Wyden

Sen. Ron Wyden (D-Ore.) has introduced legislation that would force Internet Service Providers to prove usage caps are designed to manage network congestion instead of monetizing consumer data usage.

The Data Cap Integrity Act would require the Federal Communications Commission to enact new rules forcing providers to justify their usage cap programs, create standards by how ISPs measure usage and to provide useful measurement tools to customers before they incur overlimit fees.

“Internet use is central to our lives and to our economy,” said Wyden. “Future innovation will undoubtedly require consumers to use more and more data — data caps should not impede this innovation and the jobs it creates.  This bill is intended to help consumers manage their data more effectively and ensure that data caps are used only to serve the legitimate purpose of addressing congestion.”

Wyden’s bill is an attempt to force providers to prove their contention that usage limits improve the user experience by preventing so-called “data hogs” from slowing down connections of other paying customers.

Wyden is also concerned that without uniform standards of data measurement, consumers could be blindsided with overlimit fees or even have their service cut off. In the past, providers have stuck customers with a variety of often inaccurate measurement tools that have under or over-reported usage, which can sometimes lead to higher bills. At present, no government agency has authority over the veracity of provider measurement tools, and most ISPs impose terms requiring subscribers to accept their word as final for the purpose of usage measurement.

The Oregon senator’s bill is the first measure regulating usage caps introduced in the Senate. In 2009, Rep. Eric Massa (D-N.Y.) introduced a measure in the House that would have banned most usage caps and usage-based billing without first applying a means test. Massa introduced the bill after Time Warner Cable attempted to impose a usage-billing scheme on customers in his district, which includes parts of the Rochester area.

Among the provisions in Wyden’s bill the FCC must enact and enforce within one year of its passage:

• A “truth in labeling requirement” that requires ISPs fully disclose the cost of their services, the true upload and download speed a customer will receive, and the presence of any speed throttles or usage limits;
• A ban on usage caps for any provider that cannot prove they are needed to control congestion and not simply discourage Internet usage;
• A penalty for providers that either do not provide suitable measurement tools or inaccurately measure usage leading to unjustified overlimit fees;
• A provider may not exempt certain content from its usage cap while imposing it on others.

Lyons

Wyden’s bill was introduced at the same time the nation’s largest cable lobbying group, the National Cable and Telecommunications Association, sponsored an event defending usage limits and consumption billing. Two of the three experts speaking at the event declared peak usage limits or congestion pricing ineffective.

In fact, Michael Weinberg from Public Knowledge took note of the fact the cable industry now seems to admit it does not have a congestion problem:

“The most refreshing section of the [NCTA’s] study is the one that is not there,” Weinberg wrote. “There is no meaningful discussion of usage-based pricing as a tool to reduce network congestion or a suggestion that monthly data limits are a reasonable way to impact congestion. There is also no invocation of the mythical ‘data hog,’ a sinful creature that can only be punished with data caps. Hopefully, the omission is NCTA’s tacit admission of two things: that cable networks are not congested and, if they become so in the future, monthly caps will do little to address that congestion.

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“I don’t think congestion is as big a problem in fixed broadband,” said Professor David M. Lyons of Boston College Law School at the NCTA event. “The latest broadband speed surveys that the FCC has come out suggests that there is not a whole lot of slowdown at peak periods on the fixed side.”

From writing friendly reports defending Internet Overcharging to the FCC’s new chief economist — D.C.’s revolving door keeps on spinning for Professor Steven Wildman.

The Federal Communications Commission has proved that Washington’s revolving door enjoys perpetual motion with the announcement it hired a new chief economist who just three weeks earlier was peddling his findings favoring usage caps and consumption billing before a National Cable & Telecommunications Association gathering that paid for his research.

Professor Steven Wildman’s move from the cable industry’s go-to-guy for defending Internet Overcharging to a cushy new position at the FCC just weeks after shilling for the country’s largest cable industry lobbying group is shocking even by Washington’s standards.

Remarkably, FCC Chairman Julius Genachowski praised this cheerleader of wallet-pilfering by saying “his deep economic expertise and problem solving abilities” are the perfect fit for an agency pressed with challenging initiatives – like charging you more for your broadband service and calling it “pro-consumer.”

There is no doubt Wildman has deep economic expertise — he has found success penning dubious research bought and paid for by an industry that expects his findings to echo their own talking points. His problem-solving abilities at fixing the facts around the cable industry’s agenda are also unquestioned.

But his research reports aren’t worth wasting your monthly usage allowance to download because they only tell part of the story.

At the December NCTA Connects event, Wildman was the darling of the cable industry echo chamber telling tall tales about the problems of broadband penetration in a country where providers enjoy up to 95 percent gross margins on broadband pricing:

“One of the key mechanisms through which positive welfare effects are realized is the crafting of lower-priced plans for users who otherwise might not take service, while users who have a more intensive demand for broadband are able to contract for more advanced services. We also showed that UBP has flexibility advantages for users whose data service needs vary over time. Because UBP creates an incentive to offer lower cost-lower usage plans to consumers who otherwise could not profitably be served at a unitary price, UBP can be an effective tool for promoting increased broadband penetration in the United States, a role that is enhanced by the fact that low price-low usage options reduce the financial risks to consumers thinking about trying broadband for the first time.”

“Tiered pricing also has benefits for the recovery of shared network costs and for network investment. Whereas investment decisions are also influenced by other factors, including the costs of extending networks, potential revenues, and overall economic conditions, we found that, other things equal, usage tiers will likely contribute to better cash flows and stronger incentives to invest in broadband plant, both to improve the quality of service for current customers and to extend networks into unserved and underserved territories.”

Wildman does not mention his cable benefactors earn a higher percentage of profit on broadband than oil sheikhs in the Middle East rake in charging $90+ for a barrel of oil. So it is unsurprising his analysis lacks one simple solution providers could use to differentiate their services and enhance broadband penetration: lower the price to compete. He also ignores the fact that true usage pricing would offer consumers a chance to pay only for what they actually consumed during a month, but those plans are not on offer anywhere.

Wildman ignores the real industry agenda: monetizing broadband usage to create even higher profits. The cable industry is well on its way, using the enormous market power enjoyed in the current monopoly/duopoly state of consumer broadband to preserve today’s near-extortionist pricing while trying to pick up customers currently unwilling to pay, charging for slightly discounted service that comes with a paltry usage allowance.

The meme that unlimited, flat rate broadband is somehow responsible for America’s broadband-unserved is a popular one at the FCC, where Chairman Genachowski has applauded usage based pricing as an “innovative” experiment that could change how broadband is marketed in the U.S. and promote its expansion.

While those in D.C. may live in a bubble populated by industry lobbyists, others do not.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/NCTA Connects The Pros and Cons of Broadband Peak Load Pricing Dec 2012.flv[/flv]

Message Confusion: While some in the cable industry still advocate usage pricing and caps as a matter of “fairness” and as a salve for peak time congestion, today’s advocates of usage-based billing appearing at a cable-industry event in December admit congestion is simply no longer a problem on wired networks. Sandvine’s Dave Caputo and Professor David M. Lyons of Boston College Law School dismiss the notion of congestion-based pricing only during peak usage, arguing congestion is no longer the real issue driving usage caps. That is why everyone must be subjected to higher priced, usage-capped broadband no matter what time of day they use the network. (3 minutes)

The inevitable outcome of “differentiated pricing” is charging consumers more to access popular websites, as is already the case in countries like Colombia.

Wildman argues that like car manufacturers that offer many different models ranging from basic to well-appointed with luxury extras, providers should be free to offer different types of plans to consumers.

Wildman’s auto analogy fails because consumers have more than a dozen different manufacturers to choose from, each making a range of different models. For broadband, the overwhelming majority of Americans have two choices: the cable and phone company. Unlike auto manufacturers that respond to consumer demand, broadband providers are hellbent on eliminating the overwhelmingly popular flat rate, unlimited option in favor of mandatory usage pricing and/or usage caps. It would be like telling auto-buyers that their Honda Accord, Toyota Camry, or Chevy Malibu no longer met the needs of manufacturers. Instead, you have one choice: the Toyota Yaris. But you can get it with heated leather seats, so what’s the problem?

Wildman also ignores the fact providers already sell different plans, based on different speeds. Customers with only light web use can select a cheaper, lower speed tier and never notice the difference. Heavier users buy up into premium speed tiers, paying higher prices to cover their additional usage and expectations of performance.

Providers have spent the last few years trying to justify adding a usage component to the pricing equation and Wildman is perplexed by public policy and consumer groups overwhelmingly hostile to plans that would leave current pricing largely intact and add an artificial usage cap. Considering who pays for his research, this is not too surprising.

Wildman’s style of “innovation” already exists in countries like Canada, Australia, New Zealand, and in parts of Europe allowing everyone to witness what actually happens when these pricing schemes gain a foothold. Usage-based pricing has successfully boosted the profits of providers but has done nothing to expand rural broadband networks or offer customers big savings. When providers gorge on profits made possible in uncompetitive markets, the money goes straight into bank accounts or back to investors, not into capital spending to improve service or expand into areas deemed unprofitable to serve.

Customers despise usage caps so much that in Australia and New Zealand, the government has partially taken over rebuilding infrastructure with new fiber to the home networks and promoting international capacity expansion that will eventually banish usage pricing for good. In western Canada, Shaw Cable heard so much condemnation about usage caps during its listening tour, it greatly relaxed them. (The fact its biggest competitor Telus barely enforces their own caps didn’t hurt either.)

In the rest of Canada, independent ISPs have found a growing niche selling plans with considerably larger usage allowances or flat rate access. How did dominant providers like Bell (BCE) respond? They asked regulators to force the competition to stop selling flat rate service.

How Sandvine helps providers “innovate.” Alaska’s GCI implemented its draconian caps and overlimit fees using Sandvine’s Internet Overcharging technology.

Wildman’s report flies in the face of reality, and every so often the cable industry itself admits as much. Take the word of Suddenlink president and CEO Jerry Kent, who runs a largely rural cable company that launched its own Internet Overcharging scheme:

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

Unsurprisingly, that sentiment did not make it into Wildman’s analysis either.

Wildman

Financial reports from providers that have usage caps and those that don’t show the same remarkable trend: broadband expenses are way down, capital intensity is well within expected norms, and cable operators are not pouring their profligate earnings into expanding rural broadband.

That makes Wildman the consummate team player, and hardly the best choice for taxpayers who will cover his salary for a few years before he takes another trip through the revolving door back to his industry friends. When Americans wonder why Washington doesn’t seem to be living in the reality-based community, this is why. We can hardly expect Mr. Wildman to represent our interests when he has spent the last several years representing an extremely profitable industry reviled for its overcharging, poor service, and scheming, and will be more than welcomed back if he remembers his friends while working at the FCC.

This latest move represents another disappointment from Chairman Julius Genachowski, who increasingly appears to be warming up to a telecommunications industry he used to aggressively oversee at the start of his tenure.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/NCTA Connects The Evolving Internet – Patterns in Usage and Pricing Dec 2012.flv[/flv]

Three weeks ago, the Three Musketeers of Internet Overcharging appeared at a cable industry-sponsored event promoting usage caps and consumption billing. Sandvine CEO Dave Caputo makes his living scaring providers and consumers about Internet growth and (conveniently) selling the equipment that manages the traffic “tsunami” with speed throttles and usage limits. Professor David M. Lyons of Boston College Law School calls usage pricing “second degree price discrimination,” a term he hopes the industry will rebrand into something less ominous and obvious. He argues selling broadband at incremental costs will never recover “fixed costs” for networks the cable industry itself admits have already been largely paid off. Professor Steven Wildman, now on the way to the FCC as its new chief economist, peddles research bought and paid for by the cable industry. They got their money’s worth. (1 hour, 9 minutes)

A new report critical of broadband providers’ implementation of usage-based billing and data caps finds providers are not using them to handle traffic congestion, instead implementing them to monetize broadband usage and protect pay television from online video competition.

The New America Foundation and the Open Technology Institute today released its report, “Capping the Nation’s Broadband Future?,” which takes a hard look at the increasingly common practice of limiting subscribers’ broadband usage.

The paper finds that provider arguments for limiting broadband traffic don’t make sense, but do earn more dollars from customers forced to upgrade their service to win a larger monthly usage allowance.

“Although traffic on U.S. broadband networks is increasing at a steady rate, the costs to provide broadband service are also declining, including the cost of Internet connectivity or IP transit as well as equipment and other operational costs,” the reports argues. “The result is that broadband is an incredibly profitable business, particularly for cable ISPs. Tiered pricing and data caps have also become a cash cow for the two largest mobile providers, Verizon and AT&T, who already were making impressive margins on their mobile data service before abandoning unlimited plans.”

The study finds providers are attempting to invent a climate of broadband scarcity, particularly on the nation’s wired networks, to defend the introduction of various forms of Internet Overcharging, including data caps, usage-based billing, and overlimit fees.

The New America Foundation is calling on policymakers to take a more active role in defending online innovation and controlling provider zeal to cap the nation’s broadband future.

The False Argument of Network Congestion

Providers’ tall tales.

The most common defense for usage caps providers put forward is that they curb “excessive use” and impact almost none of their customers. The report points out many of the providers implementing usage caps have left them largely unchanged, despite ongoing usage growth patterns. In 2008, the report notes Comcast measured the average monthly usage of each broadband customer at around 2.5GB. Just four years later that number has quadrupled to 8-10GB. While many customers rely on Comcast’s broadband service for basic e-mail and web browsing, the cable operator has begun to entice customers into utilizing its online video platform, which in certain cases can dramatically eat into a customer’s monthly usage allowance, which remained unchanged until earlier this year.

Many broadband providers are less generous than Comcast, some imposing caps as low as 5GB of usage per month.

“Data caps encourage a climate of scarcity in an increasingly data-driven world,” the report concludes. “Broadband appears to be one of few industries that seek to discourage their customers from consuming more of their product. Thus, even as the economic and engineering rationale for data caps on wireline broadband does not hold up given the declining costs of providing service and rapid technological advancement, the proliferation of data caps is increasing. The trend is driven in large part by a woefully uncompetitive market that allows the nation’s largest providers to generate enormous profits as well as protect legacy business models from new services and innovators.”

The argument that increased usage puts an undeniable burden on providers is untenable when one examines the financial reports of providers.

The study found, for example, Time Warner Cable’s latest 10-K report shows that connectivity costs as a percentage of revenue have decreased by half, from an already modest 1.20% in 2008 to a little over 0.60% in 2011.

In 2012, the company is again exploring ways to introduce usage caps on at least some of its customers, in return for a modest discount.

Upgrade? Spend Less and Charge Customers More Instead!

The report notes cable companies like Time Warner Cable and Comcast, whose networks were originally built for television services and have now been repurposed for broadband as well, are enjoying lucrative profits on
networks that have long been paid off. In fact, Time Warner Cable recently disclosed it earns more than 95 percent in gross margins on its broadband service, with additional rate increases for consumers likely in the near future. The company recently began charging its customers a modem rental fee as well.

Shammo

At these margins, the report concludes selling broadband service to “data hogs” who consume hundreds of gigabytes of traffic per month are still profitable for providers.

As financial reports disclose capital spending on network upgrades continue to fall, operators are instead content imposing usage limits on customers to control traffic growth and further monetize an already enormously-profitable business.

The nation’s largest phone companies also come in for criticism. The report quotes from Stop the Cap!’s coverage of Verizon’s chief financial officer openly admitting it is investing most of its available capital in the highly profitable wireless sector.

“It is clear that in shifting a greater percent of their overall capital expenditures to their wireless segments, Verizon and AT&T are more interested in expanding their dominance in the wireless industry than they are in upgrading DSL or expanding fiber connectivity to provide aggressive competition for residential broadband service,” the report found.

Verizon’s chief financial officer recently made the following statement at an investor relations event:

“The fact of the matter is wireline capital — and I won’t give the number but it’s pretty substantial — is being spent on the wireline side of the house to support wireless growth,” [Verizon CFO Fran Shammo] said. “So the IP backbone, the data transmission, fiber to the cell, that is all on the wireline books but it‖s all being built for the wireless company.”

Wall Street Educates Providers on How to Lead the Way With Data Caps

Although the majority of subscribers loathe usage restrictions on their already-expensive broadband accounts, a vocal group on Wall Street strongly favors them, and routinely browbeats providers on the issue.

Helping educate cable companies how usage caps can protect against cord cutting and further monetize broadband.

The report’s authors discovered some Wall Street banks even invest time and money developing presentations advocating usage caps and consumption billing to protect video revenue. A 2011 Credit Suisse presentation outlined ways usage-based billing can protect cable operators’ video revenues:

“…over the longer term, consumption based billing could reduce the attractiveness of over the top video options (e.g., Netflix and Hulu), as the economic attractiveness of such over the top options could be partially offset by a [broadband] bill that is higher, due to [broadband] overage charges that would be driven by large amounts of data being streamed via a customer’s [broadband] connection.”

Yet most cable operators vehemently deny usage caps and consumption billing are designed to decrease usage or protect video revenue. Credit Suisse and other Wall Street banks and analysts say otherwise, and express little concern over network congestion.

The report finds compelling evidence that data caps have effectively stopped new competitors and online innovation already, noting a Sony executive stated that the company was putting the development of its own online video service on hold, citing Comcast’s monthly usage cap.

The Wireless Cap Shell Game: Caps Protect Scarce Airwaves While Companies Promote More Usage, For a Price

The report also found suggestions of a forthcoming wireless traffic tsunami are greatly exaggerated. AT&T and Verizon Wireless have issued repeated alarmist rhetoric claiming that wireless data’s exponential growth is threatening to overwhelm available network capacity.

But both carriers recently changed pricing models to encourage consumers to bring more devices to their networks, along with suggestions customers upgrade to higher allowance plans to handle the additional traffic generated by those devices. In fact, both AT&T and Verizon Wireless see profitable futures in forthcoming “machine to machine” wireless traffic that will allow cars, appliances and medical devices to communicate over their respective mobile networks. AT&T’s security and home automation system also relies on its own wireless network, offering customers remote access to their homes, chewing up wireless bandwidth as they go.

Despite suggestions from both providers their new wireless data plans would save customers money, it has brought overall increases in the average revenue earned from each subscriber instead.

Top-rated WOW! only delivers service in a handful of cities in the midwest, but is getting larger after acquiring Knology.

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.

Pricing and packages for Lawrence, Kansas’ local cable company will remain the same… for now.

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.

Britt

“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.”

Cable operators continue to win the vast majority of new broadband customers, according to this chart from Leichtman Research Group, Inc.

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.

Cashing in on cable modems was just a hidden price increase, admits Britt.

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.

Nobody needs 1Gbps, argues Britt.

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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