Phillip “They Want to Save You Money By Charging You More” Dampier

The pro-Internet Overcharging forces’ meme of “pay for what you use” sounds good in theory, but no broadband provider in the country would dare switch to a true consumption-based billing system for broadband, because it would destroy predictable profits for a service large cable and phone companies hope you cannot live without.

Twenty years ago, the cable industry could raise rates on television packages with almost no fear consumers would cancel service. When I produced a weekly radio show about the cable and satellite television industry, cable companies candidly told me they expected vocal backlashes from customers every time a rate increase notice was mailed out, but only a handful would actually follow through on threats to cut the cord. Now that competition for your video dollar is at an all-time-high, providers are shocked (and some remain in denial) that customers are actually following through on their threats to cut the cord. Goodbye Comcast, Hello Netflix!

Some Wall Street analysts have begun warning their investor clients that the days of guaranteed revenue growth from video subscribers are over, risking profits as customers start to depart when the bill gets too high. Cable companies have always increased rates faster than the rate of inflation, and investors have grown to expect those reliable profits, so the pressure to make up the difference elsewhere has never been higher.

With broadband, cable and phone companies may have found a new way to bring back the Money Party, and ride the wave of broadband usage to the stratosphere, earning money at rates never thought possible from cable-TV. The ticket to OPEC-like rivers of black gold? Usage-based billing.

Since the early days of broadband, most Americans have enjoyed flat rate access through a cable or phone company at prices that remained remarkably stable for a decade — usually around $40 a month for standard speed service.

In the last five years, as cord-cutting has grown beyond a phenomena limited to Luddites and satellite dish owners, the cable industry has responded. As they learned customers’ love of broadband has now made the service indispensable in most American homes, providers have been jacking up the price.

Time Warner Cable, for example, has increased prices for broadband annually for the last three years, especially for customers who do not subscribe to any other services.

Customers dissatisfaction with rate hikes has not led to broadband cord cutting, and in fact might prove useful on quarterly financial reports -and- for advocating changes in the way broadband service is priced:

1. Enhance revenue and profits, replacing lost ground from departing video customers and the slowing growth of new customers signing up for video and phone services (and keeping average revenue per user ((ARPU)) on the increase);
2. Using higher prices to provoke an argument about changing the way broadband service is sold.

Pouring over quarterly financial reports from most major providers shows remarkable consistency:

• The costs to provide broadband service are declining, even with broadband usage growth;
• Revenue and profits enjoy a healthy growth curve, especially as increased prices on existing customers make up for fewer new customer additions;
• Earnings from broadband are now so important, a cable company like Time Warner Cable now refers to itself as a broadband company. It is not alone.

Still, it is not enough. As usage continues to grow in the current monopoly/duopoly market, providers are drooling with anticipation over the possibility of scrapping the concept of “flat rate” broadband, which limits the endless ARPU growth Wall Street demands. If a company charges a fixed rate for a service, it cannot grow revenue from that service unless it increases the price, sells more expensive tiers of service, or innovates new products and services to sell.

Providers have enjoyed moderate success selling customers more expensive, faster service, also on a flat rate basis. But that still leaves money on the table, according to Wall Street-based “usage billing” advocates like Craig Moffett, who see major ARPU growth charging customers more and more money for service as their usage grows.

Moffett has a few accidental allies in the blogger world who seem to share his belief in “usage-based” billing. Lou Mazzucchelli, reading the recent New York Times piece on Time Warner’s gradual move towards usage pricing, frames his support for consumption billing around the issue of affordability. In his view, usage pricing is better for consumers and the industry:

It costs real money to upgrade networks to keep pace with this demand, and those costs are ultimately borne by the subscriber. So in the US, we have carriers trying to raise their rates to offset increases in capital and operating expenses to the point where consumers are beginning to push back, and the shoving has come to the attention of the Federal Communications Commission, which has raised the possibility of treating Internet network providers as common communications carriers subject to regulation.

I believe that flat-rate pricing is a major source of problems for network carriers and consumers. In the carrier world, the economics are known but ignored because marketers believe that flat rates are the only plans consumers will accept. But in the consumer world, flat rates are rising to incomprehensible levels for indecipherable reasons, with little recourse except disconnection. Consumer dissatisfaction is rising, in part because consumers feel they have no control over the price they have to pay. This is driven by their sense of pricing inequity that is hard to visualize but comes from implicit subsidies in the current environment. The irony is that pay-per-use pricing solves the problem for carriers and consumers.

Mazzucchelli reposted his blog piece originally written in 2010 for the benefit of Times readers. Two years ago, he measured his usage at 11GB a month. His provider Verizon Communications was charging him $64.99 a month for 25Mbps service, which identifies him as a FiOS fiber to the home customer.  Mazzucchelli argues the effective price he was paying for Internet access was $5.85 for each of the 11GB he consumed, which seemed steep at the time. (Not anymore, if you look at wireless company penalty rates which range from $10-15/GB or more.)

Mazzucchelli theorized that if he paid on a per-packet basis, instead of flat rate service based on Internet speed, he could pay something like $0.0000025 per packet, which would result in a bill of $31.91 for his 11GB instead of $65. For him, that’s money saved with usage billing.

On its face, it might seem to make sense, especially for light users who could pay less under a true usage-based pricing scenario like the one he proposes.

Verizon Communications is earning more average revenue per customer than ever with its fiber to the home network. That’s about the only bright spot Wall Street recognizes from Verizon’s fiber network, which some analysts deride as “too expensive.”

Unfortunately for Mazzucchelli, and others who claim usage-based pricing will prove a money-saver, the broadband industry has some bad news for you. Usage pricing simply cannot be allowed to save you, and other current customers money. Why? Because Wall Street will never tolerate pricing that threatens the all-important ARPU. In the monopoly/duopoly home broadband marketplace most Americans endure, it would be the equivalent of unilaterally disarming in the war for revenue and profits.

That is why broadband providers will never adopt a true usage-based billing system for customers. It would cannibalize earnings for a service that already enjoys massive markups above true cost. In 2009, Comcast was spending under $10 a month to sell broadband service priced above $40.

Mazzucchelli

Instead, providers design “usage-based” billing around rates comparable to today’s flat rate pricing, only they slap arbitrary maximum usage allowances on each tier of service, above which consumers pay an overlimit fee penalty. That would leave Mazzucchelli choosing a lower speed, lower usage allowance plan to maximize his savings, if his use of the Internet didn’t grow much. On a typical light use plan suitable for his usage, he would subscribe to 1-3Mbps service with a 10GB allowance, and pay the overlimit fee for one extra gigabyte if he wanted to maximize his broadband dollar.

But his usage experience would be dramatically different, both because he would be encouraged to use less, fearing he might exceed his usage allowance, and he would be “enjoying” the Internet at vastly slower speeds. If Mazzucchelli went with higher speed service, he would still pay prices comparable for flat rate service, and receive a usage allowance he personally would find unnecessarily large. The result for him would be little to no savings and a usage allowance he did not need.

Mazzucchelli’s usage pattern is probably different today than it was in 2010. Is he still using 11GB a month? If he uses double the amount he did two years ago, under his own pricing formula, the savings he sought would now be virtually wiped out, with a broadband bill for 22GB of consumption running $63.82. By the following year, usage-based pricing would cost even more than Verizon’s unlimited pricing, as average use of the Internet continues to grow.

That helps the broadband industry plenty but does nothing for consumers. Mazzucchelli might be surprised to learn that the “real money to upgrade networks to keep pace with this demand,” is actually more than covered under today’s profit margins for flat-rate broadband. In fact, if he examines financial reports over the last five years and the statements company executives make to shareholders, virtually all of them speak in terms of reducing capital investments and the declining costs to deliver broadband, even as usage grows.

Verizon’s fiber network, while expensive to construct, is already earning the company enormous boosts in ARPU over traditional copper wire phone service. While Wall Street howled about short term capital costs to construct the network, then-CEO Ivan Seidenberg said fiber optics was the vehicle that will drive Verizon earnings for decades selling new products and services that its old network could never deliver.

Still, is Mazzucchelli paying too much for his broadband at both 2010 and 2012 prices? Yes he is. But that is not a function of the cost to deliver broadband service. It is the result of a barely competitive marketplace that has an absence of price-moderating competitors. Usage-based pricing in today’s broadband market assures lower costs for providers by retarding usage. It also brings even higher profits from bigger broadband bills as Internet usage grows, with no real relationship to the actual costs to provide the service. It also protects companies from video package cord-cutting, as customers will find online viewing prohibitively expensive.

One need only look at pricing abroad to see how much Americans are gouged for Internet service. Unlimited high speed Internet is available in a growing number of countries for $20-40 a month.

Usage-based billing is a dead end that might deliver temporary savings now, but considerably higher broadband bills soon after. It is not too late to turn the car around and join us in the fight to keep unlimited broadband, enhance competition, and win the lower prices users like Mazzucchelli crave.

Time Warner Cable has a usage meter up for some customers.

Time Warner Cable has reintroduced usage-limited broadband plans in Austin, Tex., three years after shelving an earlier market test that drew protests from local residents and civic leaders.

Time Warner Cable is offering three tiers of what it calls “Internet Essentials,” each offering different speeds of service, all with a 5GB usage allowance for a $5 monthly discount.

“It’s clear that one-size-fits-all pricing is not working for many consumers, particularly in a challenging economy,” regional vice president of operations in Texas Gordon Harp said. “We believe the choice and flexibility of Essentials will enhance value for lighter users, help us retain existing customers in a competitive marketplace and attract new customers to our superior Internet experience.”

But Stop the Cap! disagrees, noting the three variations of Internet Essentials all offer a tiny discount and come with a ridiculously low usage allowance.

With usage overlimit fees of $1/GB, currently limited to a maximum of $25, customers are playing Russian Roulette with their wallets. Just exceeding the allowance by 5GB a month eliminates any prospects of savings, and going beyond that will actually cost customers more than what they would have paid for unlimited Internet.

The company has added a usage tracker for Texas customers qualified to get the plan. It can be found under the My Services section of Time Warner Cable’s website.

Customers in Texas can choose from Grande Communications, AT&T or Verizon if they want to say goodbye to Time Warner’s endless interest in Internet Overcharging.  Image courtesy: Jacobson

Stop the Cap! recommends consumers strongly reject these plans. If customers are looking for a better deal on broadband, it is wiser to call Time Warner and threaten to take your broadband business to the competition. The savings that will result on a retention plan are sure to be better than the Internet Essentials discount, and no one will have to think twice about how they use their broadband account. Customers on an extremely tight budget can also downgrade to a slower speed plan that offers unlimited access, essential in any home with multiple broadband users.

Time Warner Cable does not help their position by significantly distorting the truth about their last experiment trying to limit customer broadband usage. In 2009, the company proposed changing the price for unlimited broadband to an enormous $150 a month. Customers protested in front of the company’s offices in several cities. Despite that, and the intense negative media coverage the company endured, Time Warner still believes its customers are itching to have their broadband usage limited:

Previous Experience with Usage-based Pricing

Time Warner Cable began testing usage-based pricing in 2009. Although many customers were interested in the plan, many others were not and we decided to not proceed with implementation of the plan. Over the past few years, we consulted with our customers and other interested parties to ensure that community needs are being met and in late 2011 we began testing meters which will calculate Internet usage.

We’d be interested to know what customers in the Austin area were consulted about the desire for usage-limited plans. Nobody consulted us either. We can imagine the “other interested parties” are actually Wall Street analysts and fellow industry insiders. We’re confident the overwhelming number of Time Warner Cable customers have no interest in seeing their unlimited use plans changed and company customer service representatives have told us there has been very little interest in the plans to date. For now, the company claims it won’t force people to take usage limited plans, but as we’ve seen in the wireless industry, yesterday’s promises are all too quickly forgotten.

With a usage meter now established, all it takes is an announcement Time Warner is doing away with unlimited broadband (or raising the price of it to the levels the company proposed in 2009), and customers are ripe for a broadband ripoff.

Time Warner Cable says it is “listening” to customers on its TWC Conversations website. We suggest you visit, click the tab marked Essentials Internet Plans, and let Time Warner Cable know you have no interest in these usage-limited plans and are prepared to go to war to keep affordable, unlimited Internet. With your voice, perhaps Time Warner Cable will finally realize that usage caps and consumption billing just don’t work for you or your family.

Comcast is running “welcome back” ads in Chattanooga that still claim they run America’s fastest ISP, when they don’t.

EPB, Chattanooga’s publicly-owned utility that operates the nation’s fastest gigabit broadband network, has already won the speed war, delivering consistently faster broadband service than any of its Tennessee competitors. So when facts are not on their side, competitors like Comcast and a conservative “watchdog” group simply make them up as they go along.

Comcast is running tear-jerker ads in Chattanooga featuring professional actors pretending to be ex-customers looking to own up to their “mistake” of turning their back on Comcast’s 250GB usage cap (now temporarily paroled), high prices, and questionable service.

“It turns out that the speeds I was looking for, Xfinity Internet had all along,” says the actor, before hugging an “Xfinity service technician” in the pouring rain. “But you knew that, didn’t you?”

The ad closes repeating the demonstrably false claim Comcast operates “the nation’s fastest Internet Service Provider.”

“I see those commercials on television and I’m thinking, I wonder how much did they pay you to say that,” says an actual EPB customer in a response ad from the public utility.

It turns out quite a lot. The high-priced campaign is just the latest work from professional advertising agency Goodby Silverstein & Partners of San Francisco, which is quite a distance from Tennessee. Goodby has produced Comcast ads for years. The ad campaign also targets the cable company’s other rival that consistently beats its broadband speeds — Verizon FiOS.

EPB provides municipal power, broadband, television, and telephone service for residents in Chattanooga, Tennessee

Comcast tried to ram their “welcome back” message home further in a newspaper interview with the Times Free Press, claiming “a lot of customers are coming back to Xfinity” because Comcast has a larger OnDemand library, “integrated applications and greater array of choices.”

Comcast does not provide any statistics or evidence to back up its claims, but EPB president and CEO Harold DePriest has already seen enough deception from the cable company to call the latest claims “totally false.”

In fact, DePriest notes, customers come and go from EPB just as they do with Comcast. The real story, in his view, is how many more customers arrive at EPB’s door than leave, and DePriest says they are keeping more customers than they lose.

EPB fully launched in Chattanooga in 2010, and despite Comcast and AT&T’s best customer retention efforts, EPB has signed up 37,000 customers so far, with about 20 new ones arriving every day. (Comcast still has more than 100,000 customers in the area.)

Many come for the EPB’s far superior broadband speeds, made possible on the utility’s fiber to the home network. EPB also does not use Internet Overcharging schemes like usage caps, which Charter, AT&T, and Comcast have all adopted to varying degrees. Although the utility avoids cut-rate promotional offers that its competitors hand out to new customers (EPB needs to responsibly pay off its fiber network’s construction costs), its pricing is lower than what the cable and phone companies offer at their usual prices.

Comcast claims customers really don’t need super high speed Internet service, underlined by the fact they don’t offer it. But some businesses (including home-based entrepreneurs) do care about the fact they can grow their broadband speeds as needed with EPB’s fiber network. Large business clients receiving quotes from EPB are often shocked by how much lower the utility charges for service that AT&T and Comcast price much higher. It costs EPB next to nothing to offer higher speeds on its fiber network, designed to accommodate the speed needs of customers today and tomorrow.

The competition is less able. AT&T cannot compete on its U-verse platform, which tops out shy of 30Mbps. Comcast has to move most of its analog TV channels to digital, inconveniencing customers with extra-cost set top boxes to boost speeds further.

The fact EPB built Chattanooga’s best network, designed for the present and future, seems to bother some conservative “watchdog” groups. The Beacon Center of Tennesee, a group partially funded by conservative activists like Richard Mellon Scaife through a network of umbrella organizations, considers the entire fiber project a giant waste of money. They agree with Comcast, suggesting nobody needs fast broadband speeds:

EPB also offers something called ultra high-speed Internet. Consumers have to pay more than seven times what they would pay for the traditional service — $350 a month. Right now, only residents of a select few cities worldwide (such as Hong Kong) even use this technology, and that is because most consumers will likely not demand it for another 10 years.

Actually, residents in Hong Kong, Japan, and Korea do expect the faster broadband speeds they receive from their broadband providers. Americans have settled for what they can get (and afford). DePriest openly admits he does not expect a lot of his customers to pay $350 a month for any kind of broadband, but the gigabit-capable network proves a point — the faster speeds are available today on EPB at a fraction of price other providers would charge, if they could supply the service at all. Most EPB customers choose lower speed packages that still deliver better performance at a lower price than either Comcast or AT&T offer.

The Beacon Center doesn’t have a lot of facts to help them make their case. But that does not stop them:

• They claim EPB’s network is paid for at taxpayer expense. It is not.
• They quote an “academic study” that claims 75 percent of “government-run” broadband networks lose money, without disclosing the fact the study was bought and paid for by the same industry that wants to keep communities from running broadband networks. Its author, Ron Rizzuto, was inducted into the Cable TV Pioneers in 2004 for service to the cable industry. The study threw in failed Wi-Fi networks built years ago with modern fiber broadband networks to help sour readers on the concept of community broadband.
• Beacon bizarrely claims the fiber network cannot operate without a $300 million Smart Grid. (Did someone inform Verizon of this before they wasted all that money on FiOS? Who knew fiber broadband providers were also in the electricity business?)

The “watchdog” group even claims big, bad EPB is going to drive AT&T, Comcast, and Charter Cable out of business in Chattanooga (apparently they missed those Comcast/Xfinity ads with customers returning to Kabletown in droves):

Fewer and fewer private companies wish to compete against EPB, which will soon have a monopoly in the Chattanooga market, according to private Internet Service Provider David Snyder. “They have built a solution looking for a problem. It makes for great marketing, but there is no demand for this service. By the time service is needed, the private sector will have established this for pennies on the dollar.”

Ironically, Snyder’s claim there is no demand for EPB’s service fall flat when one considers his company, VolState, has been trying to do business with EPB for two years. He needs EPB because he is having trouble affording the “pennies on the dollar” his suppliers are (not) charging.

Snyder tells “Nooganomics” his company wants an interconnection agreement with EPB, because the private companies he is forced to buy service from — including presumably AT&T, want to charge him a wholesale rate twice as much as EPB currently bills consumers. Snyder calls EPB’s competition “disruptive.”

Nooganomics calls EPB’s low priced service a “charity” in comparison to what AT&T and Comcast charge local residents, and the free market can do no wrong-website seems upset consumers are enjoying the benefits of lower priced service, now that the local phone company and cable operator can’t get away with charging their usual high prices any longer.

Deborah Dwyer, an EPB spokeswoman, told the website the company got into the business with state and city approval, followed the rules for obtaining capital and pays the taxes or payments-in-lieu of taxes as the same rate as corporate players. “We believe that public utilities like EPB exist to help improve the quality of life in our community, and the fiber optic network was built to do just that. One of government’s key responsibilities is to provide communities with infrastructure, and fiber to the home is a key infrastructure much like roads, sewer systems and the electric system.”

Snyder can’t dispute EPB delivers great service. He also walks away from the competition-is-good-for-the-free-market rhetoric that should allow the best company with the lowest rates to win, instead declaring customers should only do business with his company to support free market economics (?):

“If you are a free market capitalist and you believe in free markets, you need to do business with VolState,” Mr. Snyder says. “And if you’re highly principled, every time you buy from a government competitor, what you’re voting for with your dollars is, you’re saying, ‘It’s OK for the government come in to private enterprise and start to take over a vast part of what we used to operate in as a free market.’”

Perhaps Snyder and his friends at the Beacon Center have a future in the vinegar business. They certainly have experience with sour grapes.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Comcast Ad Welcome Back.flv[/flv]

Comcast’s emotionally charged ad, using paid actors, was produced by advertising firm Goodby Silverstein & Partners. The commercial running in Chattanooga is a slight variation on this one, which targets Verizon FiOS. (1 minute)

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/EPB Ad.flv[/flv]

EPB uses actual customers, not paid actors, in its own advertising that calls out Comcast’s false advertising.  (1 minute)

While Rogers top-level executives remain safe, hundreds of lower level employees are on the chopping block as Canada’s largest wireless provider announces the second round of job cuts to cut costs, the company confirmed today.

Just under 400 employees will be terminated, many in middle management positions in both the cable and wireless divisions Rogers operates. Rogers slashed at least 300 jobs earlier this year.

Rogers blames increasing competition from Bell, Telus, and smaller wireless carriers for the cost cutting. Rogers position in the market has stalled as other carriers increase their promotional offers to win over Rogers’   customers.

Bell is also cutting into Rogers’ position in cable television and broadband, especially in Ontario where the company’s Fibe TV is eroding Rogers’ margins.

“Where we actually saw the losses in subscribers, again more at the bottom end of the market with bundled offers that were extremely cheap, what we would call unsustainable, aggressive bundled offers with price points down in the mid-$70 range for a triple-play for the first six months,” Robert Bruce, president of communications told investors during an April conference call.

Rogers’ knife-wielder is its new chief financial officer Tony Staffieri, a former executive vice-president of finance at Bell. Staffieri was hired earlier this year to launch a new cost-cutting philosophy. But top executives at Rogers have been largely immune to the job and cost cuts.

Verizon customers can expect to pay more for the company’s fiber to the home service, FiOS, even as promised higher speeds arrive.

Most customers off contract can expect to pay $10-15 more a month under the new pricing regime, or cut back on selected television channels to keep their price the same. Verizon customers currently on a promotional offer will not see any price changes until their promotion expires.

Wall Street analysts call Verizon’s rate hikes a return to “pricing rationality.” The phone company has engaged in years of aggressive pricing, promotions, and rebate offers, especially in the northeast. At one point, Verizon was offering New York-area customers up to $500 in rebates when signing up for a triple play Verizon FiOS package. As Verizon pulls back from aggressive promotions, some analysts predict cable competitors Time Warner Cable and Cablevision will be able to resume more typical rate increases common before Verizon FiOS launched. Cablevision previously announced it would not increase rates during 2012, mostly in response to Verizon’s aggressive pricing.

Verizon has significantly boosted speeds on most of its broadband offerings, with the exception of its standard entry-level 15/5Mbps package, which remains unchanged. Verizon is hoping customers will find that entry level package less and less attractive and be amenable to upgrading to faster speed service at a higher price.

“We’re expecting that 80 percent of customers will want more than 15 megabits per second,” Arturo Picicci, Verizon’s director of product management told Reuters.

Under Verizon’s new pricing, triple play customers with unlimited calling, 15/5Mbps broadband, and 290 television channels pay $109.99. The next step up, for $15 more a month, would upgrade broadband to 50/25Mbps service.

Verizon is also shaming New York area cable operators with speed increases that Time Warner and Cablevision currently cannot match.

The company’s 150/65Mbps service is now priced at $99.99 a month, down from $209.99. Customers in some areas can also sign up for 300/65Mbps service for as low as $204.99 with a two-year contract.

In contrast, Comcast charges $200 a month for 105Mbps, Cablevision prices its 101Mbps service at $104.95 a month.