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

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

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

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

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

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

The False Argument of Network Congestion

Providers’ tall tales.

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

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

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

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

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

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

Upgrade? Spend Less and Charge Customers More Instead!

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

Shammo

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You've used too much, and now we have to charge you more... a lot more.

No matter where you live, work or play — be it Seoul, Korea, Manchester in England, or Oklahoma City — there is one thing consumers in all three cities will readily agree on: hatred of broadband data usage caps.

Those are the findings of a brand new survey conducted by GfK NOP in association with Reuters News in Britain.

Nearly 1,000 consumers were asked what they would do if confronted with their Internet provider implementing usage limits and other Internet Overcharging schemes.  More than half said they would be shopping for a new provider.

Not surprisingly, regardless of whether a consumer uses wired or mobile broadband, few believe usage caps are anything more than price gouging by providers to rake in additional revenue.  Many of these company’s biggest-spending-customers are unhappy to learn their provider is back looking for more money in return for less service.

The survey found users of smartphones such as the Apple iPhone care more about their mobile data allowance than they do about their choice of operator or even handset brand.

The survey found that users of the iPhone, Google Android phones or Research in Motion’s BlackBerry — typically, those who spend the most — are far more likely to switch operators to find better data deals.

More than half the users of these devices said they would switch to get a higher mobile data allowance.

Adjusted to take account of the fact that consumers do not always do what they say they will, GfK NOP esimated that 24 percent of contract customers using smartphones would actually switch operators.

Such a stampede would ring panic alarms inside any wireless carrier, but one company in particular faces some serious consequences for delivering years of bad service at high prices.

According to market research firm Morpace, nearly one-half of AT&T’s iPhone customers will seriously consider jumping ship if and when Verizon offers their own version of the wildly popular Apple smartphone.

At least 34 percent of current iPhone owners are resisting upgrade offers from AT&T that require a two-year contract renewal.  They’d rather wait until the iPhone is available on any network other than AT&T.

Even worse, should Verizon introduce their version of the iPhone in the coming year, nearly a quarter of AT&T customers (including those without the iPhone) are “somewhat or very likely” to dump AT&T immediately and head for Verizon.

In addition to complaints about lousy network performance, AT&T smartphone owners who spend the most with the carrier absolutely loathe AT&T’s new data usage limits implemented this past June.

“Experienced smartphone users who understand the benefits of using the Internet on the move and use services to help them in their day-to-day lives simply can’t live without mobile data,” says GfK/NOP analyst Ryan Garner, one of the report’s authors.

“They don’t want to be thinking about their data allowance and possible costs of over-running every time they open their browser or click on an app.”

Although AT&T told their customers and the media the new data-limited plans were going to save many customers money and have no impact on the rest, that is not what AT&T’s Chief Financial Officer Rick Lindner told Wall Street bankers and shareholders on a conference call last month.

“We believe over time, based on how much data they use, they will then begin to migrate up to [more costly] higher tiered plans,” Lindner said.

AT&T is well aware customers are already packed and ready to abandon ship, which is why the wireless provider has introduced a series of impediments to keep customers anchored in place.  Waived upgrade rules permitted most iPhone owners to upgrade to the latest iPhone 4 model this summer at the promotional price, in return for a two-year contract extension.  Customers seeking an end to their relationship with AT&T will find divorce an expensive proposition.  The company nearly doubled the contract early termination fee for smartphone owners June 1st.  Your exit price: up to $350.

Why construct more of these if providers can get you to use less and pay more in the process?

Reuters notes the biggest driver towards the introduction of Internet Overcharging schemes like usage caps is the quest for additional revenue.

Most Western carriers have frozen or cut capital expenditure in the last two years as they prioritise maintaining the dividends prized by investors — meaning the modernisation of networks has been largely put on ice.

Meantime, they say they can no longer afford physically or financially to support unlimited data usage, and are banking on the fact that most consumers will barely notice data caps that are in any case far more generous than average data usage.

Stop the Cap! has been reporting that fact for at least two years now.  Usage limits are never about saving money for customers or making consumers pay for what they use.  They are about increasing profits at the same time providers continue to reduce investments to maintain and upgrade their networks.  Providers routinely report they are spending countless billions on network infrastructure, but neglect to mention those investments are not keeping up with subscriber growth and, in many cases, are actually decreasing year-by-year.  The self-perpetuating problem of network congestion that inevitably follows then becomes an excuse to charge customers more money for usage-limited service.

Reuters confirms that many western carriers have business plans that would be familiar to any neighborhood drug dealer – hand out plentiful cheap samples, get customers hooked, and then gradually reduce the supply while also raising the price.

In Europe, Scandinavian operator TeliaSonera is betting that the superiority of its next-generation LTE network, the world’s first, will allow it to offer premium services — at premium prices.

“When a service like this is entering the market, you normally more or less give it away for free, and so we did with mobile data,” Hakan Dahlstrom, the company’s head of mobility services, told investors last month.

“After a while… to meet the customer’s need for cost control; that is when you have flat rate. And then after some time the user understand how these services work and how it suits them, and you start charging for speed and volume.”

Yet not every provider has found success in alienating and overcharging their customers for increasingly important connectivity.

Reuters found Japan and Korea’s more advanced and mature data networks have already been down the road of usage restrictions, and found they didn’t solve network congestion issues — only provider investments in upgrades did:

Japanese operators NTT DoCoMo, KDDI and Softbank have stuck to flat rates — with discounts for months in which customers use less data — while encouraging them to use more Wi-Fi to take pressure off the mobile networks.

In Korea, carriers are returning to unlimited data plans because of heightened competition while investing heavily to upgrade their networks — a move that Western counterparts are unlikely to be able to avoid for much longer.

SK Telecom, South Korea’s top mobile carrier, last month said it would offer unlimited data services and free mobile Internet calls for customers paying 55,000 won ($46.40) and over in monthly service charges.

Of course, both Korea and Japan maintain more oversight by public officials over critical network infrastructure vital to both nations’ economies.  Neither government allows unregulated monopolies or duopolies in their midst — convinced they’ll deliver the least amount of service they can for the highest possible price they can get away with. In other words — today’s marketplace model in much of Europe and North America.

An avalanche of iPhones is to blame for AT&T's wireless problems, according to a Slate columnist

Telecommunications companies love people like Farhad Manjoo.  He’s a technology columnist for Slate, and he’s concerned with the congestion on AT&T’s wireless network caused by Apple iPhone owners using their phones ‘too much and ruining AT&T’s service for everyone else.’  Manjoo has a solution — do away with AT&T’s flat data pricing for the iPhone and implement a $10 price increase for any customer exceeding 400 megabytes of usage per month. For those using less than 400 megabytes, he advocates for a “pay for what you use” billing model.  Will AT&T adopt true consumption billing, a usage cap, or just another $10 price increase?  History suggests the latter two are most likely.

Stop the Cap! reader Mary drew our attention to Manjoo’s piece, which predictably has been carried through the streets by cheering astroturf websites connected with the telecommunications industry who just love the prospect of consumers paying more money.  They’ve called the organizations that work to fight against such unfair Internet Overcharging schemes “neo-Marxist,” ignoring the fact the overwhelming majority of consumers oppose metered broadband service and still don’t know the words to ‘The Internationale.’

Manjoo’s description of the problem itself has problems.

His argument is based on the premise that the Apple iPhone is virtually a menace on AT&T’s network.  He blames the phone for AT&T customers having trouble getting their calls through or for slow speeds on AT&T’s data network.

Every iPhone/AT&T customer must deal with the consequences of a slowed-down wireless network. Not every customer, though, is equally responsible for the slowdown. At the moment, AT&T charges $30 a month for unlimited mobile Internet access on the iPhone. That means a customer who uses 1 MB a month pays the same amount as someone who uses 1,000 MB. I’ve got a better plan—one that superusers won’t like but that will result in better service, and perhaps lower bills, for iPhone owners: AT&T should kill the all-you-can-eat model and start charging people for how much bandwidth they use.

How would my plan work? I propose charging $10 a month for each 100 MB you upload or download on your phone, with a maximum of $40 per month. In other words, people who use 400 MB or more per month will pay $40 for their plan, or $10 more than they pay now. Everybody else will pay their current rate—or less, as little as $10 a month. To summarize: If you don’t use your iPhone very much, your current monthly rates will go down; if you use it a lot, your rates will increase. (Of course, only your usage of AT&T’s cellular network would count toward your plan; what you do on Wi-Fi wouldn’t matter.)

First, and perhaps most importantly, AT&T not only voluntarily, but enthusiastically sought an exclusive arrangement with Apple to sell the iPhone.  For the majority of Americans, using an iPhone means using AT&T as their wireless carrier.  If AT&T cannot handle the customer demand (and the enormous revenue it earns from them), perhaps it’s time to end the exclusivity arrangement and spread the iPhone experience to other wireless networks in the United States.  I have not seen any wireless provider fearing the day the iPhone will be available for them to sell to customers.  Indeed, the only fear comes from AT&T pondering what happens when their exclusivity deal ends.

Second, problems with voice calling and dropped calls go well beyond iPhone owners ‘using too much data.’  It’s caused by less robust coverage and insufficient capacity at cell tower sites.  AT&T added millions of new customers from iPhone sales, but didn’t expand their network at the required pace to serve those new customers.  A number of consumers complaining about AT&T service not only mention dropped calls, but also inadequate coverage and ‘fewer bars in more places.’  That has nothing to do with iPhone users.  Congestion can cause slow speeds on data networks, but poor reception can create the same problems.

Third, the salvation of data network congestion is not overcharging consumers for service plans.  The answer comes from investing some of the $1,000+ AT&T earns annually from the average iPhone customer back into their network.  To be sure, wireless networks will have more complicated capacity issues than wired networks do, but higher pricing models for wireless service already take this into account.

Business Week covered AT&T’s upgrade complications in an article on August 23rd:

Many of AT&T’s 60,000 cell towers need to be upgraded. That could cost billions of dollars, and AT&T has kept a lid on capital spending during the recession—though it has made spending shifts to accommodate skyrocketing iPhone traffic. Even if the funds were available now, the process could take years due to the hassle and time needed to win approval to erect new towers and to dig the ditches that hold fiber-optic lines capable of delivering data. And time is ticking. All carriers are moving to a much faster network standard called LTE that will begin being deployed in 2011. Once that transition has occurred, the telecom giant will be on a more level playing field.

And there are limits to how fast AT&T can move. While it may take only a few weeks to deploy new-fangled wireless gear in a city’s cell towers, techies could spend months tilting antennas at the proper angle to make sure every square foot is covered.

Karl Bode at Broadband Reports also points out a good deal of the iPhone’s data traffic never touches AT&T’s wireless network and he debunked a piece in The Wall Street Journal that proposed some of the same kinds of pricing and policy changes Manjoo suggests:

iPhone users are using Wi-Fi 42% of the time and the $30 price point is already a $10 bump from the first generation iPhone. The Journal also ignores the absolutely staggering profits from SMS/MMS, and the fact that AT&T posted a net income of $3.1 billion for just the first three months of the year. That’s even after the network upgrades the Journal just got done telling us make unlimited data untenable.

Sanford Bernstein’s Craig Moffett has been making the rounds lately complaining that a wireless apocalypse is afoot, telling any journalist who’ll listen that the wireless market is “collapsing” and/or “grinding to a halt.” Why? Because as new subscriber growth slows and the market saturates, incredible profits for carriers like AT&T and Verizon Wireless may soon be downgraded to only somewhat incredible. Carriers may soon have to start competing more heavily on pricing, driving stock prices down. That’s great for you, but crappy for Moffett’s clients.

You’ll note that neither the Journal nor Moffett provide a new business model to replace the $30 unlimited plan, but the intentions are pretty clear if you’ve been playing along at home. As on the terrestrial broadband front, investors see pure per-byte billing as the solution to all of their future problems, as it lets carriers charge more money for the same or less product (ask Time Warner Cable). Of course as with Mr. Moffett’s opinions on network upgrades, what’s best for Mr. Moffett quite often isn’t what’s best for consumers.

If AT&T doesn’t have the financial capacity or willingness to appropriately grow their network, inevitably customers will take their wireless business elsewhere, and perhaps Apple will see the wisdom of not giving the company exclusivity rights any longer.

Manjoo’s proposals (except the $10 rate increase, which they’ll love) would almost certainly never make it beyond the discussion stage.  A pricing model that automatically places consumers using little data into a less expensive price tier, or relies on a true consumption “pay for exactly what you use” pricing model would cannibalize AT&T’s revenue.  Past Internet Overcharging pricing has never been about saving customers money — they just charge more to designated “heavy users” for the exact same level of service.  Need more money?  Redefine what constitutes a “heavy user” or just wait a year when today’s data piggies are tomorrow’s average users.  Now they can all pay more.

The average iPhone user already pays a premium for their AT&T iPhone experience — an average $90 a month for a combined mandatory voice and data plan — costs higher than those paid by other AT&T customers.  AT&T accounted for the anticipated data usage of the iPhone in setting the pricing for monthly service.

The biggest data consumers aren’t smartphone or iPhone users. That designation belongs to laptop or netbook owners using wireless mobile networks for connectivity.  Those plans universally are usage capped at 5 gigabytes per month, far higher than the 400 megabyte cap Manjoo proposes.  If AT&T felt individual iPhone customers were the real issue, they would have already usage capped the iPhone data plan.  Instead, they just increased the price, ostensibly to invest the difference in expanding their network.

Perhaps at twice the price, everything would be nice.

Manjoo admits AT&T does not release exact usage numbers, but it’s obvious a phone equipped to run any number of add-on applications that the iPhone can will use more data than a cumbersome phone forcing customers to browse using a number keypad.  That in and of itself does not mean iPhone users are “data hogs.”  In reality, 400 megabytes of usage a month on a network also handling wireless broadband customers with a 5 gigabyte cap is a pittance.  That’s 10 times less than a customer can use on an AT&T wireless broadband-equipped netbook, and still be under their monthly allowance.

Here’s a better idea: end the monopoly AT&T has on the iPhone in the United States. That would immediately do a lot more for AT&T customers, as the so-called “data hogs” that hate AT&T flee off their network.

Manjoo’s alternatives are a “pay $10 more” solution that won’t save consumers money and “pay exactly for what you use” plan that AT&T will never accept.

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From the Department of Duh:

The plight of mobile providers to strike profit riches in mobile broadband has been stymied by the fact customers actually want to use the service they pay for each month.

Even worse, customers are using dongles to give their laptops and netbooks wireless connectivity, which hurts an industry accustomed to charging top dollar for data plans used sparingly on cumbersome mobile phones.

“Dongles really are reaching a critical mass,” a Vodafone spokesperson told BBC News.

French operator SFR claims laptops equipped with a dongle use 450 times more bandwidth than a classic mobile phone.

So-called “smartphones,” which often include a built-in or on-screen keyboards, are using lots of data, too.

The result has been near-universal adoption of usage caps in European mobile broadband, which UK operator O2 admitted earlier this year were “used as a deterrent and to make sure that others using the network had a good experience.”

Many providers have customers too afraid to exceed those caps, often set at 1-5GB per month.  The punitive overlimit fee can easily add tens of Euros to mobile broadband bills.  Many customers stay well clear of the cap to avoid the prospect of receiving a shocking bill.

Providers fear their mobile networks may soon be at capacity.  That would logically lead many to presume fast and furious investments in their networks to upgrade capacity, but that is exactly the opposite view some providers have.

“You can easily lose money on mobile broadband if you do it in the wrong way,” warns Bjorn Amundsen, director of mobile network coverage at Telenor in Norway.

“We have had to be careful not to invest too much, because the only thing that would happen if we did would be to increase data traffic without an increase in our profits,” said Amundsen.

Phil Sayer, principal analyst at Forrester Research told the BBC, “the user community as a whole is tired of hearing special pleading from the mobile operators.”

“Remember, these guys have been making money hand over fist from data roaming charges,” Sayer said.