Netflix has released figures for January ranking Internet Service Providers delivering the best viewing experience for viewing Netflix’s catalog of online video titles.

At the top is Google Fiber, which comes as little surprise considering Google provides 1,000/1,000Mbps service to its limited number of customers in Kansas City.

Suddenlink saw the greatest improvement. The mostly-rural and small city cable provider jumped five points in January’s ratings, scoring 3rd. Cablevision’s Optimum broadband service jumped ahead of three rivals to score second place.

Time Warner Cable and Cox remained in the middle, while AT&T U-verse demonstrated that the benefits of a fiber network end when the remaining copper wire to the customer’s home comes into play. U-verse performed only marginally better than the DSL services of independent phone companies like Windstream and CenturyLink. Frontier managed some minor improvement, now scoring 14th place out of 17.

The worst performers: DSL services from both Verizon and AT&T and Clearwire’s 4G WiMAX network, which scored dead last.

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.

Verizon and Redbox will launch an unlimited online video streaming service next year that will undercut Netflix’s monthly subscription price and offer discounts off movies rented from Redbox’s ubiquitous DVD kiosks.

Details emerged about Redbox Instant when GigaOm discovered the online help section intended to assist beta test customers was initially available to the public.

Some of the points GigaOM uncovered:

• Subscriptions start at $6 a month, but the number of movies and TV shows available will be considerably smaller than what Netflix offers. There will also be a considerable amount of title duplication between Netflix, Amazon Video, and Redbox Instant;
• For $8 a month, the service will also bundle four Redbox credits redeemable for kiosk rentals, with movie reservations taken online and through mobile apps. Unused credits expire at the end of the month;
• In addition to online viewing, customers can also watch on Android/iOS devices, Xbox 360 and select Samsung Smart TVs and Blu-ray players;
• Newer titles will be available on-demand starting at $0.99 each;

Redbox is accepting e-mail addresses of potential customers interested in more information about the service. It is very possible the venture will expand its beta test, inviting those pre-registered to try the service before it is formally introduced to the public.

Some investors on Wall Street have gotten increasingly jittery about Netflix’s largest competitors, because all of them operate diverse businesses that can help subsidize entertainment licensing costs and still undercut Netflix pricing. Amazon charges $79 a year for its Amazon Prime + Video service. Comcast offers its service at $4.99 per month. Netflix has already been under pressure to raise prices even before signing an exclusive streaming deal with Disney estimated at a value of $300 million per year.

“That figure is ironic to say the least because $300 million is what Starz demanded of Netflix 15 months ago as condition for renewal of that exclusive arrangement, and Netflix turned that bid down,” said Eric Savitz in Forbes. “Now, it appears Netflix is paying $300 million per year for the Disney-branded content which would have been on Starzplay in the first place.”

The Federal Cable-Protection Commission

Problem: Solved?

The Federal Communications Commission last Friday unanimously voted to free cable operators from their obligation to sell cable channels they own to rival satellite and phone companies.

In a bizarre justification, FCC chairman Julius Genachowski said ending the unambiguous rules would prevent anti-competitive activity in the market because the FCC would retain the right to review industry abuses on a case-by-case basis. Lawmakers called that an invitation for endless, time consuming litigation that will deprive consumers of competitive choice and favor the still-dominant cable television industry.

“The sunset of the program access rules could lead to a new dawn of less choice and higher prices for consumers,” said Rep. Ed Markey (D-Mass.), one of the original authors of the rules. “If we do not extend the program access rules, the largest cable companies could withhold popular sports and entertainment programming from their competitors, reducing the competition and choice that has benefited consumers. I urge Chairman Genachowski and the FCC commissioners to extend the program access rules that have helped to level the playing field in the paid television marketplace.”

The FCC’s decision could have profound implications on would-be competitors, particularly start-ups like Google Fiber that could find itself without access to popular cable networks at any price.

At a time when cable companies and programmers are constantly pitted against each other in contract/carriage disputes, the deregulatory spirit at the FCC is likely to irritate consumers even more.

Phillip “How nice of the FCC to think about poor cable companies” Dampier

The FCC claims it will continue to protect sports programming from exclusive carriage agreements — a potentially critical concession considering the history of “exclusive, only on cable” programming contracts was largely focused on regional sports channel PRISM.

Comcast successfully kept the popular Philadelphia-based network (today known as Comcast SportsNet Philadephia) off competing satellite services and cable operators by only distributing the network terrestrially. A controversial FCC rule (known as the “terrestrial exception”) states that a television channel does not have to make its shows available to satellite companies if it does not use satellites to transmit its programs. Cox Cable has its own implementation of that loophole running in San Diego.

Derek Chang, executive vice-president of DirecTV, says Comcast’s local market share dominance is a direct consequence of SportsNet. More importantly, Chang believes even if Comcast says it will sell the network to competitors, it is free to set prices for SportsNet as high as it wants.

“They win either way,” Chang said. “They’re either going to gouge our customers, or they’re going to withhold it from our customers.”

Verizon FiOS has secured the right to carry the channel on its system, but won’t say how much it pays.

The PRISM case is today’s best evidence that exclusive agreements do hamper competition — Philadelphia is hardly a hotbed of satellite dishes, with a 40-50% reduced satellite subscriber rate attributable to the lack of popular regional sports on satellite.

FCC Chairman Julius Genachowski’s cowardly lion act is back. Will anyone at the FCC stand up to Big Telecom companies while busy watering down pro-competitive policies?

Historically, satellite dish owners and wireless cable customers were the most likely victims of exclusive or predatory programming contracts, with some cable networks refusing to sell their programming to competing technologies at any price.  Others charged enormous, unjustified mark-ups that made the technology non-competitive. Today, wireless cable television is mostly defunct and home satellite dish service has largely been replaced with direct broadcast satellite providers DirecTV and Dish.

Today’s programming landscape is more complicated. The FCC would argue that unlike in the 1980s, most cable programmers are no longer directly controlled by yesteryear’s Tele-Communications, Inc. (TCI) and Time Warner (Time Warner Cable was spun off into an independent, unaffiliated entity in March, 2009), which collectively controlled dozens of popular cable networks. But programmers’ know their best customers remain cable operators which maintain a dominant market share in every major American city.

Friday’s ruling has implications for telco-TV providers and satellite dish companies that may find programming negotiations more complicated than ever. AT&T U-verse and Verizon FiOS may find access to cable-owned programming difficult or even impossible to obtain if cable operators decide their unwanted competition is harmful to their business interests.

But an even larger challenge looms for the next generation of video competition: Google Fiber TV and “over the top” online video.

Nobody is complaining about Google’s robust gigabit broadband offering, but Kansas City residents originally expressed concern about the company’s proposed television lineup. As originally announced, Google Fiber TV was missing HBO and ESPN.

A competing cable system without ESPN is dead in the water for sports enthusiasts.

Google has since managed to sign agreements that expand their channel lineup (although it is still missing HBO). But nothing prevents channel owners from dramatically raising the price at renewal. That is a concern for smaller cable operators as well, who want protection from discriminatory pricing that awards the best prices to giant multi-system operators like Comcast and Time Warner Cable.

The most important impact of the FCC’s decision may be for those waiting to launch virtual cable systems delivering online programming to customers who want to pick and choose from a list of networks.

The FCC’s “new rules” give programmers who depend on tens of millions of cable subscribers even more ammunition to kill competing distribution models like over the top video. Start-up providers who cannot obtain reasonable and fair access to cable programming will have to depend on the vague policies the FCC claims it will enforce to prevent egregious abuse. But the FCC is not known for its speed and start-up companies may face enormous legal fees fighting for fair access that is now open to subjective interpretation.

Phillip “Tollbooths are not innovation” Dampier

Federal Communications Commission chairman Julius Genachowski last week wrote a guest editorial on TechCrunch espousing the benefits of faster broadband networks, but the advances he celebrates often come with innovation-killing usage caps and overlimit fees he continues to ignore.

We feel the need – the need for speed. As Tom Friedman and others have written, in this flat global economy a strategic bandwidth advantage will help keep the U.S. as the home and most desired destination for the world’s greatest innovators and entrepreneurs.

[…] But progress isn’t victory, particularly in this fast-moving sector. Challenges to U.S. leadership are real. This is a time to press harder on the gas pedal, not let up. The first challenge is the need for faster and more accessible broadband networks. We need to keep pushing because our global competitors aren’t slowing down. I’ve met with senior government officials and business leaders from every continent, and every one of them is focused on the broadband opportunity. If we in the U.S. don’t foster major investments to extend and expand our broadband infrastructure, somebody else will take the lead.

We need to keep pushing because innovators need next-generation bandwidth for next-generation innovations – genetic sequencing for cancer patients, immersive and creative software to help children learn, ways for small businesses to take advantage of Big Data, and speed- and capacity-heavy innovations we can’t yet imagine.

We need to remove bandwidth as a constraint on our innovators and entrepreneurs. In addition to steadily increasing broadband speed and capacity for consumers and businesses throughout the country, we need – as we said in our National Broadband Plan – “innovation hubs” with super-fast broadband, with speed measured in gigabits, not megabits.

[…]Some argue the private sector will solve these challenges itself, and that all government has to do is get out of the way. I disagree. The private sector must take the lead, but the public sector has a vital though limited role to play.

Among the policy levers government needs to use is the removal of barriers to broadband buildout, lowering the costs of infrastructure deployment with new policies like “Dig Once” that says you should lay fiber when you dig up roads. The President recently issued an Executive Order implementing this idea, suggested in our Broadband Plan. Government must promote competition, which drives innovation and network upgrades.

We must ensure the Internet remains an open platform that continues to enable innovation without permission.

Genachowski

Genachowski’s vision for faster broadband has the noble goal of maintaining competitiveness with the rest of the world and putting the United States back on top in broadband rankings and innovation. But while hobnobbing with his industry friends at recent industry conventions, he may have gotten too close to one of the biggest impediments holding us back — big cable and phone companies merrily working their magic to create a comfortable duopoly with pricing and service plans to match.

Back in the late 1990s, most cable operators thought of broadband as an ancillary service easy enough to operate, but probably hard to monetize. Just like digital cable radio services like Music Choice and DMX, “broadband” would likely appeal only to a tiny subset of customers.

“Back in the 1990s, Time Warner was primarily a TV company in a TV industry.  Broadband then was an innovating and radical thing, and a lot of people thought it was stupid and wouldn’t work,” Time Warner Cable CEO Glenn Britt said in April, 2009.

The launch of “Road Runner” was not the most auspicious marketing effort undertaken by the cable operator. In fact, the service was rarely targeted for price adjustments, hovering at around $40 a month for a decade.

When the Great Recession hit the United States, something unexpected happened. Cable operators discovered people were willing to cancel their cable and phone services, but not their broadband. In fact, as high bandwidth online video became an increasing part of our lives, the cable industry realized they were in the catbird seat to deliver the best broadband experience, and be well-paid for it. With little competition, increasing prices brought little risk and, thanks to the insatiable drive to boost revenue and reduce costs, implementing usage caps to control “excess” usage and costs were within their grasp.

In 2008, when Stop the Cap! launched, only a handful of ISPs had usage caps. Now most providers, with the exception of Time Warner Cable, Verizon, Cablevision, and a handful of others, all have usage allowances and overlimit fee Internet Overcharging schemes to further pad their bottom lines.

Innovation: Rationing Your Internet Experience — Stick to e-mail and web pages.

Genachowski has completely ignored the growing pervasiveness of usage caps, and even excused them as an experiment in marketplace innovation. But limits on broadband usage will also limit the broadband innovation revolution he wants, especially when most Americans have just one or two realistic choices for broadband service:

1. Usage caps are the product of artificial scarcity. Rationing Internet usage, even with now-pervasive cost-effective upgrades like DOCSIS 3, simply does not make sense (but it will make dollars). Cable operators are switching off analog television service to free up bandwidth to provider faster Internet speed and fatten the pipeline that delivers it. They have plenty of capacity, but continue to proclaim they must limit usage for “fairness” reasons, without providing a single shred of evidence to prove the need for usage caps. Consumers will self-ration just to avoid the prospect of being cut off or handed a bill with overlimit fees.
2. Usage caps make faster speeds irrelevant. Selling customers premium-priced, super fast broadband speed is hardly compelling when accompanied by usage caps that constrain the benefits of buying. Why pay $20-50 more for faster speeds when customers cannot take practical advantage of them. Customers using their Internet service to browse web pages and read e-mail have no interest in upgrading to 30+Mbps. Customers streaming video or moving large files do.
3. Usage caps retard innovation. Google’s new 1Gbps fiber optic network was built on the premise that usage caps were unnecessary on a fiber-based network and would retard innovation. Developing the next generation of innovative apps that Genachowski celebrates will never happen if developers are discouraged by Internet usage toll booths and stop signs. The cost to provide the service is not largely dependent on customer usage. It is the initial price of last mile infrastructure that really matters. Both cable and phone companies have reduced their investments to upgrade their networks, and AT&T and Verizon both contemplate getting rid of their rural landlines. Most cable operators paid off their networks years ago.
4. Usage caps create a whole new digital divide.  Time Warner Cable’s discounted Internet Essentials program delivers only a $5 discount with a harsh 5GB usage cap. For an income-challenged home compelled to switch to a provider’s budget plan, the result is a different Internet experience than the rest of us enjoy. Imagine if your home broadband account was limited to 5GB a month. What online services would you have to avoid to stay under the provider’s limit? Traditionally, operators sell the lowest speed tiers with the lowest usage allowances. Slower speeds already offer a disincentive to use high bandwidth services, but many providers typically drive that disincentive home even harder with a paltry allowance that will cost plenty to exceed.
5. Usage caps harm our broadband standing. While Genachowski celebrates increasing broadband speeds, he ignores the fact the rest of the world is moving away from usage caps even as the United States moves towards them. Both Australia and New Zealand elected to construct their own national fiber networks in large part because the heavily usage-capped experience was holding both countries back. Usage caps are a product of a barely competitive market.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bandwidth Caps 7-2011.flv[/flv]

Tech News Today debunks providers’ claims that usage caps are fair and control those who “overuse” their networks, noting the same phone companies (AT&T) pushing for usage caps are also moving voice calling to unlimited service plans. (August, 2011) (4 minutes)