Phillip “Doesn’t Derive a Paycheck From Writing This” Dampier

I see it took all of five minutes for George Ou and his friends at Digital Society to be swayed by the tunnel vision myopia of last week’s latest effort to justify Internet Overcharging schemes.

Until recently, I’ve always rationalized my distain for smaller usage caps by ignoring the fact that I’m being subsidized by the majority of broadband consumers.  However, a new study from Robert Shapiro and Kevin Hassett at Georgetown University is forcing me to reexamine my personal bias against usage caps.

There’s a shock, especially after telling your readers caps “were needed.”

As I predicted, our astroturfing and industry friends would have a field day over this narrowly focused report that demands readers consider their data, their defined problem, and their single proposed solution.  The real world is, of course, slightly more complicated.

I used to debate some of my economist friends on why I thought metered pricing or more restrictive usage caps were a bad idea, but I couldn’t honestly say that my opinion was entirely objective.  My dislike for usage caps stems from the fact that I am a heavy broadband user and an uncapped broadband service is very beneficial to me since everyone else pays a little more so that I can pay a lot less on my broadband service.  But beyond self interest, I can’t make a good argument why the majority of broadband users who don’t need to transfer a lot of data should subsidize my Internet requirements.

Your opinion is still not entirely objective, George.  Your employer has industry connections.

Our readers, many of whom are hardly the usage piggies the industry would define anyone who opposes these overcharging schemes, all agree whether it’s 5GB or 150GB per month, they do not want to watch an Internet “gas gauge” or lose their option of flat rate broadband pricing that has worked successfully for this industry for more than a decade.  George and his friends assume this is an “us vs. them” argument — big broadband users want little broadband users to subsidize their service.

That’s assuming facts not in evidence.

What is in evidence are studies and surveys which show that consumers overwhelmingly do not want meters, caps, usage tiers, or other such restrictions on their service.  They recognize that a provider who claims to want to “fairly charge” people for service always means “everyone pays more, some much more than others.”  To set the table for this “fairness,” they’ve hired Washington PR firms to pretend to advocate for consumers and hide their industry connections.  Nothing suspicious about that, right?

Although George can’t make a good argument opposing usage caps, that doesn’t mean there aren’t any.  Among the many reasons to oppose caps:

• Innovation: Jobs and economic growth come from the online economy.  New services created today by U.S. companies, popular here and abroad, would be stifled from punitive usage caps and consumption billing.  Even the broadband industry, now in a clamor to provide their own online video services, sees value from the high bandwidth applications that would have never existed in a capped broadband universe, and they are the ones complaining the loudest about congested networks.
• Consumer Wishes: Consumers overwhelmingly enjoy their flat rate broadband service, and are willing to pay today’s pricing to keep it.  The loyalty for broadband is much greater than for providers’ other product lines – television and telephone.  That says something important — don’t ruin a good thing.
• The Fantasy of Savings: As already happened across several Time Warner Cable communities subjected to “experimentation,” the original proposals for lower consumption tier pricing offered zero savings to consumers who could already acquire flat rate “lite” service for the same or even lower prices.  Even when tiers and usage allowances were adjusted after being called out on this point, consumer outrage continued once consumers realized they’d pay three times more for the same broadband service they had before the experiment, with absolutely no improvement in service.  Comcast and other smaller providers already have usage caps and limits.  Pricing did not decline.  Many combine a usage allowance -and- lower speed for “economy” tiers, negating the argument that lower pricing would be achieved with fast speeds -and- a usage allowance.
• Justifying Caps Based on Flawed Analysis: The report’s authors only assume customer adoption at standard service pricing, completely ignoring the already-available “economy” tier services now available at slower speeds.
• Speed Based Tiers vs. Consumption Based Tiers: Consumers advocate for speed-based tiering, already familiar to them and widely accepted.  New premium speed tiers of service can and do already generate significant revenue for those who offer them, providing the resources for network expansion providers claim they need.
• Current Profits & Self Interested Motives: Broadband continues to be a massively profitable business for providers, earning billions in profits every year.  Now, even as some of those providers reduce investments in their own networks, they claim a need to throw away the existing flat rate business model.  Instead, they want paltry usage allowances and overlimit penalties that would reduce demand on their networks.  That conveniently also reduces online video traffic, of particular concern to cable television companies.
• Competition & Pricing: A monopoly or duopoly exists for most Americans, limiting competition and the opportunity for price savings.  Assuming that providers would reduce pricing for capped service has not been the result in Canada, where this kind of business model already exists.  Indeed, prices increased for broadband, usage allowances have actually dropped among some major providers like Bell, and speed throttles have been introduced both in the retail and wholesale markets.

More recently, building our colocation server for Digital Society has made me realize that usage caps not only has the potential to lower prices, but it can also facilitate higher bandwidth performance.  Case in point, Digital Society pays $50 per month for colocation service with a 100 Mbps Internet circuit, and at least $20 of that is for rack space and electricity.  How is it possible that we can get 100 Mbps of bandwidth for ~$30 when 100 Mbps of dedicated Internet bandwidth in colocation facilities normally costs $1000?  The answer lies in usage caps, which cap us to 1000 GBs of file transfer per month which means we can only average 3 Mbps.

One thousand gigabytes for $30 a month.  If providers were providing that kind of allowance, many consumers would consider this a non-issue.  But of course they are not.  Frontier Communications charges more than that for DSL service with a 5GB per month allowance in their Acceptable Use Policy (not currently enforced.)  Time Warner Cable advocated 40GB per month for $40-50 a month.  Comcast charges around $40-45 a month for up to 250GB.  Not one of these providers lowered their prices in return for this cap.  They simply sought to limit customer usage, with overlimit fees and penalties to be determined later.

Of course, web hosting is also an intensively competitive business.  There are hundreds of choices for web hosting.  There are also different levels of service, from shared web hosting to dedicated servers.  That is where the disparity of pricing is most evident, not in the “usage cap” (which is routinely more of a footnote and designed to keep Bit Torrent and high bandwidth file transfer services off their network). There is an enormous difference in pricing between a shared server environment with a 1000GB usage cap and a dedicated rack mount server located in a local facility with 24 hour security, monitoring, and redundancy/backup services, even with the same usage cap.

So the irony of a regulation intended to “protect” the little guy from “unfair usage caps” would actually force our small organization onto the permanent slow lane.

Actually, the Massa bill has no impact on web hosting usage caps whatsoever.  George’s provider friends would be his biggest risk — the ones that would “sell” insurance to his organization is he wanted assurance that his traffic would not be throttled by consumer ISPs.  I’d be happy to recommend other hosting providers for George if he felt trapped on a “slow lane.”  That’s because there is actual competition in web hosting providers.  If the one or two broadband providers serving most Americans had their way, it would be consumers stuck on a permanent slow lane with throttled service, not organizations like his.

So, who is in agreement with George on this question?  None of his readers, as his latest article carries no reader responses.  But fellow industry-connected astroturfers and providers themselves share their love:

• “This is the story that ISP’s have failed to tell effectively — that consumption-based billing may, in fact, be fairer for consumers.” — Michael Willner, CEO Insight Communications
• “Ars Technica reports on an interesting theory being floated by former Clinton economic advisor Robert J. Shapiro and Federal Reserve economist Kevin A. Hassett” — Brad, astroturfer Internet Innovation Alliance
• “The only way … is to introduce some form of equitable pay-as-you-use pricing.  And I could not agree more.” — Ulf Wolf, Digital Communities Blogs (sponsored by AT&T, Qwest, etc.)

PC Magazine reported even Robert Shapiro, one of the report’s authors, is not advocating for usage caps:

“We’re not talking about a bandwidth cap,” Shapiro said during a call with reporters. “We were looking simply at the different pricing models and their impact on the projections of broadband uptake based on these income sensitivities.”

The report does not specify how ISPs should implement pricing, Shapiro said. “The most important thing to me as an economist is the flexibility – that is, Internet Providers can better determine than I can the particular model that works best.”

That’s not the message astroturfers are taking forward, as they try and sell this as “pro-consumer.”

There was quite a buzz this week over a story in The Business Insider reporting that Hulu reaches more viewers than Time Warner Cable (the nation’s second largest cable operator) has subscribers.  They found 38 million Americans watched Hulu and just 34 million Americans are Time Warner customers.

It’s interesting trivia, but really doesn’t mean all that much… yet.  In fact, Comcast, the nation’s largest cable operator has 62 million subscribers, so Hulu has a long way to go to beat Comcast, not to mention websites like Google Video and YouTube, which have more than 120 million combined viewers.

More importantly, Time Warner Cable has no trouble monetizing its business, as any cable subscriber knows when that ever-increasing bill arrives every month.  The same cannot be said for Hulu, which originally depended on an advertising model to sustain itself, at the same time the domestic online advertising marketplace imploded with the near-economic collapse last fall.  If television networks and newspapers can’t sell their ad inventories, the online advertising market, still a novelty for many advertisers, is in even worse shape.

Time Warner Cable is not losing any sleep over Hulu at the moment, and if they do become a nuisance, that consumption billing concept (or hard usage cap) is always an option to deter people from watching too much.

Broadband providers who pass along video content to their customers, without any ownership interest in those videos, are stuck in the position of owning “dumb pipes.”  In the month of July alone, comScore estimated that more than 21.4 billion videos were viewed on American-owned video websites.  Those videos ranged from the five minute karaoke performance from the guy in Des Moines who posted his performance to YouTube, to hour long dramas watched on a network TV website.

What people didn’t watch were all of the most popular shows from cable networks.  Dedicated viewers who needed to watch the entire second season of A&E’s Crime 360 show had to head to Usenet newsgroups or Bit Torrent websites to ferret out someone’s personal recording collection uploaded to share.  A&E only streams one episode from the second season at a time.

That explains why the cable industry is in a hurry to test their TV Everywhere project.  Cable and other pay-television customers will discover a lot more videos hosted on cable network websites suddenly “authenticating” their subscription status, and locking out those who don’t have a subscription (or offering teaser videos or a much more limited menu of viewing choices).

The upsides for TV Everywhere include pleasing existing pay television subscribers with more online videos.  They also get to sell advertising to accompany these on demand videos.  Those cable network websites may also have ads on them and can also promote their other programming.  Perhaps even more importantly, the industry will have a new tool in their subscriber retention arsenal — the ability to delicately remind subscribers wavering over whether to continue their cable TV package that they can forget about replacing it with watching shows online for free. Owning or controlling the content (and the distribution network) is always better than simply being used to transport someone else’s content.  You can’t giveth and taketh away content you don’t own — you can just make it prohibitively expensive to watch with Internet Overcharging schemes.

The downside, at least in their eyes, is the amount of bandwidth these videos will occupy on their existing distribution platforms.  In 2008, the “big threat” that demanded usage caps and/or consumption billing came from Bit Torrent.  In 2009, it’s online video.

Of course, two of the nation’s largest providers that have “appreciated” consumption billing and usage caps — Comcast and Time Warner Cable — are also enthusiastic founding partners of TV Everywhere.  That presents a problem.  A video platform like TV Everywhere, which may one day usurp Google’s dominance in online videos, is being run by the same people trying to convince Americans of broadband capacity problems and the need to cap usage or switch to consumption billing schemes.  TV Everywhere effectively takes the wind out of that argument because, as any consumer will ask, if your platform is too congested to handle online video, why in the world would you seek to make the “problem” much worse?

That’s a rhetorical problem astroturf groups are being hired to explain away.  They apparently couldn’t sell it to consumers during focus group testing, so now they’ll try the sock puppets instead.

J.P. Morgan Securities likes what it sees from Comcast and Time Warner Cable, the nation’s largest cable companies.  It has begun coverage of both companies, calling them ripe for growth potential.

Analyst Mike McCormack was particularly impressed with the cable companies’ success in selling bundled products to customers — packages containing video, telephone, and broadband service.  McCormack also noted that cable companies’ capital expenditures to provide services to customers continue to decline, allowing earnings and free cash flow to increase.

In a note to investors, the Wall Street firm said both companies had great potential to increase revenue from customers signing up for voice and data services, which the firm feels has low penetration rates.  Comcast was praised for its position to expand the “average revenue per user (or subscriber)” as higher speed data products gain popularity.

McCormack was much less positive about cable’s biggest rivals — telephone companies.  McCormack said cable was in a stronger position because telephone companies are continuing to lose an increasing number of traditional wired phone line customers, and earnings from the “maturing and increasingly competitive” wireless industry are likely to be lower.

The wireless mobile phone industry, especially prepaid mobile service, continues to undergo a price war which is positive for consumers, but seen as increasingly negative by Wall Street.

DirecTV wants people out of reach of its satellite service to enjoy unlimited viewing of NFL football games, and today announced it would test providing them over broadband connections.  For $100 more a year than subscribers pay now for the satellite-delivered football game coverage, DirecTV will will offer New York City viewers as many NFL games they can watch over their broadband connection for $349 a year.

DirecTV claims it will sell the service only to those who cannot obtain satellite service from the company, which presumably will limit the broadband content to apartment dwellers and other urban residents who can’t mount a satellite dish.  But in a city like New York, that can easily mean tens of thousands of potential new customers, all watching video content delivered by Cablevision, Time Warner Cable, RCN, or Verizon’s broadband services.  USA Today covered the story this morning:

DirecTV has few customers [in New York City] because skyscrapers block signals coming from satellites orbiting the equator. Also, many landlords and co-op boards don’t allow residents to get a satellite service.

“A lot of the buildings (that can’t get DirecTV) we already have in databases because they’ve got exclusive contracts with cable guys,” says Derek Chang, executive vice president for content strategy and development.

To see the games, broadband customers will download a special video player and punch in a code. Users can install the software on multiple computers, but only one will be able to stream the games at any particular time.

Games with New York’s Jets and Giants, which air on broadcast TV, will be available only when the customer’s computer is outside the New York area.

Cable operators won’t just play defense in the battle for football fans. Comcast will announce today that it will offer the NFL Red Zone Channel to customers of its Sports Entertainment Package. On Sundays, the channel will display football statistics with audio from Sirius XM Radio‘s program “Around the League” — and go live to certain games when the ball is within 20 yards of the goal.

While Cablevision, RCN, and perhaps even Verizon may not express concern about the prospect of carrying NFL games across their networks without “compensation,” Time Warner Cable, which continues to express an interest in Internet Overcharging schemes, may not be so tolerant, especially if the test is successful.  ISPs who support Internet Overcharging routinely use online video growth as a justification for usage caps and consumption pricing.  Will the NFL become part of the Re-education of their customers?

Another question to ponder – would such a service even launch in a broadband marketplace infested with usage caps and limits?

An electrical fire at Time Warner Cable’s headquarters in El Paso, Texas knocked out cable television, Internet, and telephone services for customers across El Paso Tuesday.

Company officials claimed the fire, which did only minor damage, interrupted service for several hours, but some customers reported phone service and on-demand programming interruptions extending into Wednesday.  Although Time Warner claimed the problem affected only “a few” subscribers, KFOX-TV reported the outage affected the entire city of El Paso.

Ironically, although the company’s customer service center was closed Wednesday, the bill payment office remained open for business.

Service has since been restored across the city.

KFOX-TV, El Paso’s local Fox affiliate, has the most in-depth coverage of Time Warner Cable issues in southwest Texas:

[flv width=”640″ height=”360″]http://www.phillipdampier.com/video/KFOX El Paso Time Warner Services Restored Customers Ask For Credit – News Story 8-12-09.flv[/flv]

Warning – Loud Audio!

Time Warner Cable will only issue credits for service interruptions to those who specifically request them.  Residents of El Paso can call 1-800-222-5355 to request credit.

KTSM-TV also reported that some Internet customers may have also been affected with extended outages, even after cable television service was restored:

[flv width=”382″ height=”288″]http://phillipdampier.com/video/KTSM?from=%40 El Paso El Paso Cable Outage Blamed On Power Surge 8-12-09.flv[/flv]

El Paso and Time Warner Cable have had an occasionally contentious history with one another, extending back a year ago when service problems plagued area residents.

Repeated media attention, and the involvement of state and local officials became necessary.  But the ability for the state to deal with poorly performing cable companies is limited — Texas is one of the states that issues statewide cable franchises, tying the hands of local officials.  Additionally, very little state regulation of telecommunications services in Texas means customers often have limited recourse to deal with bad service, beyond simply trying to find an alternative provider, if available.

A history of past troubles can be found in several news video reports below the break.

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