CEO Glenn Britt tells investors the company successfully pushed through modem fee as hidden “price increase”; Warns programmers unfettered rate hikes will result in networks being dropped, Disses Google Fiber as publicity stunt, and suggests more broadband rate hikes are in our future.

Time Warner Cable has announced its intention to broaden its consumption billing scheme offering $5 discounts to customers willing to keep their monthly usage under 5GB per month to every cable system it owns, with the exception of Oceanic Cable in Hawaii.

CEO Glenn Britt, speaking Monday to a UBS conference in New York, told investors that despite the fact the Internet Essentials program which caps monthly usage has attracted little interest from customers, the company was still going to take the program nationwide for symbolic reasons.

“At the moment what we have been trying to do is to get this idea into the marketplace,” Britt said. “It probably won’t surprise you that not very many people have taken the lower offer. That is fine. It hasn’t had much impact on [average revenue per customer]. But I think the idea is to have this consumption idea out there in addition to the unlimited.”

Britt’s attitude about consumption billing has evolved since its 2009 public relations disaster that forced the company to pull back on a plan to introduce consumption-based billing tiers for its Internet product. Protests erupted in test markets in New York, North Carolina, and Texas, several organized by Stop the Cap!, leading to proposed legislation to ban usage caps from one Rochester-area congressman and intervention from Sen. Charles Schumer (D-N.Y.) who helped convince Britt to shelve the plan.

“I actually don’t like the idea of caps,” Britt has said consistently. “That is a negative connotation.”

Britt’s views have evolved over the years to argue that an unlimited service tier should always be available from Time Warner Cable for customers who want it. But encouraging customers to use more broadband under some type of consumption pricing offers a new source for revenue for the company and its shareholders.

“What we think is we should always offer unlimited service but that we should offer a choice of a lower price with a consumption dimension for people who don’t need unlimited, so that’s quite different than what other [broadband providers] have talked about.”

Time Warner Cable is in the middle between operators advocating monetizing broadband usage with compulsory usage limits and overlimit fees and those, like Cablevision, that oppose usage limits of any kind. But Britt is intent on getting customers to begin thinking about associating usage with cost, and stop believing in the traditional “all-you-can-eat” unlimited broadband model that has been around since the 1990s.

Britt characterized the company’s increasing emphasis on broadband as part of an evolution of the cable industry beyond the video services that defined it for decades. With its video business increasingly pressured by increased programming costs the company can no longer pass entirely onto its customers, broadband and phone service now deliver more gross profit margin than its video package.

Time Warner Cable Broadband Has a 95% Gross Profit Margin?

“The gross margin on broadband has got to be the highest gross margin of any product offered by any industry in the United States — like 95%,” noted one Wall Street audience member that quizzed Britt about future threats Time Warner’s broadband business could face with a margin like that.

“I think actually this gross margin thing is something that is a perception that maybe our company caused in our effort to be transparent,” Britt tried to explain.

Britt argued the 95% figure was misleading because the company’s accounting methods allocate all of their costs to the specific services the company offers.

“In the case of the video business because it’s all the programming costs, that’s a big number,” Britt explained, noting video profits are tempered by programming costs. “In the case of broadband it’s just the direct bandwidth costs from third parties. It’s a small number so it looks like the margin is really high.”

With a few accounting changes, the company’s gross profits could be split more evenly across the video, broadband, and telephone services. But Britt explained the expense of switching to cost accounting made it not worth the effort. But the exposure of the enormous profits and very low cost of delivering broadband service may have inadvertently created a political problem for the cable industry as consumer groups suggest the vast profits earned on broadband come at the same time the industry is hiking prices and in some cases limiting service.

Britt tried to temper enthusiasm.

“If you look at the complete picture — broadband is a great business but it is not quite as profitable as just that gross margin number might make you think,” Britt said.

The Gradual Evolution of Time Warner Cable Towards Broadband, With Rate Increases to Follow

Britt said the company continued to gradually switch off analog video channels to free up capacity for additional broadband bandwidth.

“I think if you look at our physical plants we still devote a disproportionate amount of capacity to analog video so we’re still running broadband on a relatively small part of the capacity, but as [demand] grows we will keep adding more to broadband and we’re gradually reclaiming the analog video channels,” Britt explained. “We have not seen the need to flash cut/get rid of the analog and go all-digital, but we’re doing it over time.”

Britt called cable broadband a growth industry, with new entrants getting online for the first time.

“Broadband is a great business. It is still not fully penetrated,” Britt said. “There are homes that don’t have broadband that aren’t even online yet. And the homes that have it keep using it more and more all the time. I think somewhere recently I saw a study that said the average use is now 50GB a month.”

With consumer demand for broadband at an all-time high, Britt said as usage and dependence on broadband continues to grow, the company will have more and more ability to raise prices. Britt noted the company implemented a modem rental fee in November he characterized as “essentially a price increase,” and called its implementation successful.

Britt acknowledged only about 3% of customers have elected to buy their own cable modems to date, and Britt said he believed most people will continue to rely on Time Warner’s rented modem, bringing lucrative new revenue to the company indefinitely.

The company’s gradual move to an all-IP network is an acknowledgment of the success of broadband, but also allows the company to become more nimble with its video offerings and services.

“We are talking about using IP standards and IP technology to enhance our video offering,” Britt said. “What we are trying to do is recognize that all consumer electronics are increasingly moving to IP standards. Writing software to IP standards allows you to create software that can be much more easily updated and iterated than traditional forms of software. We’re embracing that wholeheartedly.”

The company is currently testing a cloud-based program guide and set top box interface in 190,000 homes in upstate New York with positive results, according to Britt.

“We are going to have the second version of that next year and roll it our more broadly,” Britt said. “We have not been as noisy about that as some others. Again, the beauty of this is that it resides centrally, not on everyone’s set top box, and you can change the software little bits and pieces once a week or every two weeks. You don’t have to have these giant software releases.”

Other initiatives:

• Getting streaming video on every device capable of displaying it in a customer’s home;
• Introducing local broadcast station video on the company’s streaming product. “We now have the ability to encode 1,000 broadcast signals from around the country,” said Britt. “Here in New York City, the broadcasters are in the package now;”
• Will shortly introduce video-on-demand streaming through its device apps;
• Its Wi-Fi network in Los Angeles is on track to offer 10,000 hotspots. The company’s next expansion priority is more Wi-Fi for New York City.

Britt Downplays the Competition: ‘AT&T U-verse is bandwidth constrained, FiOS is mostly finished expanding, and Google Fiber is a publicity stunt.’

Britt recognized AT&T planned to restart expansion of its fiber to the neighborhood U-verse service, which actually competes with Time Warner Cable in more communities than Verizon’s FiOS fiber optic network.

“U-verse overlaps about 25 percent of our footprint today,” Britt said. “Presumably it will add a little more when they’re done with this. I would remind you that U-verse is more bandwidth constrained than our plant. We have a route to faster speeds, so we’re confident with our ability to compete with that.”

Britt said Time Warner Cable has gained experience predicting what happens when new competition arrives in town, and continued to downplay its impact on cable’s dominant market position.

“There is a phenomenon in consumer behavior that when a new competitor comes to town a certain number of people move just because they want to try the new thing,” Britt said. “After you are there for awhile that part ends and you are just into a normal marketing game. I think leaving aside the AT&T announcement, that is true generally of the two phone companies who have built what they said they would build initially.”

The one city where competition has turned into building-to-building combat is New York City, where Verizon FiOS continues to only gradually expand into new buildings. When FiOS becomes available, marketing begins to get customers to consider switching, kicking Time Warner’s customer retention efforts into high gear.

The cable operator has traditionally offered aggressive retention and new customer deals to attract and hold cable customers, and in some cases it has thrown in high value prepaid credit card rebate offers. Currently, Time Warner Cable pitches new and returning customers its triple play package for $89-99 in New York, often giving existing customers the same deal when they complain.

In Kansas City, Time Warner Cable now faces competition from both AT&T U-verse and Google Fiber, but Britt claims the company is not as worried as some might think.

“I guess I would remind everybody [Google] in the past announced they were doing things like this,” Britt said. “I think they were going to build Wi-Fi over San Francisco and they built a couple of blocks. Obviously I’m not inside their company — I can’t exactly know their motivation, but certainly if it is like the past, their motivation is to demonstrate what technology can do and try to prod the government and other players to go bigger, faster, whatever.”

Britt doubts Google will take the project much farther than Kansas City, and even if it does, the cable industry will have decades to prepare.

“I would remind you it took the cable industry which built the second wire into the home — the phone being the first — four decades or more to build across the country and many billions of dollars,” said Britt. “Even if Google builds, we’re not going to wake up and see Google instantly building out the whole country.”

Britt took a swipe at Google’s white-collar business focus and wondered exactly who needs the service Google has started to offer.

“This is not like their other businesses; it is very physical, it is blue collar workers, it is process, it is a very different thing,” Britt said. “I think what they’re doing is trying to demonstrate the wonders of 1Gbps. The problem with that is even if you build the last mile access plant to do that, there is neither the applications that require that nor a broader Internet backbone and servers delivering at that speed. It ends up being more about publicity and bragging. There has been a whole series of articles in the paper about ‘I’m a little startup business and boy it is really great I can get this’ and my reaction is we already have plant there that can deliver whatever it is they are talking about in those articles, which is usually not stuff that requires that high speed. So we’ll see.”

But Britt acknowledged the company will have a challenge competing with at least one Google Fiber service.

“They are giving one level of broadband away for free with an upfront installation,” Britt noted. “It’s hard to compete with free, although it is hard to make money at free also.”

The Cord-Cutting “Myth”: It’s the economy, stupid.

Britt continued to downplay and dismiss the popular media meme that cord-cutting is taking a toll on cable television subscriptions. Britt argued with television sets left on in most homes an average of eight hours a day, and pay television services reaching 90 percent of those homes, parting with cable TV is not that easy for a product with that level of consumer acceptance.

“Is there some cord cutting typically among young people — maybe they were cable-nevers? Yes, but it appears to be fairly minor at the moment,” Britt said. “I think the bigger issue for the industry is a combination of price and the economy.”

“These packages keep getting more and more expensive. Programming gets more and more expensive,” Britt added. “I hope the economy gets better but at the moment there are still an awful lot of people who have been unemployed a long time and this stuff is starting to cost too much and I never miss the chance to get on my bully pulpit about it. If we, as a broader industry, want to keep this going, we need to figure out some way to have packages and prices that are lower for people who just cant afford it. That is a bigger factor right now than cord-cutting.”

Britt was lukewarm about his company’s own efforts to deliver a discounted cable television package which pares down the basic package to a few dozen channels with some notable gaps, especially for sports fans.

“We have a package called TV Essentials and whether it is the ideal configuration of programming and price — it is probably not — it is what we’re able to do,” Britt said. “It does have some uptake but not enormous. I think we need as an industry to work on that. We all know the big package works for the content companies and the little packages don’t. At some point this whole thing has to be responsive to the people who ultimately pay the bills and that is the consumer.”

Throwing Down the Gauntlet: ‘We’re going to start dropping little-watched channels at contract renewal time if prices don’t come down.’

“I think the trend has been pretty constant over the last several years: Since 2008, our programming costs per customer have gone up about 30 percent while the Consumer Price Index is up about 10%, so clearly those two things are out of whack,” Britt said. “Our video pricing has gone up about 15% so we are able to close that gap a little bit but not completely. I don’t have any magic bullet about this except clearly these trends can’t continue forever.”

Britt warned programmers have become too comfortable with the status quo for cable packages and pricing that some have gotten lazy about the quality of their programming, dependent on the subscriber fees they earn whether customers watch their channels or not.

“Content companies will all gloat and chortle about how wonderful the structure is and they can charge whatever they want,” Britt complained. “We’ve accumulated networks that hardly anybody watches. If you speak to the people who run those networks or own them they almost feel it’s a birthright — I have this network that has distribution to 70-80 million homes, and I’m getting paid every month for ads — maybe this year I wasn’t able to get a big audience but you know next year I am going to work harder and I am going to spend more money on programming and it’s going to be good.”

Britt noted some of the channels Time Warner added have transformed into entirely different channels the company would have never signed up for had they known.

“Sometimes people even change the entire content of the network and our company has been pretty aggressive in not letting that happen since we’re selling a whole package that appeals to different people,” Britt said. “It’s not a birthright, it’s not a carte blanche.”

“I think what we’re saying because the consumer is telling us they can’t afford these prices anymore, where we can we’re going to have to start cutting things off,” Britt warned. “So if you have a network that gets hash mark ratings and no real sign it’s going to get any better, and your contract is up, we’re going to have a different kind of conversation than we might have had five, six or ten years ago.”

Britt said some networks will be dropped altogether, others will be invited to remain, but only on an added-cost tier for subscribers willing to pay more.

“We can’t keep carrying these giant packages of things with the services that don’t carry their own weight,” Britt said.

But Britt understands the perspective of the entertainment companies as well, having formerly been with Time Warner, Inc., the entertainment-oriented company that owns several cable networks.

“A-la carte just doesn’t work for those companies,” Britt noted. “If you think about the existing package, it’s a wonderful mechanism to mitigate risk in a business that I would argue is one of the riskiest businesses on the planet.”

Britt compared a-la-carte economics with that of a typical Broadway theater show, where a small group of individuals risk substantial sums of money on the success of a production that either makes it or it doesn’t, and most don’t. The only revenue stream is from consumers willing to pay ticket prices for admission.

Today’s cable package offers niche and general interest channels in the same package, with assured subscription revenue regardless of ratings, combined with ad revenue which can be meager or substantial depending on the ratings. With guaranteed revenue, cable channels invest in programming production or acquisition — purchases that would not be likely if reliant on an uncertain a-la-carte business model.

Therefore, in Britt’s view, a-la-carte per channel or per program changes the dynamics of the cable business away from a stable one that obtains programming on the basis of predicted revenue to one closer to a Broadway production, where risks of failure are very high, especially for niche programming.

Britt believes in today’s bundled cable package, but not in its current size or monthly price.

“I think aside from that there is a lot of value in the package if you think about cost avoidance,” Britt said. “In reality we as distributors do the marketing, the billing, the customer relationship and although somebody from a network might rail at us for not being great marketers, the reality is if each network had to separately market and bill itself and deal with consumers separately, you would introduce a whole lot of cost in the system that is not there today. This actually works quite well for consumers today and it’s a relatively good value. I think the problem is the trajectory of it and if you are in the content business you are trying to seek eyeballs so you are competing with each other and the only way people seem to know how to do that is to spend even more for programming and that is what sort of killed you with consumer behavior.”

Time Warner Cable CEO Glenn Britt took questions for an hour from Wall Street investors and analysts at the UBS Conference in New York. (December 3, 2012) (55 minutes)
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Google Fiber is more than the experimental publicity/political “stunt” many large cable companies and Wall Street investors have suspected since the search giant first announced it would build a 1,000/1,000Mbps fiber to the home network.

BTIG Research, which follows the telecom sector for large institutional investors and investment managers, says there is a lot more to Google Fiber than many initially thought.

If Google’s fiber project expands outside of Kansas City, it could ultimately transform the business model of broadband in the United States. It already has generated unease for Time Warner Cable, which has resorted to knocking on doors to preserve its customer relationships.

It is one thing to consider Google Fiber from a New York City office and another to see it working on the ground. BTIG’s Rich Greenfield and Walt Piecyk decided to travel to Kansas City to investigate the new fiber service first-hand.

“We believe Google Fiber will accelerate rapidly, changing consumer habits in its territory,” they concluded. “While it is very early in Google Fiber’s life, we fully expect Google to build out more markets after they perfect the broadband and TV offerings in Kansas City.”

There is ready-made demand, judging from the 1,100 cities that asked Google Fiber to set up shop locally. Local governments recognize their telecommunications future has been largely monopolized by one cable and one phone company, and it is important for that to change. Some have taken steps to build their own networks, others will throw a parade if Google does it for them. Reasoning with the likes of Comcast, Time Warner Cable, AT&T, and Verizon — among several others — has not gotten world class broadband at a reasonable price. Instead, many incumbent players have used their market power to raise prices, restrict usage with unnecessary usage caps, and retard innovation.

Google may prove to be the only force large and aggressive enough to throw a monkey wrench into the comfortable business plans and conventional wisdom about how broadband should be packaged and sold in this country. Community owned providers have shown they can deliver superior service and pricing, but face deep-pocketed incumbents that can use predatory pricing to save customers in one market while raising prices on captive customers in others. Incumbent providers also have successfully advocated for protectionist bans on publicly-owned broadband in a number of states. Washington regulators have thus far been largely supine and disengaged when asked to address the challenges consumers face from rising bills for more restricted service.

BTIG’s own research is a marked departure from the usual dismissive attitude incumbents and Wall Street have paid to the Google project. Greenfield himself acknowledges that the investment and business media communities typically respond with three reactions when one mentions Google Fiber:

• “Is it a sustainable business with those economics?”
• “How much cash are they blowing?”
• “Who cares about what they are doing in a couple of relatively small cities such as the Kansas Cities?”

But such thinking underestimates Google’s potential much the same way Yahoo! and AltaVista did with their dominant search engines a decade ago. The biggest mistake one could make is to assume Google just wants to be another competing cable or phone company. It goes far beyond that.

Greenfield believes Google is seeking to become an integral part of the communities it serves, equal in stature to the cable and phone companies, but without their reviled reputation.

But the most significant change Google brings is a challenge to the current business model of consumer broadband.

Phone and cable companies first monetized broadband speeds. The faster the speed chosen, the higher the price. The earnings power of broadband gradually increased as more Americans signed up for service and the costs to provide it declined. But as cable TV margins continue to erode, the money to cover the difference has come from broadband, which has seen regular, unjustified rate increases since 2010. Not content with monetizing broadband speed alone, many providers are also attempting to monetize broadband usage with usage limits and/or consumption-based billing schemes. A recent Wall Street Journal article estimated 90 percent of the price consumers pay for Internet access is profit.

With that kind of profit margin, the economics of Google’s ambitious fiber project do not look as unfavorable as some on Wall Street suggest.

Greenfield calls Google’s 1 gigabit speeds insanely low-priced at $70 a month. He’s right when one considers current pricing models of incumbents. At Time Warner Cable’s current pricing (50/5Mbps service for $99 a month), the cable company would charge consumers $1,980 a month for 1,000/1,000Mbps service, assuming they could actually deliver it. Upstream speeds above 5Mbps might cost even more. Cable television, which used to be the core service offered by cable companies, is almost an afterthought for Google. It can be added for $50 more per month, which is actually cheaper than many competing providers charge for a similar package.

Greenfield feels Google has an aspirational goal for its Kansas City network.

“In Kansas City, Google has a customer facing service with employees who are part of your community, trucks that come to your house and customer service reps that answer your questions when you need help,” Greenfield notes.

On that basis, Google can reboot itself into an entirely new entity in Kansas City, offering much more than a broadband service and a search engine.

Greenfield notes Google Fiber has been carefully developed to break away from the familiar experience one has with the phone and cable company:

• The home terminals and DVR equipment more closely resemble a sleek Apple product, not a Motorola/Cisco set top box that has looked largely the same since the 1990s;
• The installation experience has been streamlined — the external network interface on the side of the customer’s home does not require anyone to be home during the installation, reducing the time needed for a customer to sit around while service is installed inside;
• In-home equipment envisions a more integrated IP-based network future with Ethernet and Wi-Fi connectivity, a centralized storage device which acts as an enhanced whole house DVR, and a minimalist TV box that can be hidden — no more unsightly hulking set top boxes. It represents a home entertainment network that goes far beyond what the competition is offering.

These factors deliver a positive customer experience, if only because Google paid attention to complaints from cable and telephone subscribers and decided to do things differently.

Other traditional business model busters noted by Greenfield:

• Google will deliver 6/1Mbps budget priced Internet for a $300 one time fee (payable in $20 installments) which includes an in-home router, breaking through the digital divide and getting Google’s infrastructure into homes that simply cannot afford traditional cable or phone company broadband. It blows away the current “lite” offering sold by cable and phone companies with much better speeds at a far lower price;
• Google is working with charitable organizations to help the poorest get broadband for even less, through donations and other fundraising;
• Google leverages the community as a crowd-sourced marketing engine. Word of mouth advertising and competition among different neighborhoods helps drive the expansion of the network. Even if a consumer has no interest in the service, many fight to see it in their neighborhoods for the benefit of local community institutions who will receive free hookups;
• Every new customer signed up for two years’ service receives a free Nexus tablet. The tablet is sold as the service’s “remote control,” but it is capable of much more;
• No data caps, no speed throttling. With just two speed tiers, Google has completely discarded the speed-based and usage-based business models for broadband.

So what exactly does BTIG think is Google’s master plan? Greenfield suspects Google is not recouping its initial investment or costs with their current pricing model, but that may not matter. Google may earn profit in other ways.

A 33% increase in the number of homes with broadband could be a substantial boost for Google search and YouTube, earning Google additional revenue. Improved broadband available to an entire household guarantees people will spend more time online, especially with no data caps or slow speeds. Enormously faster upload speed promotes more content sharing, which in turn means more time online with services like YouTube. A home tablet enables even more broadband usage, according to Greenfield.

As broadband speeds improve, advertisers can expose web visitors to more attractive, multimedia rich advertising not easily possible on slower speed connections. That could let Google tap into a greater share of the $60 billion TV ad market, especially for YouTube videos.

Finally, Greenfield suspects the more Google develops brand loyalty, the more successful it will be pitching consumers and businesses on services of the future.

Greenfield notes there are still bugs and features to be worked on, particularly with Google’s TV offering, but the company will have plenty of opportunities to manage those before it introduces Google Fiber elsewhere.

The implications of an expanding fiber to the home universe in the United States under Google’s price model could deliver a potent punch to incumbents like Time Warner Cable. So far, the cable company has only faced satellite dish competition for television, a technologically inferior AT&T U-verse, which will never have the capacity Time Warner has so long as the phone company still relies on any significant amount of copper wiring, and Verizon FiOS, which has disengaged from a price war with the cable company and is raising prices.

The writing is already on the wall, at least in Kansas City. Greenfield relays that Time Warner has been going all-out to improve its own customer service. One customer noted Time Warner Cable came to his house twice in recent weeks, without a scheduled service call, to check on the quality of his Internet speeds and to make sure the customer was happy.

In some neighborhoods, Time Warner is going door to door to interact with customers, something not done since cable operators first knocked on doors 30 years ago to introduce you to their service.

Google Fiber could ultimately force the end of one more legacy the cable industry has earned itself over the past few decades: customers loathing its service and prices.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Google Fiber Demo by BTIG’s Rich Greenfield and Walt Piecyk 11-23-12.flv[/flv]

BTIG’s Rich Greenfield and Walt Piecyk experience Google Fiber in Kansas City.  (3 minutes)

Wall Street credit ratings agencies are unhappy with AT&T’s plans to increase spending on its broadband network to upgrade U-verse speeds and provide the fiber to the neighborhood service to more customers.

First, Moody’s placed AT&T’s “ratings on review for downgrade,” because AT&T’s plan to spend $22 billion to upgrade service and repurchase its own shares would throw AT&T’s debt level too high. Now Fitch Ratings has gone further, telling clients it has “downgraded” AT&T with a “negative outlook” because the phone company will spend money to provide U-verse to customers not profitable quickly enough to make the spending worthwhile.

Several Wall Street firms question the return on investment providing Internet service in rural areas where capital costs are higher. But many investment analysts are more positive about AT&T’s wireless service, which delivers substantial profits in much shorter time periods. Fitch called AT&T’s investments in LTE 4G service positive and important as Verizon Wireless continues to build and expand its own 4G LTE network.

Major cable and phone companies are rolling out new bundled packages and promotions designed to protect their cable television packages from cord cutting.

Verizon, Comcast and Time Warner Cable have all run promotions that carry a clear message: cancel your cable television and your wallet gets it.

The Wall Street Journal shared the story of Comcast subscriber Cathy Vu, who decided she no longer wanted cable TV and tried to downgrade to a broadband-only account.

Comcast gave her an offer she could not afford to refuse when the representative explained canceling cable television would increase her monthly bill $20. As a result, Vu decided she would save more money keeping her cable television turned on.

Welcome to the new world of double and triple play bundled pricing promotions that bring downgrade penalties customers cannot ignore.

The idea of repricing cable service to protect vulnerable cable television and phone service began in earnest after analysts like Sanford Bernstein’s Craig Moffett began noticing customers were no longer addicted to keeping cable television, no matter the cost. He proposed a solution: price broadband service higher and cut the cost of cable television.

The result: carefully constructed promotional and bundled package offers that entice customers to purchase services they might not even want, to get the best (and sometimes lowest) price. Gone were promotions that offered phone, broadband, and television service for $33 each. In their place, new pricing that charges $60-70 for the first service, and heavily discounted prices for each additional service.

You know the pitch:

“Yes, I am calling to sign up for broadband service,” you say.

“Certainly, I would be glad to help you with that. But did you know that for just $20 more a month, you can also get cable television?”

“Really, it’s only $20 more? Sure.”

“I am thrilled to hear you say that. But I hope you are sitting down because I have more good news. For just $10 more, we can give you a phone line with unlimited local and long distance calling. How much do you pay the phone company now?”

“Too much, that sounds like an amazing deal, so I get everything together for $99 a month?”

“You sure do, for the first 12 months anyway.”

One year later when the promotion ends, you call to begin downgrading service to lower your bill. But cable and phone companies are increasingly ready for you.

First they will offer you a slightly less attractive promotional retention offer to keep your business. If you accept, the company gets to book the extra revenue and probably locked you into an annual service agreement.

If you don’t bite and insist on a downgrade, they have some bad news for you — that broadband service you still want will now cost you $60-70 a month, including the modem fee.

If you bail early on a promotional discount offer, the bite on your wallet can be significant.

The Journal found unbundling just does not pay:

• Comcast: TV + Internet for about $50/month for the first 6 months vs. standalone same speed Internet for about $70/month.
• Verizon FiOS: TV + Internet for about $85/month (two-year contract) vs. standalone Internet for about $80/month.
• Time Warner Cable: TV + Internet for about $50/month for 12 months vs. standalone Internet for about $45/month for 12 months, then up to $60 after that.

At the end of the day, Moffett and the rest of Wall Street get their wish — preservation of the all-important growing average revenue (ARPU) collected from each customer. Downgrades lower ARPU, so they must be discouraged at all costs.

Cable operators “recognize that their most advantaged product is broadband,” said Moffett. “They don’t want to sacrifice that advantage by giving the opportunity for customers to cherry pick their best product at a low price and take the rest of your services from somebody else. In effect, they are pricing the broadband at a price that discourages you from taking broadband only.”

Customers primed for cord cutting (or who have never bought cable TV) are likely to receive targeted mailings from Verizon, Comcast and Time Warner Cable encouraging subscriptions to cable TV and prices that nearly give the service away.

Comcast’s Blast Plus promotion in selected markets delivers 30Mbps broadband with Digital Economy television service, both for $50 a month for six months. Internet-only customers would pay $70 per month for the same speeds without television.

Time Warner Cable in New York City wants to be your cable TV supplier so much, it offers a package of broadband and throws in Broadcast Basic service for just $5 more per month. Combined, Turbo Internet and television will cost $49.99 a month for a year. Standalone Internet on a promotion runs $45 a month for 12 months.

On a strict cost basis, charging more for Internet does not make sense. The Journal reports that about 90% of your monthly broadband bill is pure profit for cable operators, because the cost of delivering the service has continued to plummet to all-time lows. Cable television is no longer the cash cow it used to be for cable operators because programmers increasingly demand a piece of the profit pie. Today, cable operators only get to book about 35% of your monthly cable television payment as profit.

[flv width=”640″ height=”369″]http://www.phillipdampier.com/video/WSJ Cable Cord Cutting Less Attractive 11-13-12.mp4[/flv]

The Wall Street Journal examines the trend towards repricing broadband service so that customers feel compelled to keep their cable television package or face even higher bills.  (5 minutes)

As much as 90 percent of your monthly broadband bill represents pure gross profit for your phone or cable provider, according to the Wall Street Journal:

Cable executives and analysts say that about 90% of the money cable operators charge for broadband goes straight to gross profits, since there are minimal operational costs for providing Internet service.

Most of the expenses incurred by cable operators that today dominate the broadband market came from cable system upgrades that began in the early 1990s to accommodate the introduction of digital cable television and other services like digital cable radio, expanded pay-per-view and on-demand features, home security, telephone service, and the launch of cable broadband.

Most of those upgrades were paid off years ago, and the costs of bandwidth and network upgrades to handle increased data demands are proving to be both incidental and declining.

What has not declined is the price consumers pay for service.

Among Canada, the USA, Japan, the United Kingdom, France and Australia, Americans pay the highest prices and are seeing the largest rate increases for Internet access, especially after 2011, according to the Canadian Radio-television and Telecommunications Commission which tracks global broadband pricing.