The median bandwidth use slowdown (Image: BTIG Research)

Despite perpetual cries of Internet brownouts, usage blowouts, and data tsunamis that threaten to overwhelm the Internet, new data shows broadband usage has leveled off in North America, undercutting providers’ favorite excuse for usage limits and consumption billing.

Sandvine today released its latest broadband usage study, issued twice yearly. The results show a clear and dramatic decline in usage growth in North America, with median usage up just 5% compared to the same time last year. That is a marked departure from the 190% and 77% growth measured in two earlier periods. In fact, as Richard Greenfield from BTIG Research noted, mean bandwidth use was down 13% year-over-year, after the second straight six month period of sequential decline.

Companies like Cisco earn millions annually pitching network management tools to providers implementing usage caps and consumption billing. For years, the company has warned of Internet usage floods that threaten to make the Internet useless (unless providers take Cisco’s advice and buy their products and services).

“Demand for Internet services continues to build,” said Roland Klemann from Cisco’s Internet Business Solutions Group. “The increasing popularity of smartphones, tablets, and video services is creating a ‘data tsunami’ that threatens to overwhelm service providers’ networks.”

Providers typically use “fairness” propaganda when introducing “usage based pricing,” blaming exponential increases in broadband usage and costly upgrades “light users” are forced to underwrite. A leveling off in broadband usage undercuts that argument.

A Cisco White Paper intended for the eyes of Internet Service Providers further strips the façade off the false-“fairness” argument, exposing the fact usage pricing has little to do with traffic growth, pricing fairness, or the cost of upgrades:

In 2011, broadband services became mainstream in developed countries, with fixed-broadband penetration exceeding 60 percent of households and mobile broadband penetration reaching more than 40 percent of the population in two-thirds of Organisation for Economic Co-operation and Development (OECD) countries.

Meanwhile, traditional voice and messaging revenues have strongly declined due to commoditization, and this trend is expected to continue. Therefore, operators are now relegated to connectivity products. The value that operators once derived from providing value-added services is migrating to players that deliver services, applications, and content over their network pipes.

As if this were not enough, Internet access prices are dropping, sales volumes are declining, and markets are shrinking. The culprit: flat rate “all-you-can-eat” pricing. Such a model lacks stability—sending service provider pricing into a downward spiral—because it ignores growth potential and shifts the competition’s focus from quality and service differentiation to price.

While Klemann was spouting warnings about the dire implications of a data tsunami, Cisco’s White Paper quietly told providers what they already know:

Maximum Profits

“[Wired] broadband operators should be able to sustain forecasted traffic growth over the next few years with no negative impact on margins, as the incremental capital expenses required to support it are under control.”

If usage limits and consumption billing are not required to manage data growth or cover the cost of equipment upgrades, why adopt this pricing? The potential to exploit more revenue from mature broadband markets that lack robust competition.

“In light of the forecasted Internet traffic growth mentioned earlier and competitiveness in the telecommunications market, Cisco believes that fixed-line operators should consider gradually introducing selected monthly traffic tiers to sustain [revenue], while a) signaling to customers that “traffic is not free,” and b) monetizing bandwidth hogs more sustainably.”

Cisco makes its recommendation despite knowing full well from its own research that customers hate usage-based pricing.

“The introduction of traffic tiers and caps—especially for fixed broadband services—is not welcomed by the majority of customers, as they have learned to ‘love’ flat rate all-you-can-eat pricing. Most customers consider usage-based pricing for broadband services ‘unfair,’ according to the 2011 Cisco IBSG Connected Life Market Watch study.”

Cisco teaches providers how to price broadband like trendy boutique bottled water and blame it on growing Internet usage.

But with competition lacking, Cisco’s advice is to move forward anyway, as long as providers initially introduce caps and consumption billing at prices that do not impact the majority of customers… at first. In uncompetitive markets, Cisco predicts customers will eventually pay more, boosting provider revenue. Cisco’s “illustrative example” of usage billing in practice set prices at $45 a month for up to 50GB of usage, $60 a month for 50-100GB, $75 for 100-150GB, and $150 a month for unlimited access — more than double what customers typically pay today for flat rate access.

Usage billing arrives right on time to effectively handle online video, which increasingly threatens revenue from cable television packages.

Sandvine’s new traffic measurement report notes the increasing prominence of online video services like Netflix, YouTube, Hulu, and Amazon Video.

“As with previous reports, Real-Time Entertainment (comprised of streaming video and audio) continues to be the largest traffic category on virtually every network we examined, and we expect its continued growth to lead to the emergence of longer form video on mobile networks globally in to 2014,” Sandvine’s report noted.

Sandvine found that over half of all North American Internet traffic during peak usage periods comes from two services: Netflix and YouTube. YouTube globally is the leading source of Internet traffic in the world, according to Sandvine.

An old excuse for usage caps on “data hogs” – peer-to-peer file-sharing, continues its rapid decline towards irrelevance, now accounting for less than 10 percent of total daily traffic in North America. A decade earlier, file swapping represented 60 percent of Internet traffic.

Cisco’s answer for the evolving world of popular online applications is a further shift in broadband pricing towards “value-based tiers” that monetize different online applications by charging broadband users extra when using them. Cisco is promoting an idea that well-enforced Net Neutrality rules would prohibit.

Citing the bottled water market, Cisco argues if some customers are willing to pay up to $6 for a liter of trendy Voss bottled water, flat rate “one price fits all” broadband is leaving a lot of money on the table. With the right marketing campaign and a barely competitive marketplace, providers can charge far higher prices to get access to the most popular Internet applications.

“Research from British regulator Ofcom shows that consumers are becoming ‘addicted’ to broadband services, and heavy broadband users are willing to pay more for improved broadband service options.”

Wharton School professors Jagmohan Raju and John Zhang concluded price is the single most important lever to drive profitability.

The political implications of blaming phantom Internet growth and manageable upgrade costs for the implementation of usage caps or usage-based billing is uncertain. Even the “data hog” meme providers have used for years to justify usage caps is now open to scrutiny. Sandvine found the top 1% of broadband users primarily impact upstream resources, where they account for 39.8% of total upload traffic. But the top 1% only account for 10.1% of downstream traffic. In fact, Apple is likely to provoke an even larger, albeit shorter-term impact on a provider’s network from software upgrades. When the company released iOS7, Apple Updates immediately became almost 20% of total network traffic, and continued to stay above 15% of total traffic into the evening peak hours, according to Sandvine.

Some other highlights:

• Average monthly mobile usage in Asia-Pacific now exceeds 1 gigabyte, driven by video, which accounts for 50% of peak downstream traffic. This is more than double the 443 megabyte monthly average in North America.
• In Europe, Netflix, less than two years since launch, now accounts for over 20% of downstream traffic on certain fixed networks in the British Isles. It took almost four years for Netflix to achieve 20% of data traffic in the United States.
• Instagram and Dropbox are now top-ranked applications in mobile networks in many regions across the globe. Instagram, due to the recent addition of video, is now in Latin America the 7th top ranked downstream application on the mobile network, making it a prime candidate for inclusion in tiered data plans which are popular in the region.
• Netflix (31.6%) holds its ground as the leading downstream application in North America and together with YouTube (18.6%) accounts for over 50% of downstream traffic on fixed networks.
• P2P Filesharing now accounts for less than 10% of total daily traffic in North America. Five years ago it accounted for over 31%.
• Video accounts for less than 6% of traffic in mobile networks in Africa, but is expected to grow faster than in any other region before it.

A new research report issued by Time Warner Cable concludes cell phone companies like AT&T and Verizon Wireless cannot meet the future data demands of customers over their 4G LTE wireless networks without punitive usage caps and high fees to deter usage, even with new spectrum becoming available for the wireless industry’s use.

The report, authored by Michael Calabrese of the New America Foundation, finds an answer to this problem in Wi-Fi, which can offload wireless traffic and deliver wireless service customers already prefer:

There is simply not enough exclusively licensed spectrum to meet the rapidly rising demand for wireless data, to sustain a competitive market, and to keep prices at an affordable level.

Major mobile carriers are increasingly coming to grips with this reality. The Wireless Broadband Alliance, a global industry group, reports that Wi-Fi offloading has become an industry standard as “18 of the world’s top 20 largest telcos by revenue have now publicly committed to investing in deploying their own Wi-Fi Hotspot networks.” The industry is shifting steadily toward what it calls heterogeneous networks (HetNets)—i.e., a combination of licensed and unlicensed infrastructure—in order to meet their customers’ insatiable demand for data while keeping costs down.

Alcatel-Lucent forecasts an increase of “87 times [the current] daily traffic on wireless networks” over the next five years, with 50 percent of that traffic on cellular networks “while the remaining 50 percent will be offloaded to Wi-Fi.”

Cisco’s own studies back Calabrese’s findings on consumer preference towards Wi-Fi.

“Given a choice, more than 80 percent of tablet, laptop, and eReader owners would either prefer Wi-Fi to mobile access, or have no preference,” Cisco concluded. “And, just over half of smartphone owners would prefer to use Wi-Fi, or are ambivalent about the two access networks.”

The Cisco surveys found users are choosing Wi-Fi over mobile connectivity for reasons of cost, “because it doesn’t impose data-usage caps or reduce their mobile data plan quotas.” But the primary reason for choosing Wi-Fi “is that respondents find it much faster than mobile networks.” And since Wi-Fi traffic travels over increasingly upgraded wireline networks, that speed differential may only increase as more and more homes, businesses and retail outlets upgrade to fiber optic or other high-speed connections of 100Mbps or more.

America’s largest wireless carriers have fallen far behind offering Wi-Fi services to customers compared to their overseas colleagues:

• AT&T: More than 32,000 Wi-Fi hotspots are available at partnered retail businesses, restaurants, and high-traffic areas like stadiums and major tourist destinations;
• Verizon Wireless: Verizon has an insignificant Wi-Fi presence, with a small number of unadvertised hotspots in selected venues like airports and convention centers;
• Japan’s NTT DOCOMO: Up to 150,000 hotspots, up from only 8,400 in 2o12.
• China Mobile: More than 2 million hotspots are up and running carrying 70 percent of the company’s data traffic.
• France’s Free Mobile: More than 4 million residential hotspots are available through Free’s parent – Iliad.

Comcast could soon be the nation’s largest Wi-Fi hotspot provider.

Calabrese argues it is important for the United States to set aside significant spectrum for unlicensed wireless networks like Wi-Fi to meet future wireless demands. Currently, some Republican members of Congress are opposed to significant spectrum set asides they feel could best be monetized for private use through the spectrum auction process.

It is no coincidence that Calabrese’s findings would be released by Time Warner Cable which itself is growing a Wi-Fi presence in certain cities where it provides cable service.

The wireless carriers’ collective lack of interest in an aggressive nationwide Wi-Fi deployment may have provided a strategic opening for cable operators to fill that gap with Wi-Fi networks of their own. Cable operators consider them a useful tool to retain customer loyalty — access is typically free and unlimited for current customers.

This summer, Comcast announced a “neighborhood hotspot initiative” that will turn millions of customer cable Internet connections into shared Wi-Fi hotspots using a dual-use wireless home gateway. The equipment will offer two separate Wi-Fi signals — one intended for the customer and the other open for use by any Comcast customers in the neighborhood. The cable company will provision extra bandwidth for the open Wi-Fi network to ease concerns that guest users could theoretically slow down a customer’s own Wi-Fi channel. In a relatively short period, Comcast could become the nation’s biggest Wi-Fi network offering more than 20 million hotspots hosted by the company’s own broadband customers.

Calabrese points to the future of seamless transitions between wired, wireless 4G and Wi-Fi network access without dropping calls or data connections. Many customers won’t even know the difference.

The author recommends the FCC think about reserving space for new unlicensed “citizens band” frequencies dedicated for public and private Wi-Fi networks:

• The FCC should reorganize the UHF TV band to ensure the availability of at least 30 to 40MHz of unlicensed spectrum in every media market, perhaps including Channel 37 (now reserved for radio astronomy) and eliminating two dedicated channels reserved for wireless microphones;
• Open the grossly underutilized 3.5–3.7GHz federal band for unlicensed small cell antennas delivering a ‘Citizens Broadband Service.’ This band is now mostly used for offshore naval radar, allowing both services to co-exist without mutual interference;
• Expand unlicensed access to the 5GHz band by allocating the 5.35–5.47 and 5.85–5.925GHz bands providing contiguous, very wide channels useful for the 802.11ac Wi-Fi standard that can support very high-speed wireless services.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/XFINITY Wireless Gateway Powers Connected Home Summer 2013.flv[/flv]

Comcast talks about their new X3 Wireless Gateway which is capable of providing two separate Wi-Fi networks, one for the customer and another for the neighborhood. (2 minutes)

Verizon Communications is cutting investment in its landline and fiber optic networks, spending the money on improving the company’s more profitable wireless business, which now accounts for 67 percent of Verizon’s total revenue.

Verizon reported second-quarter results this morning, meeting most Wall Street analysts’ expectations. The company reported a minor increase in capital spending to bolster its wireless LTE 4G network which is seeing strong growth in data traffic.

Verizon Wireless added one million new wireless customers in the last quarter, many transferring from Sprint’s now-discontinued Nextel network shut down last month. Among the new customer additions, 941,000 signed two-year postpaid contracts.

A growing number of Verizon Wireless customers are also migrating to the company’s Share Everything plan. At least 36 percent of Verizon’s wireless customers are now on shared, usage-limited data plans. Verizon expects more customers to switch, especially when legacy plan customers discover they will not receive a subsidized phone upgrade unless they abandon the grandfathered, all-you-can-eat data plan. Verizon believes the Share Everything plan will keep the company in a strong place to accelerate earnings as customers find they must regularly upgrade to higher capacity data allowances to handle increasing data usage.

Verizon’s wired success story

The growing adoption of more expensive data plans means higher bills for Verizon Wireless’ 35 million contract customers. The average Verizon Wireless customer now pays $152.50 per month, an increase of 6.4 percent. In total, over 100 million Americans now use Verizon’s prepaid and postpaid wireless services.

In June, Verizon Wireless reported its nationwide upgrade to LTE 4G service was now essentially complete, with 99 percent of 3G service areas also covered by 4G. Verizon reports 59% of its total data traffic is carried on the 4G LTE network, which is five times more efficient than the 3G network.

Wireline: Success When Verizon Invests in Upgrades, Ongoing Customer Defections Where Verizon’s Copper Network Continues to Deteriorate

Verizon’s success story in wireless is not repeated on its wireline network. Verizon lost another 5.2 percent of its residential copper landline customers during the quarter, down from 6.6 percent at the same time last year. In contrast, where Verizon’s fiber optic network FiOS is in place, customer numbers are growing along with revenue.

In fact, 71 percent of the revenue Verizon now earns from its wired residential network now comes from FiOS. The fiber network helped Verizon boost revenues by another 4.7 percent in the second quarter. With an average Verizon FiOS bill now at over $150 a month, the company saw a 9.4 percent increase in the average revenue per wireline customer over last year.

Verizon added 161,000 new FiOS Internet customers and another 140,000 new video customers in the second quarter. FiOS Quantum, which offers a broadband speed upgrade to 50/25Mbps for $10 more a month, has continued to be a hit with customers. More than one-third of all FiOS Internet customers have upgraded to faster Quantum speeds.

Shammo

With continued growth possible in the wired network business, Verizon could increase investment in expanding FiOS fiber into more markets, but instead the company continues to divert its attention and money to Verizon Wireless.

Verizon’s legacy copper wire phone and FiOS businesses saw a further reduction of 5.9 percent in capital expenditures in the second quarter — just $1.5 billion spent in the quarter and $2.9 billion year to date. Verizon’s full-year capital spending outlook which includes wireless, in contrast, is on track to spend between $16.4-16.6 billion this year. The majority of Verizon’s capital investments are aimed at improving its wireless network. Verizon’s aging copper wire network will continue to see a declining percentage of investment, and the company continues to leave FiOS fiber expansion on hold.

Fran Shammo, Verizon’s chief financial officer, this morning told investors they should expect to see a continued decline in spending on Verizon’s wired networks and more cost savings wrung out from Verizon’s declining unionized workforce, which has been asked to make concessions in labor contracts and increase work rule flexibility.

Other highlights:

• 51 percent of new phone activations were Apple iPhones during the second quarter;
• Over 64 percent of all activated phones on Verizon Wireless’ network are now smartphones;
• Verizon’s 3G network will increasingly be used by prepaid and reseller (MVNO) customers not allowed on Verizon’s LTE network;
• Verizon’s proposed entry into the Canadian wireless market is primarily focused on serving southeastern Canada from roughly Montreal to Toronto;
• 60 percent of Verizon’s revenue declines in its enterprise division were due to the federal government’s sequestration — automatic spending cuts, and declining spending by state and local governments;
• Verizon has no interest in competing with AT&T to acquire Leap Wireless (Cricket);
• The impact of Verizon’s agreement with cable operators to sell each other’s products has underwhelmed, at least so far;
• Voice Over LTE service, which will dramatically improve sound quality on voice calls, will arrive in Verizon handsets later this year with an aim to introduce the service sometime in 2014. But Verizon Wireless wants to be certain 4G LTE coverage is robust, because if reception deteriorates, VoLTE calls are not backwards-compatible with its current CDMA network and the call will get dropped. Getting it right is more important for Verizon than getting the service out quickly.

Verizon Wireless has been making a killing herding customers into its Family Share data plans.

Originally introduced last year, Verizon charges outrageously high prices for a paltry mobile data allowance that can be shared (think Oliver Twist on a diet) with other wireless devices attached to your plan.

The company’s latest financial report shows growth in average revenue earned from each account shot up 6.6 percent in the fourth quarter to a budget-busting $146.80 a month. The more Verizon can push customers to its shared data platform, the richer the company will get. With just 23 percent of Verizon customers currently on such plans, there is plenty of room for even more earnings.

Even though the value for money has deteriorated, Verizon has placed its data plans on a usage allowance diet for two years running.

Originally, Verizon charged $29.99 a month for unlimited data usage. In 2011, the company kept the price the same but slapped on a 2GB monthly allowance. This year, new customers pay $50 for just 1GB of data on the company’s data share plan.

The lower the limit and the more devices added to your wireless account, the more money Verizon will collect as customers are forced to upgrade to more expensive plans with more generous data usage allowances.

At the same time, Verizon’s network costs are dropping because the company’s LTE 4G network is five times more efficient moving data than the older 3G network it may eventually replace.

AT&T 3G MicroCell

One of the core principles of Net Neutrality is that all Internet traffic is treated equally — nothing favored, nothing penalized.

AT&T does not seem interested in following that principle, as our regular reader James found out when reviewing the terms and conditions of AT&T’s Internet Overcharging scheme that limits DSL customers to 150GB of usage per month and 250GB for U-verse customers.

AT&T Wireless customers with the company’s 3G MicroCell that covers for AT&T’s network shortcomings are given special treatment if they also subscribe to the company’s wired broadband services: use of the MicroCell is exempt from the wired usage cap.

The MicroCell creates a mini “cell-tower” within the home for wireless devices that do not receive adequate indoor reception, powered by your home or office broadband connection. Customers with smartphones or other wireless devices can use the MicroCell to browse web pages, use apps, make and receive calls, or send and receive text messages without ever worrying about exceeding their DSL or U-verse broadband usage allowance. Want to access that content on your home computer? That does count against your cap.

“So data from another AT&T service which is sent over the same Internet connection as any other data traffic is excluded from the cap?  That sounds like a clear Net Neutrality violation to me,” says James.

From AT&T’s own FAQ:

“I have an AT&T 3G MicroCell. Since that utilizes my home broadband network to boost my wireless data signal, does that mean my wireless usage also counts against my wired broadband monthly data plan?

No, the wireless traffic from your AT&T 3G MicroCell does not count toward your monthly home broadband plan. Please register your AT&T 3G MicroCell account and your residential AT&T Internet account at www.att.com/internet-usage-MicroCell to help ensure accurate Internet usage billing. If you have broadband service with another provider, you do not need to register your account.”

The usage cap “free pass” does not extend to your wireless service plan, however. Despite using your home broadband connection, the use of the MicroCell still consumes monthly plan minutes and megabytes, unless you purchase extra add-ons. AT&T would argue it already charged you for your wireless usage, so it would not be fair to charge you again through your home broadband plan. But if you are not an AT&T broadband customer, that is exactly what happens if your local cable operator also has usage billing.

AT&T’s logic for implementing usage caps in the first place:

AT&T has experienced a dramatic increase in the amount of data that is sent and received over its wireline broadband networks. This dramatic increase is driven primarily by a small fraction of our customers. In fact, the top 2% of customers use about 20% of the total capacity on our network. A single high-traffic user can utilize the same amount of data capacity as 19 typical households. Lopsided usage patterns can cause congestion at certain points in the network, which can slow Internet speeds and interfere with other customers’ access to and use of the network.

Customers that blow through their allowance receive one warning and then a higher bill: a $10 overlimit penalty will apply and extends your usage allowance by 50GB. AT&T’s cost per gigabyte is estimated to be in the pennies.