Angelakis

Comcast says it admires Time Warner Cable for risking subscriber wrath over plans to introduce usage-based billing Time Warner says will be optional for customers in southern Texas.  But Comcast admits it is not brave enough to try similar pricing schemes themselves, fearing a customer backlash.

“We have a very high customer satisfaction rating and we don’t really want to rock the boat on [our broadband product],” Comcast chief financial officer Michael Angelakis told an audience Tuesday at a Wall Street bank-sponsored media and telecom conference in San Francisco. “I give them credit for trying different things, [but] we have real momentum in that business and the goal is to keep it.”

Comcast was a spectator of the consumer and political backlash against Time Warner Cable when it last experimented with usage pricing in April 2009.  Within two weeks, Time Warner Cable CEO Glenn Britt shelved the plan under pressure from both customers and lawmakers.

Now Time Warner Cable wants to reintroduce the concept as an option for customers of a new “Internet Essentials” discounted broadband tier that would include a $5 monthly discount if customers kept usage under 5GB per month.

Some veterans of the 2009 battle suspect Time Warner is trying to slowly slip usage pricing past customers waiting to fight its return by first suggesting it is only an option, but later herding broadband customers into usage based plans by substantially raising the price of flat rate service.

“Looks like a trial run the company could easily expand to all of their Internet customers,” shares Stop the Cap! reader Jeff in San Antonio, Tex., one of the cities that will participate in the upcoming usage-based plan. “I have a hard time believing Time Warner is going through all the effort developing usage meters and billing support for usage pricing just to market a handful of customers a $5 discount.”

Jeff, who helped fend off the cable company’s original Internet Overcharging experiment in 2009, suspects Time Warner’s earlier attempt to market a “flat rate” broadband option at $150 a month could still be a blueprint for how the company could push customers out of their unlimited plans.

“They can claim they want to keep unlimited Internet, but have remained silent about how much they will charge for it,” Jeff says. “We need something in writing that this company will not gouge customers with the fine print going forward.”

Stop the Cap! posed several similar questions to Time Warner Cable’s Jeff Simmermon, director of digital communications, through the cable company’s blog.  The company, to date, has offered no response.

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.

While a downturn economy continues to afflict middle and lower income America, it doesn’t seem to be doing much harm to Time Warner Cable’s profits.

America’s second largest cable operator saw profits jump more than $150 million higher to $564 million last quarter, compared to $392 million at the same time the year before.  Time Warner’s revenue grew by 4% to $5 billion in the fourth quarter alone.  In fact, the company is performing so well, executives announced they would return $3.3 billion in earnings to shareholders through share buybacks and dividend payouts, in addition to the forthcoming $4 billion share repurchase program.  Wall Street liked what they saw, boosting shares 7% after the company posted its quarterly and annual results on its website.

Time Warner’s biggest success story remains its broadband service, which consistently delivers the company new subscribers and has helped offset the loss of video subscribers, numbered at an additional 129,000 who “cut the cord” in the fourth quarter of 2011.

Time Warner Cable earned $1.148 billion in revenue from broadband in the last quarter, an increase of 8.6% over last year.  For 2011, the cable operator earned $4.476 billion selling residential Internet access, also representing an 8.6% growth rate over earnings across 2010.

The company attributed this to “growth in high-speed data subscribers and increases in average revenues per subscriber (due to both price increases and a greater percentage of subscribers purchasing higher-priced tiers of service).”

The increased costs incurred by Time Warner Cable to upgrade and expand their network and cable systems were well offset by the aforementioned price increases and subscriber upgrades.  The company increased capital expenditures to $942 million in the last quarter.  Results over the full year show just a 0.2% overall increase in capital investment, now at $2.937 billion.  System upgrades, Time Warner’s plans to move their systems to all-digital cable television, the ongoing rollout of DOCSIS 3.0, new home security and automation services, and investment in online video and data centers are included in these costs. But a more significant reason for the increase comes from the company’s ongoing expansion into business services, which requires wiring more office buildings for cable.

Britt

Time Warner Cable CEO Glenn Britt led off the conference call with investors with an explanation for the increased expenses.

“We plan to continue our aggressive growth in business services by expanding product offerings, growing our sales force, improving productivity and increasing our serviceable footprint. This means continued investment, both in people and in capital,” Britt said. “Projects include expansion of our content delivery network, which powers our IP video capability, our 2 international headends, completion of DOCSIS 3.0 deployment, and conversion to all-digital in more cities. We expect to be able to accomplish this while maintaining the capital spending of the last 2 years — that is, between $2.9 billion and $3 billion, which represents a continued decline in capital intensity.”

Nothing in Time Warner Cable’s financial disclosures provides any evidence to justify significant changes in their pricing model for broadband, which currently delivers flat rate, unlimited service to customers at different speed rates and price points.  In fact, the company’s investments in DOCSIS 3.0 upgrades, which can support faster broadband speeds and a more even customer experience, have already paid off with subscriber upgrades.

Robert D. Marcus, president and chief operating officer, noted subscribers are increasingly considering faster (and more profitable) broadband tiers.

“Once again, high-speed data net adds over-indexed to our higher-speed tiers,” Marcus noted. “Roughly 3/4 of residential broadband net adds were Turbo or higher. And DOCSIS 3.0 net adds accelerated for the eighth consecutive quarter to an all-time high of 54,000.”

Time Warner’s biggest challenges continue to be the current state of the economy, which has made subscribers much more sensitive to pricing and rate increases, and cord cutting traditional cable television service.

“One group is extremely price-conscious, perhaps due in part to the ongoing economic malaise,” Britt said. “The other group is willing and able to pay for more features and service. We’re going to focus more attention on products and services that best meet each group’s needs rather than pursuing traditional one-size-fits-all solutions.”

That is clearly evident in the company’s bundled service options, including increasingly aggressive discounted pricing for new customers and for those threatening to leave and Time Warner’s super-premium Signature Home service, which delivers super-profits.  Average revenue from Signature Home customers averages $230 a month.  Traditional “triple play” customers who buy phone, Internet, and cable service only bring the cable company an average of $150 a month.

The company’s plans for 2012 do not include a specific statement about implementing an Internet Overcharging scheme like usage billing or usage caps.  But it is unlikely such an announcement would be made explicitly at an earnings announcement.  In the last quarter, Stop the Cap! reported comments from chief financial officer Irene Esteves that the company was still very interested in the concept of selling broadband with usage pricing as a “wonderful hedge” against cord-cutting.

Esteves told a UBS conference she believes usage-based pricing for Time Warner Cable broadband will become a reality sooner or later.  Charging “heavy users” more would already be familiar to consumers used to paying higher prices for heavy use of other services, and she claimed light users would have the option of paying less.

But despite favorable reception to the idea of usage pricing by Wall Street, Esteves acknowledged the company’s past experiments in usage pricing didn’t go as planned, and she suggested the company will introduce usage pricing “the right way rather than quickly.”

Other developments and highlights

• 

  Time Warner faces Verizon's $500 rebate offers in NY City

  Time Warner Beats Up DSL: Time Warner Cable’s most lucrative source for new broadband customers comes at the expense of phone companies still relying on DSL to deliver broadband service.  As DSL speeds have failed to stay competitive with cable broadband, the cable operator has successfully lured price-sensitive DSL customers with attractive ongoing price promotions delivering a year of standard 10/1Mbps cable Internet access for $29.99 a month, often less expensive than the total price of DSL service that frequently delivers slower speeds.

• Stalled Verizon FiOS deployment has limited the amount of competition Time Warner faces from fiber optics to just 12% of the company’s service area.  Where competition does exist, especially in New York State, Time Warner has had to stay aggressive to retain customers with deeply-discounted retention deals to keep up with Verizon’s high value rebate gift cards and new customer offers.  AT&T now provides U-verse competition in about 25% of Time Warner’s service area, but like satellite, AT&T U-verse pricing is less heavily discounted.
• Retention pricing and new customer deals deliver lower prices than ever.  In November, Time Warner started selling a triple play offer for $89.99 a month that includes DVR service and now also includes deep discounts or free 90 day trials of premium movie channels. That is $10 less than the same time last year.
• Premium movie channels continue to take a major hit as subscribers try to reduce their bills, especially after Time Warner began increasing rates on those networks.  HBO now sells for as much as $15 a month in many areas.  Time Warner Cable hopes to ‘revitalize’ premium movie channels with online video services like HBO and Max Go and promotional discounts.
• Long-standing customers of Time Warner’s “triple play” package received a “thank-you gift” — free voice-mail in 2011, something that will continue in 2012.
• Customers signing up for Time Warner’s premium-priced Wideband (50/5Mbps) service ($99/month) are being offered free phone service to sweeten the deal.

What to Expect in 2012

• Time Warner is moving forward to create its own Regional Sports Network for southern California;
• Los Angeles will continue to see large-scale expansion of Time Warner’s growing Wi-Fi network, available for free to premium broadband customers, with thousands of new access points on the way;
• The cable company will introduce Wi-Fi service in other, yet-to-be-announced cities in 2012, with up to 10,000 access points planned.
• Time Warner will be making its “digital phone” product more attractive with lower prices and more features, especially in product bundles, as consumers increasingly discard landlines;
• Expect to see the end of analog cable television in a growing number of Time Warner Cable areas, requiring customers to use new equipment (initially provided free) to continue watching on older televisions and those without existing set top boxes.
• Time Warner will continue to expand its “TV Everywhere” project to include live streaming TV on smartphones, video game consoles, computers, and more.  On-demand programming will be available as well sometime this year across all platforms.
• A nationwide channel re-alignment will move subscribers to consistent channel numbers across the country, in part based on grouping them together into “genres.”  Many areas already have digital cable channels arranged this way, but now they will be consistent from coast-to-coast.
• Time Warner will complete DOCSIS 3 deployment in all areas this year.
• The company is moving to introduce 2-hour service call windows almost everywhere, and 1-hour windows and weekend appointments in some markets.  Several cities now allow customers to select specific times for service appointments.
• Self-install kits will become increasingly available for different products, allowing customers to install equipment themselves;
• Time Warner’s IntelligentHome home security, monitoring, and automation product will expand beyond its launch markets (Syracuse and Rochester, N.Y., Charlotte, N.C. and Los Angeles/Southern Calif.).  The product currently has customers in the thousands, considered relatively small.  But Time Warner has learned subscribers are using the service in surprising ways, which will let them adapt their marketing.  Among the most popular features: remotely watching your pets at home.

Most Memorable Quote: “I think, more than anything else, our pricing strategy is dictated by what the marketplace will bear as opposed to what our underlying cost structure is.” — Robert Marcus, president and chief operating officer, Time Warner Cable

Years ago, phone companies could not simply raise rates willy-nilly.  They had to justify rate increases before an oversight body, usually on the state level.  But after spending millions to lobby state lawmakers to deregulate the phone business, AT&T is set to recoup their investment with a dramatic 25 percent rate increase for landline phone service in the state of California.

Some residential customers have kept basic landline service as a last resort, switching to “measured service,” where customers pay a small charge for every call they make or receive a calling allowance that covers several calls a day.  Measured service can deliver substantial savings over traditional flat rate service.  But now AT&T is targeting these “budget customers” for some stunning rate hikes.

Starting March 1st, AT&T is raising rates by nearly 25% for measured service — from $12.37 to $15.37 a month — a $3 increase.  After your calling allowance is exhausted, each additional local call will cost three cents per minute.

Customers with flat rate service will also pay AT&T $1.05 more — $21 a month (before taxes, fees, and surcharges) for basic flat rate, unlimited local calling.

Best of all (for AT&T), the company does not have to explain or justify the rate increase.  That attitude was evident when reading the Los Angeles Times‘ account of the rate hike, complete with an arrogant, shoulder-shrugging AT&T spokesman:

Lane Kasselman, an AT&T spokesman, said fees for measured and flat-rate calling plans are going up because, well, because.

“Goods and services go up,” he told me. “That’s how our economy works.”

The increase is expected to hit seniors and low income consumers the hardest — they are the biggest constituency of the 10 percent of AT&T customers who choose measured-rate, budget service.  They are also the least likely to have cut the cord on their traditional landline service in favor of a cell phone or competing Voice Over IP provider.

AT&T hints that the rate increase is partly to push customers into multi-service bundles that include phone, Internet, and television service.  By hiking the price of individual services, the bundled price suddenly seems to deliver the best “savings” for customers.

Critics call that price pumping — artificially raising the price of a-la-carte services to create phantom savings for the company’s higher-revenue bundled service packages.

A San Francisco advocacy group calls it something else.

“It’s extortion, pure and simple,” said Regina Costa, telecom research director for the Utility Reform Network, or TURN, a consumer group. “There’s no proof that these price increases are justified.”

Thanks to California’s deregulation of the landline phone business, no proof is required.

Internet Overcharging schemes bring even more profits to a cable industry that already enjoys a 95% gross margin on broadband service.

At least one major national cable company plans to implement a usage-based billing system in the coming year, predicts Sanford Bernstein analyst Craig Moffett.  Bloomberg News quotes Moffett in a piece that thinly references Time Warner Cable as that operator, whose CEO strongly believes in further monetizing broadband usage.

Moffett is among the chief cheerleaders hoping to see operators charge customers additional fees for their use of the Internet.

“In the end, it will be the best thing that ever happened to the cable industry,” Moffett said.

For customers, DISH Satellite chairman Charlie Ergen predicts it will lead to at least a $20 monthly surcharge for broadband users who watch online video, which could bring already sky-high broadband pricing to an unprecedented $70-80 a month, the same amount most cable operators now charge for standard digital cable-TV service.

The cable industry’s interest in being in the cable television business has waned recently as subscribers increasingly turn away from expensive cable packages.  Now companies that used to consider broadband a mildly-profitable add-0n increasingly see Internet access as the new mainstay (and profit center) of their business.

Time Warner Cable, for example, wasn’t even sure its entry in the broadband business in the late 90s would ever amount to much.  Fast forward a dozen years, and it is an entirely different story:

“We’re basically a broadband provider,” Peter Stern, chief strategy officer for New York-based Time Warner Cable, said Nov. 17 at the Future of Television conference in New York. “As a convenience for our customers, we package and distribute television and provide service around that.”

Bloomberg reports the cable industry profit margin on broadband is nearly 95 percent, a testament to the lack of competitive pressure on Internet pricing.  The industry is going where the money is to make up for increasing challenges to their video business, which currently “only” brings them a 60 percent profit margin.

Suddenlink, already enjoying a 12 percent increase in broadband revenue in the last quarter alone, is implementing its own Internet Overcharging scheme, charging $10 for every 50GB a customer exceeds their arbitrary usage allowance.  That, despite the fact CEO Jerry Kent admits Suddenlink’s broadband margins are double those earned from the cable company’s video business.

Complicit in the parade to Internet Overcharging is Federal Communications Commission chairman Julius Genachowski, who publicly supported usage-based pricing in public statements made last December.  Cable operators were fearful Genachowski might lump the pricing scheme in with the Net Neutrality debate.  Providers have since used Genachowski’s loophole in an end run around Net Neutrality.  If providers cannot keep high volume video traffic from competitors like Netflix off their networks, they can simply make using those services untenable on the consumer side by increasing broadband pricing, already far more expensive than in other parts of the world.

That is a lesson already learned in Canada, where phone and cable companies routinely limit usage and slap overlimit fees on consumers who cross the usage allowance line.  Canada’s broadband ranking has been deteriorating ever since.

Moffett - The chief cheerleader for Internet Overcharging

Bloomberg says such a pricing regime would discourage investment in online video products that currently are held responsible for some cable cord-cutting:

“It’s the reason why Apple or Google would inevitably be reticent about committing a significant amount of capital to an online video model,” Moffett told Bloomberg. “You can’t simply assume just because you can buy the content more cheaply, you can offer a product that’s cheaper to the end user.”

The only way around this might be video providers like Google getting into the broadband business themselves, something Google is experimenting with in Kansas City.  Google’s “Think Big With a Gig” project is partly designed to prove gigabit broadband delivered over a fiber network is practical and doesn’t have to be unaffordable for consumers.  It will also finally bring competitive pressure on a comfortable broadband duopoly, at least for residents in one city.

So far, video providers who depend on an Internet distribution model are not putting much money in the fight against usage-billing.  Instead, companies like Netflix are releasing occasional press releases that decry the practice.

“[Usage billing] is not in the consumer’s best interest as consumers deserve unfettered access to a robust Internet at reasonable rates,” Steve Swasey, a Netflix spokesman, said previously.

It is clear consumers despise usage pricing.  In every survey conducted, a majority of respondents oppose limits on their broadband usage, especially at today’s prices.  But that may not be enough to get companies like Time Warner Cable to back off.  The company has reportedly been quietly testing usage meters since last summer.  CEO Glenn Britt, with a considerable drumbeat of support from Wall Street analysts like Mr. Bernstein, has never shelved the concept of usage pricing, seeing it more lucrative than hard usage caps.  The company retreated from a 2009 plan to charge up to $150 a month for flat rate access after consumers rebelled over planned trials in Texas, North Carolina, and New York.

But without a solid message of opposition from consumers, and an about-face from an FCC chairman that should know better, they’ll be back looking for more money soon enough.

[Thanks to regular Stop the Cap! reader Ron for sharing the news.]