Are Cable Companies Hoping Usage-Based Internet Access Will Help Thwart Netflix?

Future Tense
The Citizen's Guide to the Future
Feb. 25 2013 12:16 PM

Are Cable Companies Hoping Usage-Based Internet Access Will Help Thwart Netflix?

Former FCC chairman Michael Powell now advocates for usage-based pricing.
Former FCC chairman Michael Powell now advocates for usage-based pricing.

Photo by Alex Wong/Getty Images

In 1994, my family got our first personal computer and started subscribing to AOL. In those early days of the Internet, dial-up was the only option, and AOL was a “walled garden” of email, chat, news content, and message boards. It wasn’t until late 1994 that users were even able to access a browser and the World Wide Web. (Yes, once upon time we actually called it that.)

Another supposedly dated feature of AOL was usage-based pricing. You paid $9.95 for five hours of access a month; each additional hour cost $3.50. When a flood of new Internet service providers arrived in 1996, AOL instituted an unlimited plan for $19.95 a month.

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For the next decade or so, we were largely liberated from the need to tally the hours we spent online, and it allowed for the stunning innovation we have seen in recent years. Slowly but surely, however, those plans are becoming the norm again, though now users will be required to count bits instead of hours.

First, they came for unlimited data on our smartphones. Now capped plans and usage-based pricing are likely coming to a cable provider near you (and indeed, they’re already here for some). The cable industry claims the move is about fairness: a fair return on their investment and fair pricing. But the egalitarian rhetoric is designed to obscure their more self-interested aims: increasing profits and thwarting competition from online video.

At a January event, National Cable and Telecommunications Association president and former FCC chairman Michael Powell reportedly suggested that caps on cable broadband were not about managing congestion on their networks (as previously argued), but “fairly monetiz[ing] a high fixed cost.”

Translation: We paid a lot of money to build these networks—digging up streets, putting in wires—and now we need to make that money back.

The argument makes some intuitive sense. But those major investments were completed years ago to provide and upgrade cable television service, not broadband. Offering high-speed Internet service required substantially less capital investment for most cable companies.

Powell further suggested that capped plans and usage-based pricing could be helpful to increase broadband access by making available lower-cost options for those subscribers who use less data. That’s good marketing, but in reality, a shift to usage-based pricing is not an act of charity by the cable industry. Large cable companies like Time Warner Cable and Comcast already make “almost comically profitable” margins on broadband service. How do you improve on 97 percent? A 2011 report from the Cisco Internet Business Solutions group suggested, “Usage based pricing can be a tool to catalyze new revenue.”

Comcast was the first national cable company to employ a data cap on all of its Internet plans. It was a punitive measure initially: Users who went over had their service cut off for a year. Since then, the company has raised its cap and is now experimenting with charging users $10 per additional gigabyte of data used.

Last year, Time Warner Cable started offering a new “Essentials Internet” plan, where consumers received a $5 discount in exchange for a metered plan that starts with 5 GB and charges $1 for each additional gigabyte of data up to $25. To put the 5 GB of data in perspective, the median cable broadband subscriber uses 28 GB per month, according to data from FCC. Thus for a meager 11 percent discount on Time Warner's $45 standard Internet plan, subscribers must reduce their usage by 82 percent. And that $1 fee for each additional GB is a 10,000 percent markup, since it costs between $.01 and $.07 to provide an additional GB worth of data to a subscriber.

But the push for usage-based billing isn’t just about increasing profits. The large cable companies are determined to prevent mass movement to cord-cutting, in which users give up their cable TV subscriptions and substitute with services like Netflix. How do you prevent this from happening? Data caps and usage-based pricing.

Netflix has already struggled with obtaining content for its streaming service. Studios and content companies, with every incentive to maintain the gravy train made possible by the cable TV model, substantially raised their licensing fees in 2011 or pulled their content after previous agreements expired.

Last March, Comcast announced that video content accessed over its own Xfinty streaming app on the Xbox console and only available to TV subscribers would not count against the service provider's data cap. All other online video though was out of luck. In addition, engineers discovered Comcast was giving the service a form of prioritization on their network.

With its survival at stake, Netflix recently upped the ante by exclusively distributing House of Cards and the forthcoming Arrested Development season. This week, it was reported that 86 percent of Netflix subscribers are more likely to keep their subscriptions because of House of Cards.

That makes usage-based pricing all the more appealing for cable companies. How many hours of online video per month could a user watch with Time Warner's 5 GB capped plan? About five for a high-quality stream, barely two for HD. By comparison, Nielsen estimated that in 2010, the average household watched 143 hours of television a month. Cord cutting families might be in for some very interesting dinner table conversations regarding dividing up the cable data plan.

But cable's plot to kill competitive online video will also create additional collateral damage—by capping future innovation on the Internet and limiting opportunities for budget constrained users. Caps and usage-based pricing raise the cost for using other higher bandwidth applications and services, such as the increasing number of online education courses and resources. That would be a loss for low-income families, who would benefit the most from the access to these educational innovations, but who will also most likely adopt discounted, capped plans.

In 1994, AOL's five-hours-a-month plan offered a rather limited Internet experience. How limited will the Internet's future be, if cable has its way?

Future Tense is a partnership of SlateNew America, and Arizona State University.

Benjamin Lennett is a senior research fellow at the New America Foundation's Open Technology Institute

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