I’ve streamed music and video after I’ve hit 10GB,” Kevin writes, although he admits YouTube can be a bit problematic with buffering issues at the slower speeds.

Kevin says if he stuck with Rogers he would be paying them around $195 a month for the same usage he pays $35 for with WIND.

“Who cares about the speed of Rogers’ LTE network when you pay that much,” Kevin adds.

WIND Mobile is one of a handful of upstart independent cell phone providers challenging the dominance of incumbent telecommunications companies that have set the standards for high Canadian broadband pricing and low usage caps. Kevin wishes more Canadians would consider switching away from dominant providers to send them a message they have to compete with lower prices and better service.

Lawrence, Kansas can’t catch a break. While their neighbors in Kansas City are preparing for Google’s unlimited-use gigabit broadband, the three different owners of the area’s cable operation in the last three years have stuck local residents with usage caps as low as 5GB per month.

What began as Sunflower Broadband, formerly owned by the The World Company, which publishes the daily Lawrence Journal-World, has now been sold to a new owner that plans to leave the current caps in place.

Knology of Kansas Inc., a division of West Point, Ga.-based Knology acquired the Sunflower operation for $165 million in 2010. This week, WideOpenWest (WOW) announced it had completed a system-wide acquisition of Knology, including the former Sunflower system for $1.5 billion.

Consumers in Lawrence hoping for something better from one the nation’s top-consumer-rated cable operators will apparently have to wait. The company announced it was planning no immediate changes to its services or rates, said Rod Kutemeier, who currently remains general manager of the operation.

“Which means while Kansas City becomes a gigabit broadband city with unlimited-use broadband ranging in price from free to $70 a month, we’re stuck with this lousy cable operation that wants $53 a month for 18/2Mbps service with a nasty 50GB data cap and up to $1/GB overlimit fee,” says former Knology customer Sam. “I switched to U-verse, which is only mildly less criminal with their 250GB cap.”

Sam’s price represents standalone broadband service and includes Knology’s $5 monthly modem rental fee. If he purchased video service from the company, his broadband rate would be $10 lower.

Sunflower Broadband introduced one of the country’s first broadband Internet Overcharging schemes, limiting customers on the company’s lowest speed tier to 5GB of usage per month. The company later introduced devotees of unlimited, flat rate access to a reduced priority unlimited option for just shy of $60 a month, with no quoted speed or promise of performance.

Lawrence cable subscribers were hopeful the new owners would adopt pricing and service similar to what WOW offers elsewhere. WOW tells its other customers it does not impose usage limits or consumption-based billing of any kind. But that doesn’t hold true in Lawrence.

“They need to get rid of the current management which continues this ripoff scheme and bring in the same WOW mindset that gave them top ratings in magazines like Consumer Reports,” shares Stop the Cap! reader Sam.

WOW currently offers most customers broadband speeds of 2/1, 15/1, 30/3, and 50/5Mbps. Knology of Kansas offers service at speeds of 5/1, 18/2, and 50/5Mbps — all usage capped.

CEO Glenn Britt tells investors the company successfully pushed through modem fee as hidden “price increase”; Warns programmers unfettered rate hikes will result in networks being dropped, Disses Google Fiber as publicity stunt, and suggests more broadband rate hikes are in our future.

Time Warner Cable has announced its intention to broaden its consumption billing scheme offering $5 discounts to customers willing to keep their monthly usage under 5GB per month to every cable system it owns, with the exception of Oceanic Cable in Hawaii.

CEO Glenn Britt, speaking Monday to a UBS conference in New York, told investors that despite the fact the Internet Essentials program which caps monthly usage has attracted little interest from customers, the company was still going to take the program nationwide for symbolic reasons.

“At the moment what we have been trying to do is to get this idea into the marketplace,” Britt said. “It probably won’t surprise you that not very many people have taken the lower offer. That is fine. It hasn’t had much impact on [average revenue per customer]. But I think the idea is to have this consumption idea out there in addition to the unlimited.”

Britt’s attitude about consumption billing has evolved since its 2009 public relations disaster that forced the company to pull back on a plan to introduce consumption-based billing tiers for its Internet product. Protests erupted in test markets in New York, North Carolina, and Texas, several organized by Stop the Cap!, leading to proposed legislation to ban usage caps from one Rochester-area congressman and intervention from Sen. Charles Schumer (D-N.Y.) who helped convince Britt to shelve the plan.

“I actually don’t like the idea of caps,” Britt has said consistently. “That is a negative connotation.”

Britt’s views have evolved over the years to argue that an unlimited service tier should always be available from Time Warner Cable for customers who want it. But encouraging customers to use more broadband under some type of consumption pricing offers a new source for revenue for the company and its shareholders.

“What we think is we should always offer unlimited service but that we should offer a choice of a lower price with a consumption dimension for people who don’t need unlimited, so that’s quite different than what other [broadband providers] have talked about.”

Time Warner Cable is in the middle between operators advocating monetizing broadband usage with compulsory usage limits and overlimit fees and those, like Cablevision, that oppose usage limits of any kind. But Britt is intent on getting customers to begin thinking about associating usage with cost, and stop believing in the traditional “all-you-can-eat” unlimited broadband model that has been around since the 1990s.

Britt characterized the company’s increasing emphasis on broadband as part of an evolution of the cable industry beyond the video services that defined it for decades. With its video business increasingly pressured by increased programming costs the company can no longer pass entirely onto its customers, broadband and phone service now deliver more gross profit margin than its video package.

Time Warner Cable Broadband Has a 95% Gross Profit Margin?

“The gross margin on broadband has got to be the highest gross margin of any product offered by any industry in the United States — like 95%,” noted one Wall Street audience member that quizzed Britt about future threats Time Warner’s broadband business could face with a margin like that.

“I think actually this gross margin thing is something that is a perception that maybe our company caused in our effort to be transparent,” Britt tried to explain.

Britt argued the 95% figure was misleading because the company’s accounting methods allocate all of their costs to the specific services the company offers.

“In the case of the video business because it’s all the programming costs, that’s a big number,” Britt explained, noting video profits are tempered by programming costs. “In the case of broadband it’s just the direct bandwidth costs from third parties. It’s a small number so it looks like the margin is really high.”

With a few accounting changes, the company’s gross profits could be split more evenly across the video, broadband, and telephone services. But Britt explained the expense of switching to cost accounting made it not worth the effort. But the exposure of the enormous profits and very low cost of delivering broadband service may have inadvertently created a political problem for the cable industry as consumer groups suggest the vast profits earned on broadband come at the same time the industry is hiking prices and in some cases limiting service.

Britt tried to temper enthusiasm.

“If you look at the complete picture — broadband is a great business but it is not quite as profitable as just that gross margin number might make you think,” Britt said.

The Gradual Evolution of Time Warner Cable Towards Broadband, With Rate Increases to Follow

Britt said the company continued to gradually switch off analog video channels to free up capacity for additional broadband bandwidth.

“I think if you look at our physical plants we still devote a disproportionate amount of capacity to analog video so we’re still running broadband on a relatively small part of the capacity, but as [demand] grows we will keep adding more to broadband and we’re gradually reclaiming the analog video channels,” Britt explained. “We have not seen the need to flash cut/get rid of the analog and go all-digital, but we’re doing it over time.”

Britt called cable broadband a growth industry, with new entrants getting online for the first time.

“Broadband is a great business. It is still not fully penetrated,” Britt said. “There are homes that don’t have broadband that aren’t even online yet. And the homes that have it keep using it more and more all the time. I think somewhere recently I saw a study that said the average use is now 50GB a month.”

With consumer demand for broadband at an all-time high, Britt said as usage and dependence on broadband continues to grow, the company will have more and more ability to raise prices. Britt noted the company implemented a modem rental fee in November he characterized as “essentially a price increase,” and called its implementation successful.

Britt acknowledged only about 3% of customers have elected to buy their own cable modems to date, and Britt said he believed most people will continue to rely on Time Warner’s rented modem, bringing lucrative new revenue to the company indefinitely.

The company’s gradual move to an all-IP network is an acknowledgment of the success of broadband, but also allows the company to become more nimble with its video offerings and services.

“We are talking about using IP standards and IP technology to enhance our video offering,” Britt said. “What we are trying to do is recognize that all consumer electronics are increasingly moving to IP standards. Writing software to IP standards allows you to create software that can be much more easily updated and iterated than traditional forms of software. We’re embracing that wholeheartedly.”

The company is currently testing a cloud-based program guide and set top box interface in 190,000 homes in upstate New York with positive results, according to Britt.

“We are going to have the second version of that next year and roll it our more broadly,” Britt said. “We have not been as noisy about that as some others. Again, the beauty of this is that it resides centrally, not on everyone’s set top box, and you can change the software little bits and pieces once a week or every two weeks. You don’t have to have these giant software releases.”

Other initiatives:

• Getting streaming video on every device capable of displaying it in a customer’s home;
• Introducing local broadcast station video on the company’s streaming product. “We now have the ability to encode 1,000 broadcast signals from around the country,” said Britt. “Here in New York City, the broadcasters are in the package now;”
• Will shortly introduce video-on-demand streaming through its device apps;
• Its Wi-Fi network in Los Angeles is on track to offer 10,000 hotspots. The company’s next expansion priority is more Wi-Fi for New York City.

Britt Downplays the Competition: ‘AT&T U-verse is bandwidth constrained, FiOS is mostly finished expanding, and Google Fiber is a publicity stunt.’

Britt recognized AT&T planned to restart expansion of its fiber to the neighborhood U-verse service, which actually competes with Time Warner Cable in more communities than Verizon’s FiOS fiber optic network.

“U-verse overlaps about 25 percent of our footprint today,” Britt said. “Presumably it will add a little more when they’re done with this. I would remind you that U-verse is more bandwidth constrained than our plant. We have a route to faster speeds, so we’re confident with our ability to compete with that.”

Britt said Time Warner Cable has gained experience predicting what happens when new competition arrives in town, and continued to downplay its impact on cable’s dominant market position.

“There is a phenomenon in consumer behavior that when a new competitor comes to town a certain number of people move just because they want to try the new thing,” Britt said. “After you are there for awhile that part ends and you are just into a normal marketing game. I think leaving aside the AT&T announcement, that is true generally of the two phone companies who have built what they said they would build initially.”

The one city where competition has turned into building-to-building combat is New York City, where Verizon FiOS continues to only gradually expand into new buildings. When FiOS becomes available, marketing begins to get customers to consider switching, kicking Time Warner’s customer retention efforts into high gear.

The cable operator has traditionally offered aggressive retention and new customer deals to attract and hold cable customers, and in some cases it has thrown in high value prepaid credit card rebate offers. Currently, Time Warner Cable pitches new and returning customers its triple play package for $89-99 in New York, often giving existing customers the same deal when they complain.

In Kansas City, Time Warner Cable now faces competition from both AT&T U-verse and Google Fiber, but Britt claims the company is not as worried as some might think.

“I guess I would remind everybody [Google] in the past announced they were doing things like this,” Britt said. “I think they were going to build Wi-Fi over San Francisco and they built a couple of blocks. Obviously I’m not inside their company — I can’t exactly know their motivation, but certainly if it is like the past, their motivation is to demonstrate what technology can do and try to prod the government and other players to go bigger, faster, whatever.”

Britt doubts Google will take the project much farther than Kansas City, and even if it does, the cable industry will have decades to prepare.

“I would remind you it took the cable industry which built the second wire into the home — the phone being the first — four decades or more to build across the country and many billions of dollars,” said Britt. “Even if Google builds, we’re not going to wake up and see Google instantly building out the whole country.”

Britt took a swipe at Google’s white-collar business focus and wondered exactly who needs the service Google has started to offer.

“This is not like their other businesses; it is very physical, it is blue collar workers, it is process, it is a very different thing,” Britt said. “I think what they’re doing is trying to demonstrate the wonders of 1Gbps. The problem with that is even if you build the last mile access plant to do that, there is neither the applications that require that nor a broader Internet backbone and servers delivering at that speed. It ends up being more about publicity and bragging. There has been a whole series of articles in the paper about ‘I’m a little startup business and boy it is really great I can get this’ and my reaction is we already have plant there that can deliver whatever it is they are talking about in those articles, which is usually not stuff that requires that high speed. So we’ll see.”

But Britt acknowledged the company will have a challenge competing with at least one Google Fiber service.

“They are giving one level of broadband away for free with an upfront installation,” Britt noted. “It’s hard to compete with free, although it is hard to make money at free also.”

The Cord-Cutting “Myth”: It’s the economy, stupid.

Britt continued to downplay and dismiss the popular media meme that cord-cutting is taking a toll on cable television subscriptions. Britt argued with television sets left on in most homes an average of eight hours a day, and pay television services reaching 90 percent of those homes, parting with cable TV is not that easy for a product with that level of consumer acceptance.

“Is there some cord cutting typically among young people — maybe they were cable-nevers? Yes, but it appears to be fairly minor at the moment,” Britt said. “I think the bigger issue for the industry is a combination of price and the economy.”

“These packages keep getting more and more expensive. Programming gets more and more expensive,” Britt added. “I hope the economy gets better but at the moment there are still an awful lot of people who have been unemployed a long time and this stuff is starting to cost too much and I never miss the chance to get on my bully pulpit about it. If we, as a broader industry, want to keep this going, we need to figure out some way to have packages and prices that are lower for people who just cant afford it. That is a bigger factor right now than cord-cutting.”

Britt was lukewarm about his company’s own efforts to deliver a discounted cable television package which pares down the basic package to a few dozen channels with some notable gaps, especially for sports fans.

“We have a package called TV Essentials and whether it is the ideal configuration of programming and price — it is probably not — it is what we’re able to do,” Britt said. “It does have some uptake but not enormous. I think we need as an industry to work on that. We all know the big package works for the content companies and the little packages don’t. At some point this whole thing has to be responsive to the people who ultimately pay the bills and that is the consumer.”

Throwing Down the Gauntlet: ‘We’re going to start dropping little-watched channels at contract renewal time if prices don’t come down.’

“I think the trend has been pretty constant over the last several years: Since 2008, our programming costs per customer have gone up about 30 percent while the Consumer Price Index is up about 10%, so clearly those two things are out of whack,” Britt said. “Our video pricing has gone up about 15% so we are able to close that gap a little bit but not completely. I don’t have any magic bullet about this except clearly these trends can’t continue forever.”

Britt warned programmers have become too comfortable with the status quo for cable packages and pricing that some have gotten lazy about the quality of their programming, dependent on the subscriber fees they earn whether customers watch their channels or not.

“Content companies will all gloat and chortle about how wonderful the structure is and they can charge whatever they want,” Britt complained. “We’ve accumulated networks that hardly anybody watches. If you speak to the people who run those networks or own them they almost feel it’s a birthright — I have this network that has distribution to 70-80 million homes, and I’m getting paid every month for ads — maybe this year I wasn’t able to get a big audience but you know next year I am going to work harder and I am going to spend more money on programming and it’s going to be good.”

Britt noted some of the channels Time Warner added have transformed into entirely different channels the company would have never signed up for had they known.

“Sometimes people even change the entire content of the network and our company has been pretty aggressive in not letting that happen since we’re selling a whole package that appeals to different people,” Britt said. “It’s not a birthright, it’s not a carte blanche.”

“I think what we’re saying because the consumer is telling us they can’t afford these prices anymore, where we can we’re going to have to start cutting things off,” Britt warned. “So if you have a network that gets hash mark ratings and no real sign it’s going to get any better, and your contract is up, we’re going to have a different kind of conversation than we might have had five, six or ten years ago.”

Britt said some networks will be dropped altogether, others will be invited to remain, but only on an added-cost tier for subscribers willing to pay more.

“We can’t keep carrying these giant packages of things with the services that don’t carry their own weight,” Britt said.

But Britt understands the perspective of the entertainment companies as well, having formerly been with Time Warner, Inc., the entertainment-oriented company that owns several cable networks.

“A-la carte just doesn’t work for those companies,” Britt noted. “If you think about the existing package, it’s a wonderful mechanism to mitigate risk in a business that I would argue is one of the riskiest businesses on the planet.”

Britt compared a-la-carte economics with that of a typical Broadway theater show, where a small group of individuals risk substantial sums of money on the success of a production that either makes it or it doesn’t, and most don’t. The only revenue stream is from consumers willing to pay ticket prices for admission.

Today’s cable package offers niche and general interest channels in the same package, with assured subscription revenue regardless of ratings, combined with ad revenue which can be meager or substantial depending on the ratings. With guaranteed revenue, cable channels invest in programming production or acquisition — purchases that would not be likely if reliant on an uncertain a-la-carte business model.

Therefore, in Britt’s view, a-la-carte per channel or per program changes the dynamics of the cable business away from a stable one that obtains programming on the basis of predicted revenue to one closer to a Broadway production, where risks of failure are very high, especially for niche programming.

Britt believes in today’s bundled cable package, but not in its current size or monthly price.

“I think aside from that there is a lot of value in the package if you think about cost avoidance,” Britt said. “In reality we as distributors do the marketing, the billing, the customer relationship and although somebody from a network might rail at us for not being great marketers, the reality is if each network had to separately market and bill itself and deal with consumers separately, you would introduce a whole lot of cost in the system that is not there today. This actually works quite well for consumers today and it’s a relatively good value. I think the problem is the trajectory of it and if you are in the content business you are trying to seek eyeballs so you are competing with each other and the only way people seem to know how to do that is to spend even more for programming and that is what sort of killed you with consumer behavior.”

Time Warner Cable CEO Glenn Britt took questions for an hour from Wall Street investors and analysts at the UBS Conference in New York. (December 3, 2012) (55 minutes)
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