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?

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.

Talking Points

One of the grand mysteries of the entire “broadband can no longer be unlimited” argument is the incredible range of usage caps cable operators and telephone companies suggest are required to keep them from going the way of the U.S. auto industry.  Broadband providers doing capping will swear that their cap model is the only one that is “fair” and “protects consumers” and “allows us to make required upgrades.”  Once those arguments are recited in a unified chorus, corporate spokesfolks zig zag their way all over the place explaining why their 5/40/150/250GB cap is fairest of them all, while trying to ignore those providers who are quite happy and profitable with no cap at all.  The customer is the last person they ask, because they know the answer from most will be, “no cap at all.”

This bring several questions to the table:

• Can you provide us with the raw data that illustrates there is a major problem with the current unlimited broadband model and that it cannot sustain profitability except with usage caps?
• Can we obtain independent analysis of that data by a third party and/or put together a conference of business, public, and educational groups to consider new possibilities to deal with what is rapidly becoming a utility-type service?

The answers to those questions have been, by all major industry players, an emphatic “no.”  You are required to take their word there is a problem and their solution is the only one that works.  And, for that matter, take their word they have an infallible way to measure and bill for usage under a consumption based model.  You can independently verify your usage all you want, as long as you pay the bill they send you with their own usage measurement.

It’s not that we’ve been the only ones asking.  Broadband Reports has the same questions we do, and asked for the hard data to prove that flat-rate pricing is simply untenable going forward.  And here was their response:

“We’ve shared our analysis of our data. We’re not going to share raw data…just not going to happen.”

Okay then, I guess that settles that!

That provokes us to first ponder whether there actually -is- a crisis in the flat rate broadband industry at all?  A press release or a claim by a company official isn’t evidence of anything.

Assuming we will never get a satisfactory answer to that question, how about these:

• Why can a company like Time Warner be unable to survive with flat rate pricing in Rochester, Austin, San Antonio, and Beaumont, but can deliver faster speeds with no cap in cities where they face strong competition from uncapped providers?
• If the company was interested in an honest assessment of marketplace reaction to usage caps, why not test in communities with the most robust and challenging competition?
• Why should customers not be deeply offended for being involuntarily turned into guinea pigs and be expected to pay more for a dramatically reduced level of service?
• Why is the nation’s largest cable operator Comcast able to deliver service with a 250GB limit at their current pricing, Verizon FIOS is able to deliver a product line twice as fast as Time Warner with no usage cap at all, and the nation’s second largest cable operator Time Warner needs consumers choosing a meager 20GB tier to not only pay $10/month more than their current unlimited service, but also pay a penalty of $1 for every extra GB?

That old axiom about pricing what the market will bear comes to mind, particularly considering the fact Time Warner is only interested in “gathering facts” from cities where the competition is limited.

The fact the Internet of the last few years is becoming an increasing threat to the video side of the cable industry may also have something to do with it.  That will be the subject of an upcoming Talking Point.

Usage Caps on Selected Broadband Service Providers

Charter Cable – Cap starts at 150GB for “light user” plan, removed entirely for deluxe plan (60Mbps service) – Violators are asked to select higher tier service or face account suspension – No meter yet

Comcast Corporation – Residential accounts limited to 250GB usage per month – Violators face account suspension – Tracking meter provided

Time Warner Cable – Residential accounts limited to 5-40GB currently, Violators face $1 per GB overage fee – Tracking meter to be provided

Verizon FIOS – Residential accounts are unlimited.  No violation, no tracking meter required

Comcast CEO Brian Roberts likes his new high-tech toys, even if using them on his own cable system is now pointless.   At the January Consumer Electronics Show, Roberts demonstrated the next generation of broadband Comcast is poised to begin rolling out to consumers in the next several months.

Dubbed “wideband,” Roberts downloaded a High Definition copy of Batman Begins in less than four minutes.   Comcast’s DOCSIS 3.0 upgrade, which bonds multiple channels together to deliver broadband speeds up to  160 Megabits per second, will be able to bring Comcast customers the latest high bandwidth applications, particularly including very high quality video, in just a matter of minutes.

Designed to compete with Verizon’s FIOS fiber to the home network, Comcast’s “wideband” service will create a new paradigm for high quality video services entering the home.

Except for one thing.

A 250GB monthly usage cap.

Using Comcast’s wideband service, customers downloading movies could easily exceed the 250GB cap in less than five hours.

Even the cable industry’s trade publications like Multichannel News are now posing questions about how exactly Comcast can promote customers upgrading to wideband service when a cap of 250GB stops the fun in a matter of hours.   What MN didn’t add to the equation is the fact Verizon FIOS does not have a usage cap and has no current plans to implement one.

So exactly why would any consumer choose Comcast wideband, with a usage cap over Verizon FIOS, which leaves you alone and doesn’t threaten to terminate your service if you use more than the cable company deems appropriate?

Another issue MN touched on, but didn’t bother extending to the real issue – stifling competition:

Imagine if all your TV were delivered via the Internet. High-quality  1080i HD video at (conservatively) an average of  5 Mbps would chew up plenty of bandwidth: roughly 286 Gigabytes in a 30-day period, given that Americans watch an average of 127 hours and 15 minutes of TV per month, according to Nielsen.  Cap busted!

Imagine indeed.   Imagine virtual “cable companies” delivering cable networks and broadcast TV over the Internet.   Pay your monthly bill for data from the cable company, but watch your video programming from another provider.   A 250GB cap puts an end to that business plan quite nicely, thank you.

Comcast CEO Demonstrates Wideband At Cable Show In May

By the way, a quick note to Frontier, which still thinks 5GB a month is just plenty. Pay attention to the file sizes in this video and then get back to us about why you think your customers will never come close to using 5GB a month in the coming year or two.

Comcast’s announcement that it would implement a usage cap of 250GB per month comes on the heels of the company’s entanglements with the Federal Communications Commission, who spanked the nation’s largest cable operator for purposely interfering with Internet traffic  Comcast felt constituted a problem on its network – namely torrent traffic.

Cable operators face the evolution of cable modem service from something primarily valued by a minority of Internet enthusiasts into a “must-have” product for more and more Americans.   And with the spectacular growth of the Internet, new applications are being introduced daily that are specifically designed to take advantage of the speeds that broadband promises to provide.

Just 24 months ago, the “problem” was peer-to-peer traffic, such as file sharing networks and torrent applications.   Customers fired up their trading software and often let it run for hours on end as they attempted to grab the latest software, TV show, or movie.   File sharing software can consume an enormous amount of bandwidth, as users share  files with one another, uploading and downloading pieces of a favorite TV show or movie until a complete file is assembled.   Good etiquette dictates leaving the software running even longer to help make sure everyone else in the queue  can  complete their download as well.

The result was a lot  of traffic going in both directions.   Most networks in the United States are designed to handle people receiving more files than sending them, and file sharing software began to challenge that paradigm.

Soon enough, broadband providers began complaining that this kind of traffic was tying up their networks,  designed for what company officials thought  average customers  would do with their Internet connection.   People consuming a lot of bandwidth downloading music or movies required operators to spend more money to expand and enhance their networks.

Ironically, the same companies complaining about file sharing created their own “problem” by marketing cable modem service as the fastest way to… download movies and music!   DSL, they said, kept you waiting for your favorite show while cable modem service guarantees your show will be ready the moment the popcorn is popped.

The earliest theories of the artificial “bandwidth crisis” offered by companies annoyed with having to keep up with the demands of their customers, suggested that file sharing traffic would be the death of the Internet as we know it, as torrent traffic completely clogged the network, consuming any and all available bandwidth.   Godzilla’s destructive powers had nothing on file sharing, which could literally create a global Internet crisis.

Comcast decided it could address the torrent traffic problem by inspecting the bits and bytes of traffic running across its network and, at certain peak times, substantially slow down the delivery of that traffic.   Their theory suggested that this would protect other customers  from the neighbors eating up more than their fair share of bandwidth.   In practice, it essentially crippled the usefulness of running any torrent application.

The FCC would have none of it, telling Comcast it cannot discriminate against the traffic being carried over its network.   The answer to the traffic problem was to build better roads to  manage the traffic.

Instead of simply agreeing to keep up with demand, Comcast has now approached this “bandwidth crisis” from a different angle.   It has simply put a limit on the amount of traffic each subscriber can utilize on its network during a 30 day period, regardless of what that traffic represents.

Comcast’s suggested limits on bandwidth gave a number of broadband providers the idea that they, too, could slap caps on their customers.   And since the usage cap question was first raised nationally earlier this year, the suggested caps have gotten lower and lower from each subsequent company testing or implementing them.

Cox has “informal” caps of up to 75GB  per month in some areas.   Time-Warner began testing caps of up to 40GB per month in Beaumont, Texas.   Frontier announced a forthcoming 5GB usage cap, which is among the lowest in the United States.    In Canada, companies have gone even lower with caps like Rogers’ 400MB monthly cap for their $60 wireless Internet plan for iPhone owners.   Canadians were so outraged by that cap, Rogers eventually had to relent and create a 6GB monthly service package for $30.

Usage capping cable and DSL providers  are in a race to  the bottom as they try to learn  how low they can  go without creating mass  defections among their customers.

Some Comcast customers have told Stop the Cap! they are relieved that at least they are on the top of the usage cap pile with  Comcast’s 250GB cap, which at first  glance appears generous.   In fact, only a small minority of their customers will currently exceed that kind of usage cap.

But regardless of how generous a usage cap appears, it still raises a lot of questions.

1. If informal efforts to control “bandwidth hogs” have been so successful, why bother with a cap at all?

For several years, Comcast has informally enforced its own internal interpretation of a usage cap with customers who consumed incredible amounts of bandwidth, usually as a result of running a home-based torrent/peer-to-peer file server, web server, or other application that runs contrary to the residential acceptable use policy.   Company officials send warnings to customers who consume hundreds of gigabytes of bandwidth every month.   Comcast’s own public statements indicate such warnings are usually successful.

“We know from experience the vast majority of customers we ask to curb usage do so voluntarily,” Comcast notes on their website.

So why bother the 99% of the rest of your customers with a formal usage cap if they don’t come anywhere close to exceeding it?   It’s awfully hard to convince people of a broadband bandwidth crisis if you also claim the overwhelming majority of your customers consume less than 5% of your proposed cap!

2. While most people won’t come close to 250GB of usage, unless they are backing up their files through an online backup service or are downloading a very large number of files, the usage cap that seems generous today is draconian tomorrow.

The biggest problem usage caps bring to the table is the artificial drag they create on innovation.   In the global race to be leaders in the emerging Internet economy, the United States was in a strong position to lead the world in  high bandwidth next generation applications like streamed high definition video programming, store-and-forward video on demand and Tivo-like recording, storing TV shows online and delivering them to you on demand, online file backup services, high quality video teleconferencing,  new “cable-TV”-like services over broadband which compete with cable and satellite providers, and more applications  yet to be dreamed up.

Just ten years ago, when most cable modem service began to really get off the ground, the Internet of the late 1990s was very different from the Internet of today.    A usage cap based on what customers did then would likely be under one gigabyte  a month, as users satisfied themselves with low  bitrate RealAudio streams, slideshow-like online video, and  a  World  Wide Web considered primitive by today’s standards.

As broadband Internet became established in a growing number of consumers’ homes, the applications to take advantage of the increased bandwidth followed.    Voice Over IP telephone services, high quality streamed audio and video, and online file storage would never have been developed based on the Internet of the late 90s, and would never have gotten  off the ground in a world with usage caps.

High definition streaming video consumes  many gigabytes per hour.    It’s among the very first exciting applications being made available to consumers with broadband connections, but will die an early death if usage caps are the order of the day.

3. Usage caps are anti-competitive and convenient, particularly as those who mandate them have a direct interest in limiting the potential of competitors that exist today or cannot get start-up funding tomorrow.

Usage caps actually do nothing to solve the “bandwidth crisis”  the cable and DSL companies suggest are on the verge of killing the Internet.   They merely restrict the  natural growth of traffic, allowing companies to pocket higher profits and spend less on expanding and enhancing their networks.

More importantly, cable companies conveniently put a stop  to plans to bring competing  multichannel video packages to consumers over the Internet.   The “cable company online” model exists today with providers like SkyAngel, which delivers Christian and secular “pro-family” programming to its customers over a set top box connected to the Internet.   More than 65 channels ranging from TBN to Animal Planet and The Weather Channel reach their customers over broadband for a monthly subscription fee.    SkyAngel’s service is in peril in a world with usage caps that will limit viewing to as little as  a few hours per month before exceeding usage caps.

Netflix and  some satellite dish companies offer video on demand programming utilizing the Internet to deliver the programming to subscribers.   In a world with usage caps, you will be stuck watching those programs only  from your cable company or local video rental store.

Future businesses that seek start-up funding to build the  high  bandwidth applications of the future will get a  guaranteed rejection once potential investors learn that consumers will be unable to  take advantage of those applications because they will exceed their usage caps and have their service shut off.

Of course, the convenient exception  to the usage cap world comes  from companies that partner with that cable or DSL company.

Frontier has already announced it  will exempt its partners from their 5GB usage cap.   ESPN360 and their online backup service preferred partner will enjoy the benefits of an uneven playing field in the marketplace because they aren’t subject to a usage cap.   Everyone else is.

What about  Time-Warner and Comcast?   Will their partner services  also enjoy exemptions from  usage caps while everyone else is forced out of business when customers discover that using them  puts them over their monthly limit?

What about Voice Over IP?    Cable companies are giving telephone companies a real headache by offering telephone service over cable lines at highly competitive pricing.   But  independent companies like Vonage and MagicJack don’t enjoy the benefit of being  exempted from  usage caps limiting the number of calls you can make or receive.   If you are owned or  are partnered with a cable or  DSL company, your service gets a free pass from the usage cap.   Everyone else is  potentially buried by it.

4. The punitive measures suggested  for those that violate  usage caps scare customers into using their connections even less, to the great benefit of the bottom line of the broadband provider.

What’s  the best way to make sure your customers use their connections as little as possible?   Impose outrageous penalties for exceeding usage caps.   Comcast proposes to send a warning letter first, but then potentially turn off a customer’s service for six months to an entire year if they dare to use their broadband service more than the company wants.

Other providers have discovered the tangible benefits of the “penalty rate.”   It guarantees striking fear into the hearts of your most hearty customers, when to exceed the cap means paying 50 cents per MEGABYTE for traffic above and beyond your capped limit, as Rogers charges Canadians right now.

Download that one hour episode of CSI: Miami, and pay up to $175 in penalties on your next bill.   Ouch!   Imagine the conversation at that family’s dinner table after your son or daughter downloaded a TV show before you had a chance to tell them you were at your monthly limit.   Horatio Caine can then come and solve the homicide at your house.

It all comes down to paying the same or more money for less service.   And if you are potentially going to have your service cut off or outrageous overage fees billed for exceeding that cap, you will make darn sure you don’t even come close to it out of fear of exceeding it.

Being in the “bandwidth shortage business” means more profits for you, less service for your customers.

The best part about imposing usage caps is that you get to invent word of a “bandwidth crisis” to justify penalizing your customers, provide absolutely no independent evidence to prove such a crisis exists, reduce your investment  in keeping your network up with the times, and help protect your product lines from pesky competition.  

After all, your cable modem or DSL service was among your most profitable products before usage caps were even proposed, but now you can make even more money.   And if a competitor ever does arrive without usage caps, you can just drop them and go back to making a decent profit instead of one that rivals the oil industry.