Time Warner Cable bides its time

Not surprisingly, Time Warner Cable has decided to put its consumption-based billing trials on hold:

Time Warner Cable Chief Executive Officer Glenn Britt said, “It is clear from the public response over the last two weeks that there is a great deal of misunderstanding about our plans to roll out additional tests
on consumption based billing. As a result, we will not proceed with implementation of additional tests until further consultation with our customers and other interested parties, ensuring that community needs are being met. While we continue to believe that consumption based billing may be the best pricing plan for consumers, we want to do everything we can to inform our customers of our plans and have the benefit of their views as part of our testing process.”

Time Warner Cable also announced that it is working to make measurement tools available as quickly as possible. These tools will help customers understand how much bandwidth they consume and aid in the dialog going forward.

The public response was somewhat less public than it may appear, as most of it was ginned-up by a few activist bloggers and the interest groups that are generally in the middle of these things, such as Free Press’ “Save the Internet” blog. In this case, the Internet was saved from a plan that Free Press’ chairman Tim Wu had previously lauded for its fairness in allocating network resources:

“I don’t quite see [metering] as an outrage, and in fact is probably the fairest system going — though of course the psychology of knowing that you’re paying for bandwidth may change behavior,” said Tim Wu, a law professor at Columbia University and chairman of the board of public advocacy group Free Press.

Of course, the “psychology of knowing that you’re paying for bandwidth” is actually meant to change behavior.

Free Press is now crowing that the postponement of the trial signals a great victory for the Internet:

“We’re glad to see Time Warner Cable’s price-gouging scheme collapse in the face of consumer opposition. Let this be a lesson to other Internet service providers looking to head down a similar path. Consumers are not going to stand idly by as companies try to squeeze their use of the Internet.

The Freeps should have chosen their words a bit more carefully. The dilemma that TWC faces does indeed relate to “squeezing,” but that doesn’t actually originate exclusively (or even primarily) at the cable company’s end of the bargain. TWC’s consumption per user has been increasing roughly 40% per year, and there’s no reason to assume it will do anything but increase as more HDTV content becomes available on the web, people connect more devices, and video calling becomes more popular. TWC’s capital expenditures are 20% of income, and the company lost $7.3 billion in the course of spinning out from Time Warner, Inc. last year. Some of TWC’s critics have charged that their bandwidth is free (or nearly so,) citing “high speed data costs of $146 million.” In reality, TWC pays six times that much for the interest on its capital expenditures alone ($923M.)

Heavy users squeeze light users by leaving less bandwidth on the table, and the flat-rate pricing system squeezes them even more by making them pay a larger share of the costs of bandwidth upgrades than those who actually use them. No fair-minded and rational person can look at the costs of operating a network and conclude that flat-rate pricing for a single Quality of Service level is the best we can do.

Continuous upgrades are a fact of life in the broadband business, and aligning their costs with the revenues carriers collect is one of the keys to creating an economically sustainable broadband ecosystem. We’ll take that up in another post.

UPDATE: Dig into the comments for some discussion of transit and peering prices.

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19 Responses to Time Warner Cable bides its time

  1. Wes Felter says:

    Hopefully Time Warner will take your advice and start telling the customers how much they use per month before bringing up caps again.

  2. That does seem to be the rationale for the delay, and they do seem to be reading.

  3. Brett Glass says:

    I’m an ISP, and the brouhaha over Time Warner’s caps has me worried as to whether I can continue in business. In the long run, I need to have pricing which is attractive, competitive, and fair, and at the same time not run afoul of any regulatory or legislative constraints.

    The problem is that the lobbyists seem to be trying to make this impossible. First, they lobby the FCC to prohibit flat rate pricing with constraints on usage (e.g. throttling, duty cycle constraints, or limits on bandwidth-hogging activities such as P2P). Now, they lobby against variable pricing (caps and overage charges). What’s left? Bandwidth costs money. A LOT of money in rural areas. And we have to cover costs.

    One wonders whether their real goal is to make it impossible to be a for-profit ISP (or even a non-profit ISP which is not taxpayer-subsidized).

  4. Wes Felter says:

    Brett, I agree. After reading your rants for the last few months, I’ve reluctantly come to the conclusion that most rural ISPs just aren’t sustainable. The only way you’re staying in business now is by providing crippled Internet access and hoping the customers don’t notice. If the FCC outlaws crippled Internet access, you’re toast.

  5. Brett Glass says:

    Wes, your condescending BS isn’t appreciated. The fact is that we’re providing excellent service — better than the telephone and cable companies, which is why many people switch to us from them. But of course, the idea that an ISP could actually be conscientious or care about its customers would completely blow away your agenda, so you won’t ever admit it.

  6. First, they lobby the FCC to prohibit flat rate pricing with constraints on usage (e.g. throttling, duty cycle constraints, or limits on bandwidth-hogging activities such as P2P). Now, they lobby against variable pricing (caps and overage charges). What’s left?

    Um… look, I don’t know about your company’s situation, but what’s left for Time Warner is the same model that has seen their profits and subscriber base continue to grow in double-digit percentages while costs decrease in double-digit percentages:

    SPEED tiers.

    Heavy users naturally want more speed, and TWC’s Road Runner Turbo product, which provides theoretically 50% more downstream and IIRC 100% more upstream for $10 more per month has been, by all accounts, very successful.

    There has been no evidence provided to justify the cost increase amounting to 300% for some users. Just vague claims about “rising consumption and rising costs”, the latter of which appears to be a flat-out lie, based on their SEC 10-K filings.

  7. Brett Glass says:

    If you provide “speed tiers,” and give users a flat amount of speed, then users will be dissatisfied either with the responsiveness of the service or its cost. Why? Because most interactive Internet applications, such as Web browsers, use speed in bursts. The user wants Web pages to load fast, but then spends a long time reading them before clicking anything else.

    My wholesale cost for bandwidth is $100 per month. So, let’s say I sell a user a $30 per month service tier. If I had no overhead at all — zero — and made absolutely no profit for all of the tech support and other work I do, that user would have a flat capacity of 300 Kbps. Not enough to stream HD without pauses, and slow at loading big, complex Web pages. And below the new federal standard for “broadband.” In short, users would get horrible quality of service not only from me but from anyone outside a major city. (The city of Lafayette, LA says that it pays $50 per Mbps per month, and in some rural communities the cost is higher than mine — $325 or more per Mbps per month.)

    Clearly, that won’t work.

  8. To address your first point, TWC also provides “PowerBoost” to users who pay the extra for Turbo, whereby they can get speeds up to 22Mbps in burts of a few seconds when necessary.

    As for your second point, again, this whole thing is about Time Warner Cable, not anybody else. They are the ones lacking justification for their rates. You don’t have to justify your business to me, I’m not your customer. You may have to justify it to your customers, but if that’s the cost of living in a rural area, then that’s what it is.

  9. Brett Glass says:

    Scott, this is not just about Time Warner Cable. This is about legislation — which is now being lobbied for — to prevent ANY Internet provider from metering. Don’t mess with our business. It works now and our customers are happy.

  10. I’m sure that any legislation that goes into effect would take into account markets of all sizes and demographics. If it looks like it won’t, I’m sure persons such as yourself will make their voices heard, and the plans will be adjusted accordingly.

    On a philosophical level, I’m not strictly opposed to consumption-based billing, but the pricing structure has to be appropriate to the market, to the provider’s actual costs, etc. It was clear that Time Warner Cable’s plan was nothing more than a price-gouging, television-business-protecting cash grab.

  11. Brett Glass says:

    No, it is not clear at all that Time-Warner was price gouging. Bandwidth can be expensive, especially if you have a competitor backhauling it (as is the case with cable companies much of the time). A price of $1 per gigabyte is actually very much in line with these providers’ costs.

    As for legislation: This legislator has vowed to ban ALL metering. No, if it were to go through it would not be reasonable. And you can bet they wouldn’t listen to the little guy.

  12. If you don’t talk to them on the basis of your assumption that they won’t listen to, then it’s a self-fulfilling prophecy.

    But back to the price:

    1. It’s not just the $1/GB figure (though that does sound outrageous when the New York Times estimates that TWC’s wholesale bandwidth price is 10 cents or less), but as I told the Time Warner reps: all the claims about cost ring hollow when your own 10-K filing shows that, 2008 vs. 2007, you spend about 11% less on your broadband business expenses, you increased profits about 11%, and your subscriber base grew about 11%. In the face of that, how do you justify price increases of 300% for some customers?

    Brett, you seem to be looking at all of this from the perspective of a small, rural ISP operator. TWC’s economy of scale is worlds apart from yours. But even you should know that a broadband provider’s costs do not increase in any significant way with consumption, so the entire premise of the billing model is flawed.

  13. Brett Glass says:

    Scott, don’t make the mistake of trying to dismiss me as a hick just because I have chosen to specialize in covering rural areas (which, by the way, requires MORE expertise than covering cities.) Just because Time Warner is bigger does not mean that they can manufacture bandwidth out of thin air. The best price ANYONE can get for backbone bandwidth, and this is in quantities of 1 gigabit per second, is $3 per Mbps, FOB a major Internet hub (i.e. without backhaul to the location where it is used). The backbone providers are actually in the process of trying to drive this UP, not down, via consolidation and artificially created scarcity; they have successfully pushed it up to $10 per Mbps in many cities. No matter how big you are you will not get it for less than the wholesale price at a peering point.

    What’s more, a provider’s costs DO go up with consumption. Every provider must buy enough bandwidth to handle peak usage. If a user pushes the peak up, he or she increases the provider’s costs 24×7.

  14. Dr. Peering has a nice overview of some of the costs of moving data from an ISP to the core. It’s not as cheap as you might think, even for Tier 1s.

    And this price schedule from Cogent reflects usage-based pricing schemes for transit; it’s a bit dated, but generally quite relevant.

  15. Brett Glass says:

    By the way: I predicted, long ago, that consumers would react badly to metered billing of Internet service. See my testimony before the FCC at http:/www.brettglass.com/FCC/remarks.html.

    Note that at the time I warned that if implicit limits on bandwidth usage (e.g. transparent throttling, such as what Comcast was doing) were prohibited, metering was inevitable. But the FCC did not listen to me (although just barely; the order went through by a 3-to-2 margin). Now, we’re seeing capping and metering, because they are the only way to ensure that the provider’s revenue covers its costs if the provider is not allowed to throttle.

  16. I don’t know if any interested parties are still checking this, I couldn’t find my way back to this article when I was at home this weekend, but back at work and have it open still today.

    I was not trying to label you a “hick,” Brett, and I apologize if I sounded that way. My only intent was to say that you may not be fully aware of the particulars of Time Warner’s situation. (And I fully admit I’m only aware as much as what I can read publicly.)

    So, Brett, maybe I wasn’t clear when I said something like “New York Times estimates that TWC’s wholesale bandwidth price is 10 cents or less”. What I meant was the cost to transfer that data.

    Yes, costs go up with consumption, but because the cost to transfer a GB is that low, it’s not significant in the long haul. Users would have to use 400 GB/mo to go past their usual $40/mo plan and start costing TWC money. Based on the way they’re pitching their tiers, we know that’s a VAST minority of users, and they’re making it up on all of the people that use much less — 30% supposedly using less than 1 GB/mo.

    I agree with you on this statement: “Every provider must buy enough bandwidth to handle peak usage. If a user pushes the peak up, he or she increases the provider’s costs 24×7,” But this is exactly the reason why speed-based tiers are the most just. It’s a direct correlation: you want to be able to download more at one time, thus contributing more to peak usage? You pay more.

    I understand that your costs lead you to believe that speed tiers are unsustainable for your rural business, and I get that. And I understand that you may have to go to something like consumption-based billing to offer a pricing model that works for your customers. But you must admit that Time Warner Cable, in these larger cities, is under no such burden. The data that we have — NYT and other reports of TWC’s cost-to-transmit 1 GB, TWC’s 2008 10-K filing with the SEC, etc. — indicates that they are not in financial trouble, no matter how much their consumption is growing (and it is certainly not growing exponentially, a word which has been carelessly tossed out there repeatedly by them these days).

    If you think a law prohibiting consumption based billing would be a business killer for smaller and/or rural ISPs out there, then do your civic responsibility and communicate that to your lawmakers. SItting idly by because you think they won’t listen is just defeatist.

    By the way, why aren’t you charging for consumption? :)

  17. Oh, and thanks for that link Richard! It’s got some fantastic info, like:

    “What was most striking about the last ten years researching Internet Peering was the rate at which Transit Fees dropped.”

    and

    “Don’t take these prices as absolutes, but do recognize the historic transit pricing trend as unmistakably downward.”

  18. And another article crushing the idea that increased consumption significantly increases cost:

    http://www.nytimes.com/2009/04/20/business/20isp.html?_r=2&partner=rss&emc=rss

    With choice quotes from the likes of Comcast: “the nation’s largest cable provider has told investors that doubling the Internet capacity of a neighborhood costs an average of $6.85 a home.”

  19. Brett Glass says:

    Scott, I’m not sure where you are getting your numbers, but they’re way, way off. Comcast might pay about $7 to double the capacity of the last mile to a user, but it will pay far more than that in bandwidth costs if the user saturates that additional capacity.

    Nor do you understand the logistics of the ISP business. Delivering Internet service in major cities is also not easy (though the challenges are a bit different from ours) and is extremely expensive.

    You’re playing armchair quarterback in a game you don’t even begin to understand.

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