Verizon Wireless will force customers off of their grandfathered unlimited data plans when they reach the end of their current two-year service contracts, according to the company’s chief financial officer.

It is all part of the cell phone company’s strategy to boost the average bills of customers with new, more expensive tiered family-shared data plans. With a significant number of current customers grandfathered on unlimited data plans that users likely will not forfeit voluntarily, Verizon will force the issue as customers come up for contract renewal.

The plan received considerable approval at today’s JPMorgan Chase TMT conference, a gathering for Wall Street investors and tech companies like Verizon.  Executive vice-president and chief financial officer Fran Shammo laid out the plan to switch customers to forthcoming family “data share” plans that are priced based on anticipated usage:

As you come through an upgrade cycle and you upgrade in the future, you will have to go onto the data share plan. And moving away from, if you will, the unlimited world and moving everybody into a tiered structure data share-type plan.

So when you think about our 3G base, a lot of our 3G base is unlimited. As they start to migrate into 4G, they will have to come off of unlimited and go into the data share plan. And that is beneficial for us for many reasons, obviously. So as you pick what tier you want to be and we think that there will be some price up in those tiers.

“Price up” is code language for bill hiking. Customers adopting family share plans may be able to share data across a larger number of devices, but at consumption pricing, many customers will find their Verizon bills substantially higher than before.

Shammo

“And the important part of that is we want the connections to come in and the way we have designed our plan, this plan is built on tiers and as we look at the future growth of LTE consumption because of the speeds and video consumption and consumption of other M2M-type devices, it is going to be more important that people will start to upgrade in their tiers as they start to really realize the benefits of the LTE network,” Shammo said. “As [customers] add more devices, they are going to have to buy up into tiers. So again, you will see the revenue increase there.”

Those revenue predictions were not sufficient to satiate Phil Cusick, an analyst at JPMorgan Chase. He questioned Shammo about the prospects for Verizon further increasing revenue with across-the-board rate increases on service plans.

Shammo would not commit to that, but was pleased with the lack of customer protests over their recent introduction of a $30 equipment upgrade fee. He called the new fee “the right thing to do.” More fees and surcharges are likely, according to Shammo.

“I think implementing these additional fees is probably where we are at,” he said. “With the construct that we have dealt with around data share and where we see consumption of LTE going, when you put the combination of them together, we are fairly confident that we will see people start to uptake in the tiers, which is really where we will get the revenue accretion in the future.”

Shammo also said Verizon’s fiber to the home network FiOS has gotten such rave reviews, it almost sells itself. That means the company will pull back on promotional offers and plans a general rate increase for all customers in the coming months, if only to bolster company profits.

“We have to do a better job in discipline of price increases and I think that you’ll see us do some price increases here over the next two quarters to offset the content increase and that will also contribute more profitability to the bottom line,” Shammo said. “You are going to have to concentrate more on reducing the amount of promotions, reducing the amount of retention that you put on the table to retain a customer and then also you are seeing that the industry is pricing up.”

Verizon FiOS customers will find rate increases applying both to equipment rental and service pricing nationwide, according to Shammo.

“We were actually below-market compared to our competitors on the amount of fee that we charge on the rental of a set-top box or a digital converter box,” Shammo explained. “We are switching around our bundles and the customers that are coming out of the current bundles will be priced up to the newer bundles. So you are going to see really a shift over the next two to three quarters in price-ups coming out of FiOS.”

As far as FiOS expansion goes, the company does not expect any major expansion in the service for the next several years.

“If we can penetrate the market and really turn the wireline profitability, could we potentially build out to other areas? Yes, but that is a decision that will be made in years out, not right now,” Shammo said. “So from a capital perspective, we are being very disciplined with where we are going to put that capital.”

Comcast Monday announced it was exempting its new Xbox streaming video service from the company’s long standing 250GB monthly usage cap, claiming since the network doesn’t exist on the public Internet, there is no reason to cap its usage.

Net Neutrality advocates immediately denounced the cable operator for violating Net Neutrality, giving favorable treatment to its own video service while leaving Netflix, Amazon, and others under its usage cap regime.

Public Knowledge president Gigi Sohn:

“The Xbox 360 provides a number of video services to compete for customer dollars, yet only one service is not counted against the data cap—the one provided by Comcast.” Sohn said. “This is nothing less than a wake-up call to the Commission to show it is serious about protecting the Open Internet.”

Stop the Cap! believes Comcast also inadvertently undercut its prime argument for the company’s 250GB usage cap — that it assures “heavy users” don’t negatively impact the online experience of other customers:

We work hard to manage our network resources effectively and fairly to ensure a high-quality online experience for all of our customers. But XFINITY Internet service runs on a shared network, so every user’s experience is potentially affected by his or her neighbors’ Internet usage.

Our number one priority is to ensure that every customer has a superior Internet service experience. Consistent with that goal, the threshold is intended to protect the online experience of the vast majority of our customers whose Internet speeds could be degraded because one or more of their neighbors engages in consistent high-volume Internet downloads and uploads.

The threshold also addresses potential problems that can be caused by the exceedingly small percentage of subscribers who may engage in very high-volume data consumption (over 250 GB in a calendar month). By applying a very high threshold on monthly consumption, we can help preserve a good online experience for everyone.

Comcast argues around the exemption of the Xbox service by reclassifying it as somehow separate from the public Internet.  The company then tries to claim the Xbox app functions more like an extra set top box, not as a data service.  But, in fact, it –is– a data service delivered over the same cable lines as Comcast’s broadband service, subject to the same “last-mile congestion problem” Comcast dubiously uses as the primary justification for placing limits on customers.

Cable providers who limit broadband use routinely use the “shared network experience” excuse as a justification for usage control measures.  Since cable broadband delivers a fixed amount of bandwidth into individual neighborhoods which everyone shares, a single user or small group of users can theoretically create congestion-related slowdowns during peak usage times.  Cable operators have successfully addressed this problem with upgrades to DOCSIS 3 technology, which supports a considerably larger pipeline unlikely to be congested by a few “heavy users.”

Comcast’s argument the Xbox service doesn’t deserve to be capped because it is delivered over Comcast’s own internal network misses the point.  That content reaches customers over the same infrastructure Comcast uses to reach every customer.  If too many customers access the service at the same time, it is subject to precisely the same congestion-related slowdowns as their broadband service.  Data is data — only the cable company decides whether to treat it equally with its other services or give it special, privileged attention.

Even if Comcast argues the Xbox streaming service exists on its own segregated, exclusive “data channel,” that represents part of a broader data pipeline that could have been dedicated to general Internet use.  The fact that special pipeline is available exclusively for Comcast’s chosen favorites, while keeping usage limits on immediate competitors, is discriminatory.

Comcast customers who have lived under an inflexible 250GB usage limit since 2008 should be wondering why the company can suddenly open unlimited access to some services while refusing to adjust its own usage limits on general broadband service.

Stop the Cap! believes Comcast has forfeit its own justification for usage caps and network management techniques that can slow customer Internet speeds.  We have no problem with the company offering unlimited access to the Xbox streaming service. But the company must treat general Internet access with equal generosity, removing the unjustified and arbitrary usage cap it imposed on customers in 2008.  After all, if the company can find vast, unlimited resources for a service it launched only this year, it should be able to find equal resources for a service it has sold customers (at a remarkable profit) for more than a decade.

Anything less makes us believe Comcast’s usage caps are more about giving some services an unfair advantage — violating the very Net Neutrality guidelines Comcast claimed it would voluntarily honor.

Stop the Cap! strongly believes usage caps are increasingly less about good network management and more about controlling and monetizing the online experience, seeking marketplace advantages and new revenue streams from consumers who already pay some of the world’s highest prices for broadband service.  As we’ve argued since 2008, Internet Overcharging through usage caps and usage based billing is also an end run around Net Neutrality.  The evidence is now apparent for all to see.

[Thanks to our readers Scott and Yannio for sharing developments.]

Phillip "The Mayans Never Met AT&T" Dampier

AT&T has used the specter of a nationwide wireless bandwidth crisis to pressure Washington to adopt its agenda for additional mobile spectrum.  But talk of a looming “data tsunami” has done nothing to stop AT&T from heavily marketing their most data-hungry devices — smartphones and tablets to customers.

In fact, the “broadband shortage business” has become enormously profitable for the former Ma Bell.

Switch to a Smartphone

Wireless carriers like AT&T aggressively market smartphones because they drive the highest average monthly revenue earned from customers.  So far, the marketing push has been an unparalleled success.  PricewaterhouseCoopers reported smartphones accounted for 48% of all wireless phone sales in 2011, up from 30% in 2010.  More than half of customers upgrading their old phones chose smartphones to replace them — an enormous increase over just 36% of upgrades in 2010.  Because smartphones are designed for an online experience, most companies mandate customers subscribe to a data plan, often adding $30 or more per phone, per month to a wireless phone bill.

AT&T’s 4th quarter results told the story, and it was all smiles.  AT&T celebrated customer enthusiasm for smartphones and the data they consume with no worries about “data tsunamis” or “bandwidth crises”:

• In 2011, AT&T’s growth engines — wireless, wireline data and managed services — represented 76 percent of total revenues and grew 7.5 percent versus 2010, led in the fourth quarter by:
  • 10.0 percent growth in wireless revenues
  • 19.4 percent growth in wireless data revenues, up $956 million versus the year-earlier quarter
• 9.4 million smartphone sales, best-ever quarter and 50 percent more than previous quarterly record and nearly double 3Q11 sales; 82 percent of postpaid sales were smartphones
• Best-ever quarter for Android and Apple smartphones, including 7.6 million iPhone activations

Double-Digit Growth for Wireless Revenues. Total wireless revenues, which include equipment sales, were up 10.0 percent year over year to $16.7 billion. Wireless service revenues increased 4.0 percent, to $14.3 billion, in the fourth quarter.

Wireless Data Revenues Increase 19.4 Percent. Wireless data revenues — driven by Internet access, access to applications, messaging and related services — increased by $956 million, or 19.4 percent, from the year-earlier quarter to $5.9 billion. AT&T’s postpaid wireless subscribers on monthly data plans increased by 16.4 percent over the past year. The number of subscribers on tiered data plans also continues to increase. About 22 million, or 56 percent, of all smartphone subscribers are on tiered data plans, and about 70 percent have chosen the higher-tier plans.

Wireless Margins Reflect Record Sales. Fourth-quarter wireless margins reflect record-setting smartphone sales and customer upgrade levels. This was offset in part by improved operating efficiencies and further revenue gains from the company’s growing base of high-quality smartphone subscribers.

Forcing Customers to Upgrade… Or Else

AT&T's 2G Exit Strategy Started in 2009 (Courtesy: Blackberry News)

Back in 2009, AT&T decided it was inventory clearance time, released a memo entitled “2G Exit Strategy,” and slashed prices on 2G “feature” or “messaging phones” to attract customers looking for a bargain.  A few years later, the company is now sending letters to some of them strongly recommending they upgrade to a new, potentially more expensive phone.  If they don’t, AT&T writes, “your current, older-model 2G phone might not be able to make or receive calls and you may experience degradation of your wireless service in certain areas.”

AT&T hopes many customers will adopt smartphones, because the plans that accompany them are far more expensive than the 2G “messaging” plans they replace. AT&T wants to repurpose 1900MHz 2G spectrum for other services, but sometimes customers are left holding the bag if they don’t want the designated replacement phone(s) AT&T is willing to provide.

In Grand Valley, Col. last fall, AT&T created lines outside its stores as customers were compelled to upgrade phones and service plans to continue reliable AT&T service:

AT&T isn’t actually discontinuing the 2G network — it is moving 2G service to less-favorable spectrum it owns in order to make room for improved 3G coverage.  That might work fine in areas less expansive and rugged than western Colorado, but in the Grand Valley, it means many customers will find they no longer have data service at all.

The ongoing tower upgrades have also disrupted cell service generally, and when customers arrive at AT&T’s stores to complain, the employees on hand attempt to upsell them more expensive phones to “fix” the problem.

“There is significant pressure on carriers to migrate to the most efficient networks while needing to address the issue of spectrum scarcity,” explains PricewaterhouseCoopers’ Dan Hays. “We are beginning to see carriers shut off legacy networks and force customers to migrate to new technologies.”

Internet Overcharging for Profit Without Raising Company Costs

AT&T has no worries about data tsunamis and "exafloods" when app makers or consumers are willing to pay more.

With customers seeking to get the most out of expensive wireless data plans, data usage naturally goes up. But so do prices, meaning the “data tsunami” carriers warn about is not bad for their bottom line at all.

In 2011, consumer research group Validas found average data consumption was up 34.7% for all users, from 448.8MB in January to 604.8MB by December.  AT&T responded with a price increase and an allowance boost that will benefit only a tiny minority of customers.  The most popular data plans now cost $5 a month more: $30 for 3 gigabytes, up from $25 for 2GB and $50 for 5GB, up from $45 for 4GB.  But Validas found only 5% of wireless customers use more than 2GB of data per month, with only 2.7% using more than 3GB.

That translates into higher AT&T bills for the 97% of customers who don’t come close to using even 2GB a month.  Although the price hike delivers no tangible benefit to the overwhelming majority of customers, it does deliver an extra $5 a month from their bank account to AT&T’s.

The “Anyone Pays But Us” Model for “Heavy Traffic”

With online video “clogging” the wireless airwaves, companies like AT&T should be interested in offloading as much video to wired or Wi-Fi service. But late last month, the company suggested a way customers could bypass its stringent data caps by allowing content companies to pay for the wireless traffic their customers generate.

“A feature that we’re hoping to have out sometime next year is the equivalent of 800 numbers that would say, if you take this app, this app will come without any network usage,” said John Donovan, who oversees AT&T’s network and technology. “What they’re saying is, why don’t we go create new revenue streams that don’t exist today and find a way to split them … “It’d be like freight included.”

Only wasn’t the railroad already overburdened with traffic, threatened with a nationwide slowdown?  If one is willing to flash enough money, it’s remarkable how quickly the tidal wave of wireless congestion and despair can be pushed back out to sea.  Just don’t tell Washington lawmakers.  This is a crisis of epic proportions after all.

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Carriers Facing Data Tsunami 3-21-12.mp4[/flv]

Derek Kerton, principal analyst at Kerton Group, talks about increased demand for data and the impact on wireless carriers. Kerton compares it to today’s gasoline prices. Demand=higher prices.  Wall Street folks like Kerton thinks more spectrum isn’t the total answer.  Smaller cell sites and more Wi-Fi might be.  Otherwise, prepare for bill shock.  (4 minutes)

Phillip "Keeping an Eye on Time Warner's Eye" Dampier

Today’s announcement by Time Warner Cable that it is reintroducing usage based billing, at least optionally for customers in southern Texas, is a concerning development that requires further examination and vigilance.  But before we delve into that, I’d like to thank the company for avoiding the kind of mandatory usage billing/cap system we’ve seen appearing at certain other providers.  We also welcome the company’s admission that they have earned enormous profits from unlimited consumption plans and consider that pricing part of the success story they’ve had selling Internet access.

Stop the Cap! has never opposed optional usage-based billing tiers for customers who feel their light usage justifies a service discount.  However, industry trends so far have made no provisions for truly unlimited usage plans that sit side by side tiered plans without quietly diluting the value of flat rate Internet with tricks and traps in the fine print.  We have serious concerns this “foot in the door” to Internet Overcharging could eventually become mandatory for all customers.  Perhaps Time Warner Cable will be different than all the rest.  We can only hope so.

Let’s break it down:

First, Time Warner Cable’s admission it blew it the first time it experimented with these pricing schemes is most welcome.  Being on the front lines of the battle against the company’s Internet Overcharging experiment in 2009 remains very-well-documented on this website.  We confronted arrogant local management that argued usage billing was “fair” and would barely affect any customer.  In fact, the original plan a later revision would have tripled flat rate Internet access to a ridiculous $150 a month.

The company’s 2009 “listening tour” was also a farce, with a number of e-mailed comments deleted unread (we know, because Time Warner’s comment system sent e-mail to customers telling them exactly that.)  Local media outlets, newspaper editorials, and customers made it quite clear: customers want their unlimited Internet access left alone.  They do not want to learn the mysteries of a gigabyte, they don’t want to watch a gauge to determine how much usage they have left, and they sure don’t want to pay any more for broadband service.

If Jeff Simmermon, Time Warner Cable’s director of digital communications, now represents the prevailing attitude about unlimited Internet access among Time Warner Cable’s executive management, that is a very welcome change indeed.  But we’re not completely convinced.  For nearly two years, Time Warner executives have talked favorably about usage-based billing as the “fairest way” to bill for Internet usage.  Besides Simmermon’s comments, we have seen nothing from CEO Glenn Britt or CFO Irene Esteves that indicates they have changed their original views on that.

Unfortunately, we’ve learned over the last three years today’s promises may not mean a lot a year from now.  We’ve watched too many companies introduce these pricing schemes and then gradually tighten the noose around their customers.  Once broadband usage is monetized, Wall Street looks to the practice of charging for usage as a revenue source, and they pressure companies to keep that money flowing.  What begins as an optional tiered plan can eventually become the only plan when flat rate broadband is “phased out.”

Canadians understand this is not unprecedented.  They’ve been down this broadband road before, and it is loaded with expensive potholes and broken promises to repair them.  Usage allowances have actually dropped at some Canadian providers.  The fixed maximum on overlimit fees has gradually been relaxed or removed altogether, exposing Canadian consumers to broadband bill shock.

Time Warner Cable customers are now paying upwards of $50 a month for broadband after consecutive annual rate increases.  That’s plenty, and usage should remain unlimited for that kind of money.

Still, Stop the Cap! has never been opposed to truly optional usage-based billing plans.  We’re just unconvinced companies will keep the wildly popular flat rate pricing if boatloads of additional revenue can be made dragging customers to tiered usage plans, particularly in the absence of aggressive competition.  Just ask AT&T.

Second, as we’ve seen on the wireless side, “unlimited Internet access” means one thing to consumers and all-too-often something very different to providers.  For example, companies have discovered they can claim to provide unlimited access but then de-prioritize flat rate traffic, or even worse, throttle speeds and give preferential treatment to usage-based billing traffic.  Time Warner Cable needs to commit that unlimited access means exactly that — no traffic prioritization, no speed throttles, and no sneaky fine print.

Third, we don’t expect Time Warner will get too many takers for their Broadband Essentials Internet program.  The discount, just $5 a month, is quite low for broadband service limited to 5GB per month.  Exceeding that limit is quite easy, and after just 5GB of “excess usage,” the discount is eaten away and the penalty rate of $1/GB kicks in.  That could ultimately risk up to $25 a month in extra charges.  I’m uncertain how many customers would want to risk exposing themselves to that for a modest discount.

While we are not issuing a Call to Action over these developments, we will be watching them very closely.  Time Warner Cable should make no mistake: if their usage billing plans begin to eat away at fairly priced unlimited access plans, we will once again picket the company and do whatever is necessary to bring political and consumer pressure to force them to rescind these kinds of pricing schemes yet again.

Time Warner Cable's usage meter.

Time Warner Cable today relaunched usage-based billing, offering customers a $5 monthly discount off Internet access when they confine their usage to a maximum of 5GB per month.

Stop the Cap! was at the forefront of protesting Time Warner’s last Internet Overcharging experiment in 2009, which would have allowed unlimited access for $150 a month — a major rate increase to be sure.  Other customers had usage allowances that originally would have ranged from 40-60GB per month, with overlimit fees of $1/GB or more.

Time Warner Cable’s Jeff Simmermon, director of digital communications, admitted the 2009 experiment attempted in Beaumont, San Antonio, and Austin, Texas, Greensboro/Triad, N.C., and Rochester, N.Y. was unsuccessful.

“Yes, we did try this before, a few years ago,” Simmermon said. “And yes, pretty much everyone agrees that it didn’t go so well. So we listened to customer complaints. A lot.”

The cable company is trying again in southern Texas, including the cities of San Antonio, Laredo, Corpus Christi, the Rio Grande Valley and the Border Corridor.

This time Simmermon says the usage-based pricing program for Time Warner Cable customers will be optional. He also promised Time Warner Cable customers will always have access to unlimited broadband at a flat monthly rate.

This is a major change for the cable company, because earlier statements from both CEO Glenn Britt and the chief financial officer Irene Esteves called usage based billing inevitable.

Simmermon admitted Time Warner Cable is making plenty of money selling unlimited access to customers today.

Simmermon

“We profit from unlimited consumption, and a free, open Internet is the sort of Internet that has gotten us this far,” Simmermon wrote on the company’s blog.

“All participation in the Essentials plan is opt-in, with the opportunity to save a few dollars each month,” Simmermon said. “It’s not going to be for everybody, and that’s fine — all Time Warner Cable customers will still have the option of selection an unlimited broadband plan.”

The details:

1) Up to 5GB/month of data transmission for a $5/month discount from one’s current monthly bill. All Standard, Basic and Lite broadband customers will be eligible. Turbo, Extreme and Wideband customers will continue as always, with access to unlimited broadband and no optional tiered plan or discounts.

2) The ability to opt-in and opt-out of a tiered package at any time.

3) A “meter” that tracks usage on a daily, monthly, weekly or even hourly basis, enabling customers to accurately gauge usage.

3) A 60 day/2 billing-cycle grace period to allow customers to adjust usage patterns. During this time the company will notify customers of overages but won’t charge for them.

4) Overages will cost $1 per GB, not to exceed a maximum of $25/month.

This presents the opportunity to save $5/month from a monthly broadband bill.

Time Warner already has the TV Essentials plan for $39.99/month that offers low-income households to have access to cable, in a stripped down package. Simmermon says this is meant to be the broadband equivalent.

[Stop the Cap! will publish our own views on this development in a separate editorial.]