As we reported back in May, Netflix has become the largest source of Internet traffic in North America, thanks to its streaming video service. Now, cable operators are rethinking their Internet pricing strategy because Netflix and Hulu’s subscription services have driven up usage at peak hours once reserved for watching TV. MSOs are weighing how to profit from the surging Internet demand. In fact, according to a Bloomberg story, they’re are on the verge of instituting new fees on internet customers who use the most.
At least one major cable operator will institute “usage-based billing” next year, predicts Craig Moffett, an analyst with Sanford C. Bernstein & Co. He said Cox Communications, Charter Communications or Time Warner Cable may be first to charge web-access customers for the amount of data they consume.
“As more video shifts to the Web, the cable operators will inevitably align their pricing models,” Moffett told Bloomberg. “With the right usage-based pricing plan, they can embrace the transition instead of resisting it.”
While customer complaints hampered usage- based plans in the past, pay-TV companies are testing usage caps and price structures that point to the advent of permanent fees. Of course, cable companies also see usage-based billing as a way to limit the appeal of online services like Netflix and Hulu, and reduce the threat from new entrants like Amazon and Google—at least while they can.
Netflix steers customers with enough bandwidth toward high-definition movies, which soak up about double the data. Charging by Web usage, cable companies may discourage customers from dropping traditional pay-TV service and slow the growth of Netflix, Hulu and an expanding list of online alternatives, Moffett said.
“We’re basically a broadband provider,” Peter Stern, chief strategy officer for Time Warner Cable, said 11/17 at the Future of Television conference in NYC. “As a convenience for our customers, we package and distribute television and provide service around that.”
So Time Warner Cable is testing meters to measure broadband consumption for the purpose of tiered pricing, CEO Glenn Britt said in June. In April, he said usage-based billing is “inevitable.”
Comcast and Charter have instituted caps large enough that most customers aren’t affected–yet. Neither charges overage fees, nor do they have near-term plans to charge subscribers based on consumption.
Meanwhile, FCC Chair Julius Genachowski publicly supported usage-based pricing in December, calming concerns that usage-based billing would run afoul of net neutrality rules prohibiting Internet services from favoring one form of content for another.
Rogers Communications, the largest Canadian MSO, has been billing broadband customers based on consumption since 2008. U.S. providers AT&T Inc. and St. Suddenlink Communications are currently experimenting with usage-based plans. AT&T charges DSL customers who exceed a monthly limit of 150 gigabytes in three consecutive months $10 extra for every additional 50 gigabytes of data they use.
Suddenlink, with about 1.4 million customers in Missouri, Arizona, Texas and North Carolina, began instituting usage caps in some markets in October. Users pay $10 for each 50 gigabytes they use over their monthly allowance.
Data usage is surging by almost 50% a year, Suddenlink CEO Jerry Kent said in an interview. Broadband revenue rose 12% in Q3, versus a 1.6% gain from pay-TV.
As well, many are cutting the cable cord to watch TV shows online. Time Warner Cable, fore example, lost 126,000 pay-TV accounts in Q3.
Usage-based billing could end up lowering bills for some customers. “Some form of usage-based billing might have some utility for customers who use the Internet very little, or only use low- bandwidth applications like e-mail,” Alex Dudley, a Time Warner Cable spokesman, told Bloomberg.
RBR-TVBR observation: Many MSOs already have tiered pricing for varied internet speed. But this is different. It’s how much bandwidth and data you as a customer are pulling from the pipe, so to speak. What else is drawing bandwidth down? Home-based businesses that rely on the internet for distribution of content and data. Either way, the profit center is moving to the internet portion of the bundle, not the TV programming. The TV programming draw on data is fairly static.