Google formally announced its new fiber to the home service to residents of Kansas City today with game-changing pricing for broadband and television service.

For $70 a month, Google will deliver consumers unlimited 1Gbps broadband service. For an additional $50 a month, customers can also receive a robust television package consisting of hundreds of digital HD channels, and throw in a free tablet (they call it ‘the remote control’), free router, free DVR with  hundreds of hours of storage, and access to Google’s cloud backup servers.

Google has also found a solution to affordable Internet for poorer residents. The company is promising free 5/1Mbps service for up to seven years if customers will pay a $300 installation charge, payable in $25 installments.

Customers who agree to sign up for multiple services and a service contract can waive the $300 installation charge.

Google’s new service will roll out to different areas of Kansas City. Google has split neighborhoods into “fiberhoods” that consist of around 800 homes. In a masterful public relations and public policy demonstration, Google intends to show up the cable and phone companies who have repeatedly declared customers have no interest in fiber-fast broadband speeds by asking would-be customers to pre-register for Google Fiber, which will cost $10. Those “fiberhoods” with the largest number of pre-registrations will be the first to get Google’s new fiber service. At least 80 families (around 10%) of each “fiberhood” will have to be willing to sign up for Google to activate the service in each neighborhood.

Google hopes consumers will evangelize the possibilities of fiber broadband with friends and neighbors nearby and get them on board. If the telecom industry’s predictions of lukewarm interest are true, then Google won’t collect many $10 registrations and will not be able to publicize the number of customers who want nothing more to do with incumbent cable and phone companies. If Google is correct, they will have successfully proven America’s phone and cable companies have been dramatically overcharging Americans for service and large numbers are clamoring for a better choice.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Google Fiber In Kansas City 7-26-12.flv[/flv]

Google’s formal introduction of Google Fiber in Kansas City this morning. Presentation begins at around the five minute mark.  (1 hour, 6 minutes)

Google has the goods to entice technology fanatics. Those signing up for television service will find Google has moved way beyond the traditional cable set top box that still won’t reliably record your favorite shows. Google will supply customers with:

• a free Nexus 7 tablet that will come pre-programmed to function as a remote control (but can be used for other things);
• a Bluetooth-based traditional remote;
• a combination set top box and DVR system that can record up to 500 hours of programming;
• a Wi-Fi enabled Gigabit router;
• an iOS (Android coming, of course) app that will let viewers manage everything over their tablet or mobile phone;
• a 2TB storage locker;
• a free terabyte of Google Cloud storage

But Google’s current television lineup does omit many popular cable networks, either in an effort to control programming costs or because the company has not completed negotiations with every programmer they want on the lineup. Among the missing:

• ESPN and regional sports networks
• Disney networks
• Turner networks like TNT, TBS and Turner Classic Movies
• Rainbow Networks’ AMC
• Time Warner-owned channels like HBO, CNN and TruTV
• Fox-owned networks like Fox News Channel and Fox Business News

Time Warner Cable’s response to Google’s network seems to indicate, publicly at least, they are not that worried.

“Kansas City has been a highly competitive market for a long time and we take all competitors seriously,” said spokesman Justin Venech. “We have a robust and adaptable network, advanced products and services available today, and experienced local employees delivering local service. We are confident in our ability to compete.”

The Federal Communications Commission’s July report on America’s broadband speeds shows virtually every major national provider, with the exception of Frontier Communications, made significant improvements in delivering the broadband service and speeds they advertise to customers.

Utilizing thousands of volunteer testers agreeing to host a router that performs automated speed tests and other sampling measurements (full disclosure: your editor is a volunteer participant), the FCC speed measurement program is one of the most comprehensive independent broadband assessments in the country.

Hourly Sustained Download Speeds as a Percentage of Advertised, by Provider—April 2012 Test Data

The FCC found Cablevision’s improvements last year paid off handsomely for the company, which now effectively ties with Verizon Communication’s FiOS fiber-to-the-home service for delivering promised speeds during peak usage times. The cable operator was embarrassed in 2011 when the FCC found Cablevision broadband customers’ speeds plummeted during Internet use prime time. Those problems have since been corrected with infrastructure upgrades — particularly important for a cable operator that features near-ubiquitous competition from Verizon’s fiber network.

“This report demonstrates our commitment to delivering more than 100 percent of the speeds we advertise to our broadband customers – over the entire day and during peak hours – in addition to free access to the nation’s largest Wi-Fi network and other valuable product features and enhancements,” said Amalia O’Sullivan, Cablevision’s vice president of broadband operations.

Verizon also blew its own horn in a press statement released this afternoon.

“Verizon’s FiOS service continues to demonstrate its mastery of broadband speed, reliability and consistency for consumers as represented in today’s FCC-SamKnows residential broadband report,” said Mike Ritter, chief marketing officer for Verizon’s consumer and mass market business unit. “The FCC’s findings reaffirm the results from the 2011 report, which found that FiOS provides blazing-fast and sustained upstream and downstream speeds even during peak usage periods. This year’s results also show once again that FiOS Internet customers are receiving speeds that meet or exceed those we advertise, adding even more value to the customer experience.”

Average Peak Period Sustained Download and Upload Speeds as a Percentage of Advertised, by Provider—April 2012 Test Data

Cable operators’ investments in DOCSIS 3 technology also allowed their broadband networks to perform well even as broadband usage continues to grow. Comcast delivered 103% of promised speeds during peak usage, Time Warner Cable – 96%, and Cox – 95%.

Just one nationwide provider lost ground in the last year — Frontier Communications, whose DSL service has grown more congested than ever, with insufficient investment in network upgrades apparent by the company’s dead-last results.

Frontier managed 81% of promised speeds in 2011, partly thanks to its inherited fiber to the home network. This year, it managed only 79%.

Frontier performed adequately for customers choosing its lowest 1Mbps speed tier. It also performed well in areas where its fiber network can sustain much faster speeds. The biggest problems show up for Frontier’s DSL customers buying service at speeds of 3-10Mbps. At peak times, network congestion brings those speeds down.

On average, the FCC found fiber to the home service delivers the best broadband performance, followed by cable broadband, and then telephone company DSL. Five ISPs now routinely deliver nearly one hundred percent or greater of the speed advertised to the consumer even during time periods when bandwidth demand is at its peak. In the August 2011 Report, only two ISPs met this level of performance. In 2011, the average ISP delivered 87 percent of advertised download speed during peak usage periods; in 2012, that jumped to 96 percent. In other words, consumers today are experiencing performance more closely aligned with what is advertised than they experienced one year ago.

The FCC report also found that outlier performers in the 2011 study, with the exception of Frontier, worked hard to make their differences in performance disappear. Last year, the standard deviation from promised broadband speeds was 14.4 percent. This year it is 12.2 percent.

Peak Period Sustained Download Performance, by Provider—April 2012 Test Data

The FCC also found consumers are gravitating towards higher-priced, higher-speed broadband service. Last year’s average broadband speed tier was 11.1Mbps. This year it is 14.3Mbps, almost 30% higher. Along with faster speeds comes more usage. Customers paying for more speed expect to use their broadband connections more, and the FCC found they do.

Overall, the FCC was encouraged to see broadband speed tiers on the increase, some to 100Mbps or higher.

Highlights from the report:

• Actual versus advertised speeds. The August 2011 Report showed that the ISPs included in the Report were, on average, delivering 87 percent of advertised speeds during the peak consumer usage hours of weekdays from 7:00 pm to 11:00 pm local time. The July 2012 Report finds that ISP performance has improved overall, with ISPs delivering on average 96 percent of advertised speeds during peak intervals, and with five ISPs routinely meeting or exceeding advertised rates.
• Sustained download speeds as a percentage of advertised speeds. The average actual sustained download speed during the peak period was calculated as a percentage of the ISP’s advertised speed. This calculation was done for each speed tier offered by each ISP.
  • Results by technology:
    • On average, during peak periods DSL-based services delivered download speeds that were 84 percent of advertised speeds, cable-based services delivered 99 percent of advertised speeds, and fiber-to-the-home services delivered 117 percent of advertised speeds. This compared with 2011 results showing performance levels of 82 percent for DSL, 93 percent for cable, and 114 percent for fiber. All technologies improved in 2012.
    • Peak period speeds decreased from 24-hour average speeds by 0.8 percent for fiber-to-the-home services, 3.4 percent for DSL-based services and 4.1 percent for cable-based services. This compared with 0.4 percent for fiber services, 5.5 percent for DSL services and 7.3 percent for cable services in 2011.
  • Results by ISP:
    • Average peak period download speeds varied from a high of 120 percent of advertised speed to a low of 77 percent of advertised speed. This is a dramatic improvement from last year where these numbers ranged from a high of 114 percent to a low of 54 percent.
    • In 2011, on average, ISPs had a 6 percent decrease in delivered versus advertised download speed between their 24 hour average and their peak period average. In 2012, average performance improved, and there was only a 3 percent decrease in performance between 24 hour and peak averages.
• Sustained upload speeds as a percentage of advertised speeds. With the exception of one provider, upload speeds during peak periods were 95 percent or better of advertised speeds. On average, across all ISPs, upload speed was 107 percent of advertised speed. While this represents improvement over the 103 percent measured for 2011, upload speeds have not been a limiting factor in performance and most ISPs last year met or exceeded their advertised upload speeds. Upload speeds showed little evidence of congestion with little variance between 24 hour averages and peak period averages.
  • Results by technology: On average, fiber-to-the-home services delivered 106 percent, DSL-based services delivered 103 percent, and cable-based services delivered 110 percent of advertised upload speeds. These compare with figures from 2011 of 112 percent for fiber, 95 percent for DSL, and 108 percent for cable.
  • Results by ISP: Average upload speeds among ISPs ranged from a low of 91 percent of advertised speed to a high of 122 percent of advertised speed. In 2011, this range was from a low of 85 percent to a high of 125 percent.
• Latency. Latency is the time it takes for a packet of data to travel from one designated point to another in a network, commonly expressed in terms of milliseconds (ms). Latency can be a major controlling factor in overall performance of Internet services. In our tests, latency is defined as the round-trip time from the consumer’s home to the closest server used for speed measurement within the provider’s network. We were not surprised to find latency largely unchanged from last year, as it primarily depends upon factors intrinsic to a specific architecture and is largely outside the scope of improvement if networks are appropriately engineered. In 2012, across all technologies, latency averaged 31 milliseconds (ms), as opposed to 33 ms measured in 2011.
  • During peak periods, latency increased across all technologies by 6.5 percent, which represents a modest drop in performance. In 2011 this figure was 8.7 percent.
    • Results by technology:
      • Latency was lowest in fiber-to-the-home services, and this finding was true across all fiber-to-the-home speed tiers.
      • Fiber-to-the-home services provided 18 ms round-trip latency on average, while cable-based services averaged 26 ms, and DSL-based services averaged 43 ms. This compares to 2011 figures of 17 ms for fiber, 28 ms for cable and 44 ms for DSL.
    • Results by ISP: The highest average round-trip latency for an individual service tier among ISPs was 70.2 ms, while the lowest average latency within a single service tier was 12.6 ms. This compares to last year’s maximum latency of 74.8 ms and minimum of 14.5 ms.
• Effect of burst speed techniques. Some cable-based services offer burst speed techniques, marketed under names such as “PowerBoost,” which temporarily allocate more bandwidth to a consumer’s service. The effect of burst speed techniques is temporary—it usually lasts less than 15 to 20 seconds—and may be reduced by other broadband activities occurring within the consumer household. Burst speed is not equivalent to sustained speed. Sustained speed is a measure of long-term performance. Activities such as large file transfers, video streaming, and video chat require the transfer of large amounts of information over long periods of time. Sustained speed is a better measure of how well such activities may be supported. However, other activities such as web browsing or gaming often require the transfer of moderate amounts of information in a short interval of time. For example, a transfer of a web page typically begins with a consumer clicking on the page reference and ceases when the page is fully downloaded. Such services may benefit from burst speed techniques, which for a period of seconds will increase the transfer speed. The actual effect of burst speed depends on a number of factors explained more fully below.
  • Burst speed techniques increased short-term download performance by as much as 112 percent during peak periods for some speed tiers. The benefits of burst techniques are most evident at intermediate speeds of around 8 to 15 Mbps and appear to tail off at much higher speeds. This compares to 2011 results with maximum performance increases of approximately 50 percent at rates of 6 to 7 Mbps with tail offs in performance beyond this.
• Web Browsing, Voice over Internet Protocol (VoIP), and Streaming Video.
  • Web browsing. In specific tests designed to mimic basic web browsing—accessing a series of web pages, but not streaming video or using video chat sites or applications—the total time needed to load a page decreased with higher speeds, but only up to about 10 Mbps. Latency and other factors limited response time starting around speed tiers of 10 Mbps and higher. For these high speed tiers, consumers are unlikely to experience much if any improvement in basic web browsing from increased speed–i.e., moving from a 10 Mbps broadband offering to a 25 Mbps offering. This is comparable to results obtained in 2011 and suggests intrinsic factors (e.g. effects of latency, protocol limitations) limit overall performance at higher speeds. It should be noted that this is from the perspective of a single user with a browser and that higher speeds may provide significant advantages in a multi-user household or where a consumer is using a specific application that may be able to benefit from a higher speed tier.
  • VoIP. VoIP services, which can be used with a data rate as low as 100 kilobits per second (kbps) but require relatively low latency, were adequately supported by all of the service tiers discussed in this Report. However, VoIP quality may suffer during times when household bandwidth is shared by other services. The VoIP measurements utilized for this Report were not designed to detect such effects.
  • Streaming Video. 2012 test results suggest that video streaming will work across all technologies tested, though the quality of the video that can be streamed will depend upon the speed tier. For example, standard definition video is currently commonly transmitted at speeds from 1 Mbps to 2 Mbps. High quality video can demand faster speeds, with full HD (1080p) demanding 5 Mbps or more for a single stream. Consumers should understand the requirements of the streaming video they want to use and ensure that their chosen broadband service tier will meet those requirements, including when multiple members of a household simultaneously want to watch streaming video on separate devices. For the future, video content delivery companies are researching ultra high definition video services (e.g. 4K technology which has a resolution of 12 Megapixels per frame versus present day 1080p High Definition television with a 2 Megapixel resolution), which would require higher transmission speeds.

Year by Year Comparison of Sustained Actual Download Speed as a Percentage of Advertised Speed (2011/2012)

Verizon has a moratorium on further expansion of its fiber to the home service except in areas where it has existing agreements to deliver service.

A new study predicts an agreement between Verizon and the nation’s top cable companies to cross-sell each other’s products could cost up to 72,000 jobs in the northeastern U.S. and potentially threaten Verizon’s state-of-the-art fiber optics network FiOS.

The Federal Communications Commission (FCC) and the U.S. Department of Justice are continuing to review a proposed deal that would allow Verizon Wireless and companies including Time Warner and Comcast to cross-market each other’s products, which critics allege will eliminate competition and job-creating investment.

In the crosshairs of the deal: Verizon’s fiber to the home network FiOS, which has been stalled since 2009 when Verizon signaled it was “winding down” FiOS spending. According to the new report, produced by the Communications Workers of America (CWA), FiOS is at risk of being undercut by Verizon in favor of reselling cable-TV packages from Comcast, Time Warner Cable, and other cable companies. At worst, some critics of the deal contend Verizon will eventually abandon FiOS altogether.

The CWA has already seen the impact of Verizon’s declining interest in expanding FiOS as the company has left several major American cities in its service footprint, including Baltimore, Buffalo, Syracuse and Boston without fiber optic upgrades.

The CWA is calling on regulators to impose conditions on any deal between Verizon and cable operators:

• Prohibit Verizon Wireless and the cable companies from cross-marketing in Verizon’s landline service areas;
• Require Verizon to build the FiOS network to 95% of Verizon households in its landline footprint, including in rural and low-income areas;
• Ensure that Verizon Wireless and other cable companies are not able to lock out competitors.

If Verizon were to maintain the expansion of FiOS to non-FiOS areas, about 72,000 new jobs would be created, the CWA report found. Job growth would be concentrated in eight Eastern states and Washington D.C.

“If done right, the proposed deal would add tens of thousands of new jobs and allow underserved communities access to high quality broadband service,” said Debbie Goldman, telecommunications policy director for the CWA. “The FCC has the obligation carefully to assess this deal in terms of likely job loss.  We expect regulators to reject this deal unless the parties accept conditions that would create jobs, increase network investment, and promote consumer choice.”

Those living in Verizon service areas without FiOS are already upset that they have been effectively bypassed by the phone company.

“It’s an arrogant stand,” Buffalo Councilman Darius Pridgen said in a phone interview with the Philadelphia Inquirer. Verizon has upgraded other areas in upstate New York with FiOS, but not financially distressed Buffalo. “It’s advertised in the city, but it’s not available in the city.”

In Philadelphia, Verizon obtained a 15-year video franchise agreement with city officials and the company agreed to extend FiOS throughout the city by 2016. But residents are complaining that Verizon’s definition of “extending service” has meant wiring cables down major thoroughfares, not wiring up every home that wants the service.

City Councilman James Kenney called for a public hearing in April amid complaints that Verizon was reneging on its commitment to city officials and residents.

Cole

Baltimore councilman William Cole thinks his city was skipped by Verizon for a reason, while more affluent areas are set to get fiber upgrades. Cole told the newspaper his constituents have called Verizon after seeing local ads for FiOS service, but are told they cannot get the service.

Verizon spokesman Edward McFadden said the decision to build the FiOS network was never popular on Wall Street. “We got hammered,” he told the Inquirer, “and our shareholders were punished for this.”

Now that the network is up and running, McFadden says Verizon retains a strong incentive to maintain its FiOS business because of the huge investment and the increased earnings it brings the phone company.

But the CWA’s Goldman remains convinced Verizon has broken its word with regulators and politicians who believed promises from Verizon and other telecom companies that passage of the deregulation-packed 1996 Telecommunications Act would inspire the dawn of a new competitive era in American telecommunications. Now instead, Verizon and the cable companies want to simply sell each other’s services.

“They wanted deregulation, and they said they would compete,” Goldman said. “This marks the beginning of the surrender, this truce.”

Despite concerns from consumer groups that a deal to exchange wireless spectrum in return for collaborative marketing between two competitors will lead to higher prices for consumers, the Federal Communications Commission seems prepared to approve it, according to a report from the Reuters news agency.

Two sources familiar with the matter told Reuters the FCC has taken the lead on the “spectrum transfer” issue, which involves turning over prime wireless spectrum currently owned by large cable operators Comcast, Time Warner Cable, Cox, and Bright House Networks to Verizon Wireless. The combined licenses the cable industry holds are in the majority of major American cities, which critics charge Verizon will acquire to eliminate any potential competitive threat from a new nationwide wireless carrier.

Verizon’s recent moves to sell off its own “excess” spectrum to its current competitors has garnered favor inside the FCC, according to sources. Verizon Wireless recently agreed to transfer some of that spectrum to T-Mobile USA, which coincidentally was a fierce opponent of the deal between Verizon and cable operators. T-Mobile’s opposition has since muted.

Licenses owned by the cable industry would have been expansive enough to launch a new national wireless competitor. (Image: Phonescoop)

The deal between Verizon and the nation’s top cable companies is worth about $3.9 billion, but the Justice Department continues to signal concerns it would ultimately cost consumers more than that. According to Reuters, Verizon remains in “tougher talks” with lawyers inside the Justice Department who are concerned cooperative marketing between the phone and cable companies would result in decreased competition and higher prices.

One source told Reuters regulators were hoping Verizon’s now-stalled fiber to the home network FiOS would bring major competition to the cable industry, which until then had only faced moderate competition from satellite dish providers. In return, Comcast and other cable operators were expected to invade the wireless phone marketplace, adding needed competition.

Instead, both sides have retreated to their respective positions — Verizon focusing on its wireless service and Comcast and other cable companies abandoning interest in wireless phones and sticking to cable-based products.

The idea that both would begin to cross-market each other’s products is “a problem” according to the Justice source not authorized to speak publicly.

Additionally, concerns are being raised over a proposed “joint operating entity” between Verizon and cable operators that would focus on developing new technologies that could lock out those not in the consortium.

No decision is expected from the Justice Department until August, but Justice officials have signaled they have several options they can pursue:

1. Sue to stop the spectrum transfer;
2. Force the companies to modify their proposal to reduce potential collusion;
3. Approve the deal but monitor how cross-marketing agreements impact on consumer markets for wireless and cable products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mazzucchelli

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

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

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

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

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

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

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

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