Time Warner’s Caps About Cable Profits, Not Fairness

As Time Warner’s metered broadband plans are currently shelved, awaiting a more palatable consumer climate, we have time to examine why broadband providers suddenly feel compelled to eliminate the flat-rate, all-you-can-eat pricing model. Metered Internet service is hardly a new idea; early services like AOL and Compuserve were metered, but, with competition from thousands of independent ISPs, all-you-can-eat plans ultimately won out and users have enjoyed flat-rate unlimited service ever since. So, why now do some broadband providers want to return to a failed pricing model that users rejected long ago?

According to Time Warner, usage caps and metered pricing are the “fair” way to charge for broadband service. Why should light Internet users pay just as much as heavy users that download 100 times more data? Or as Time Warner COO Landel Hobbs asked, “When you go to lunch with a friend, do you split the bill in half if he gets the steak and you have a salad?” What Time Warner and Hobbs are implying, of course, is that their costs are based on usage and that providing service to heavy users is more expensive than for light users.

Time Warner’s fairness justification seems intuitive and sounds good, but there’s a problem with its premise. Broadband providers’ costs are not directly tied to usage. A user could download 10GB of movies today and turn off her computer tomorrow, and Time Warner’s costs for those two days wouldn’t be materially different. This is because broadband providers’ infrastructure and peering costs are largely fixed. Once these expenses have been sunk, the cost of providing service to both heavy and light users is nominal. In this regard, Time Warner is really selling access to its network, rather than gigabytes. So, I think Hobbs’s question would be more accurate if he asked, “When you go to a movie with a friend, do you split the bill in half if he watches every minute and you take a nap?” Of course you do because you’re paying for admission and how you choose to use that access is of no consequence to the theater’s costs or ticket prices.

Instead, metered pricing plans and usage caps are a strategy intended to salvage diminishing cable revenues by forcing users to use less Internet. Users have been watching increasing amounts of video online, with some abandoning their cable service altogether in favor of broadband (an effect that has been sped by the struggling economy). This presents an obvious dilemma for broadband providers that also offer a cable product, like Time Warner: as online video watching goes up, the revenue-generating cable usage goes down. Online video is bad for business because a cable company directly profits from its cable content through advertising, pay-per-view and video-on-demand, but can’t profit off Internet content. The fact is that Time Warner is offering competing products and the company has a vested interest in cable video prevailing over Internet video. Time Warner introduced metered pricing and usage caps to make its customers turn off their computers and pick up the remote.

The public backlash that forced Time Warner to (temporarily) acquiesce demonstrated that Internet users don’t want to return to metered pricing, but Time Warner already knew that. The company thought it could get away with introducing a hugely unpopular pricing scheme because it knew that its customers have very few broadband options. The vast majority of users are served by a phone company and cable company duopoly, which can hardly be said to be a free and functioning market.

Time Warner targeted cities for metered pricing and caps where it knew that its customers wouldn’t cancel their service. At the time the plan was announced, each of the four cities (Austin, San Antonio, Greensboro and Rochester) were served by phone companies (AT&T and Frontier) that were themselves in the process of implementing usage caps and metered pricing. Time Warner knew that the only other broadband option available in these cities was intent on doing the same thing and that its customers had nowhere else to go for unlimited service.

This is exactly the type of behavior that happens in unregulated monopoly markets (and duopoly markets are little better as they inevitably tend towards implicit collusion). Without sufficient competition, broadband providers have no incentive to improve their product. This is why America’s broadband access and speeds lag embarrassingly far behind Asian and European countries that have functioning broadband markets with multiple providers. Only when we have a broadband market with more providers and some semblance of competition will we see an end to unfair and unpopular practices, like cable-revenue protecting usage caps.

06/01/09 UPDATE: Last week, Time Warner CEO Glenn Britt essentially admitted that the competitive threat of online video to traditional cable is the driving force behind the company’s capped and metered pricing model. Mr. Britt told investors, “If, at an extreme, you could get all of the programming you get over cable for free on the Internet, over time people will stop buying (TV).” Unfortunately, the public collateral damage of forcing customers to use less Internet and more TV is not a consideration in Time Warner’s plans. The Internet is a medium for free expression and a facilitator of unrestricted communication, education, and commerce. Television simply is not.

Matthew Henry is an EFFA board member and a partner at McCollough|Henry, PC

The Death Of the Internet…

In a recent Fox news article, the inevitable death of the Internet was recently announced.

The exponential growth of Internet traffic has been a hotly debated reality from the the very beginning. Historically there have been two reactions to exponential Internet bandwidth demand, fear, and denial. Funny how that hasn’t changed for 25 years! Meanwhile bandwidth demand, and the capacity to support it continues to grow hand in hand regardless.

On the business front there are three intertwined factions each with self serving businesses motivations:

1. The Venture Capital funded Internet businesses that seek to grow as much stock value as possible on services delivered over the Internet in order to achieve unrealistic exit opportunities for their investments. They run roughshod over the internet and poison the Net Neutrality debate with their own brand of pirate capitalism masquerading as Internet socialism. They present the perfect enemy to the next faction, the Phone and Cable guys.

2. Phone and Cable service companies, stuck in a 19th century business model they adopted from Thomas Edison. They fear the encroachment of the Internet on their core services. They strive to constrain the last mile of the Internet to being an information service, lest it replace the antiquated Infrastructure that delivers their voice and video services with a more efficient service delivery model that better meets the demands of consumers.

3. Cisco and its business strategy to dominate the Internet infrastructure market by making Internet protocols and equipment unnecessarily complex to block competition. They are the arms dealer in the Net Neutrality war. Through their “strategic under specification” strategy within the IETF standards groups, they have convinced the world that complex packet examination, reordering and discard is the best method to insure quality of service. This, as opposed to avoiding congestion through intelligent capacity planning and management using simple, reliable and low cost packet routers.

I’ve worked in all three of these businesses. Hell, I even researched the capacity problem for DARPA in the 90s. Needless to say what drives the self serving commentary on Internet capacity/demand remains the same – FEAR and DENIAL.

Is it any wonder that analysts, researchers, the press and the general public are confused? The fact is, the phone and cable broadcast business models should have died in the 20th century and they are doing everything the can to keep their businesses on life support. Add to the mix the threats of venture funded upstarts and the lure of Cisco’s “Kill Your Competitor’s Packets” endgame solution, and you have the perfect war – Two bitter enemies and an arms dealer to keep them alive and fighting indefinitely.

… and now for the rest of the story:

First and foremost, Internet backbone bandwidth is well compensated for by ISP’s and the customers they host. This bandwidth is not free. As demand for capacity requires lighting up more dark fiber, customers are there to pay for this, the fiber is there to be lit, and the routers can be added to support drive the traffic. Currently, backbone Internet data paths are well maintained. These links are well utilized (90+%) and have none of the random spikes of bandwidth demands that the alarmists would like us all to believe. The only real spikes in the backbone occur when a backhoe cuts a line or a backbone router crashes due to software failure. Physical layer failover mechanisms provided by SONET and other similar technologies resolve these failures in microseconds. The fact is that the Internet backbone is more reliable than ever, and shows little sign of dying an untimely death. So the real “capacity” problem exists with the last mile, which remains under the control of the very business that want the Internet to fail or better yet just go away.

What’s funny is, I find myself working with utilities and regulators on Smart Grid technology over the last few years. The Internet poses the identical threat to the electric utility business model. This industry is being transformed by the growing demand for distributed renewable energy and the need for a vast and ubiquitous information grid to manage an increasingly complex electric grid. They fear the Internet so much, that they are attempting to build their own capacity constrained private service network. These Advanced Meter Infrastructure (AMI) networks are being extended to utility meters and into controls and displays in customer premises. They will likely fail just as Compuserve and Prodigy did, and for the same reasons – they simply cannot compete with the service delivery capabilities and low cost network capacity of the Internet. Its like deja vu all over again! The utilities biggest threat? Google’s recently announced PowerMeter service! Now all three 19th century style utility businesses have their sights on killing the Internet!

Sadly, the Smart Grid needs the Internet to survive and thrive. There is no possible way to build a private network fast enough to support services promised to energy consumers. I sincerely hope that recent hype and government stimulus money to accelerate Smart Grid growth will help to offset some of the other agendas that seek to constrain the last mile of the Internet.

One thing is for sure, if the Internet fails, it won’t be due to us all watching Hulu, but because someone decided to shut it down to keep their dying business alive for a few more years. Unfortunately, it could result in the failure of the Smart Grid and ultimately turn the lights out for all of us.

Michael Hathaway is an EFFA board member and founder of Pico Innovations

EFF-Austin presents Richard Stallman

EFF-Austin invites you to a talk by the Free Software Foundation Activist – Richard Stallman on 23rd April 2009.

Talk Abstract:
Richard Stallman wrote the first GNU General Public License in 1989, and version 3 which was completed in 2007. He will discuss the philosophy of the GNU GPL, the changes made in version 3, and the reasons for those changes.

A must attend for software enthusiasts, developers, entrepreneurs, managers, and students. There is limited seating at the venue: first come, first served registration will apply.

Speaker Bio:
Richard Stallman launched the development of the GNU operating system (see www.gnu.org) in 1984. GNU is free software: everyone has the freedom to copy it and redistribute it, as well as to make changes either large or small. The GNU/Linux system, basically the GNU operating system with Linux added, is used on tens of millions of computers today. Stallman has received the ACM Grace Hopper Award, a MacArthur Foundation fellowship,the Electronic Frontier Foundation’s Pioneer award, and the the Takeda Award for Social/Economic Betterment, as well as several honorary doctorates.

Thanks to Saurabh Sureka (sab at ieee.org) for coordinating the presentation.