Wednesday, April 22, 2009

Saul Hansell: Reports on Time-Warner and ATT Cable Controversies and Why Japan Has a Better Model; Tana Geneva: On Consumer Responses

As Costs Fall, Companies Push to Raise Internet Price
New York Times

Internet service providers want to end the all-you-can-eat plans and get their customers paying à la carte.

But they are having a hard time closing the buffet line.

Faced with rising consumer protest and calls from members of Congress for new regulations, Time Warner Cable backed down last week from a plan to impose new fees on heavy users of its Road Runner Internet service.

The debate over the price of Internet use is far from over. Critics say cable and phone companies are already charging far more than Internet providers in other countries. Some also wonder whether the new price plans are meant to prevent online video sites from cutting into the lucrative revenue from cable TV service.

Cable executives say the issue is not competition but cost. People who watch or download a lot of movies and TV shows use hundreds of times more Internet capacity than those who simply read e-mail and browse the Web. It is only fair, they argue, that heavy users should pay more.

“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?” Landel C. Hobbs, the chief operating officer of Time Warner Cable, asked recently in a blog post defending the company’s now abandoned plan.

Still, critics say the image of Internet providers as restaurants about to go broke serving an endless line of gluttons simply does not match the financial or technological realities of the industry.

They point out that providers’ profit margins are stable, and that investment in network equipment is generally falling.

To Read the Rest of the Article

The Cost of Downloading All Those Videos
By Saul Hansell
New York Times

In an article in today’s New York Times, I wrote about the controversy over the now-abandoned plan by Time Warner Cable to impose additional fees on customers who upload and download more than a set quota.

AT&T continues to test a similar plan, and many cable and phone company executives still argue that usage is growing so fast, mainly driven by video that they need to start charging heavy users to cover the additional cost of the bandwidth they consume.

Hard numbers are not that easy to come by, but I’ve found a few. I see no evidence that the pace of spending to expand network capacity has increased at all. Indeed there are a lot of areas where new technology is radically cutting the cost of Internet bandwidth.

For those that want to understand more about what drives these costs, here is some of the hard data I’ve found. (As always, Bits readers are a knowledgeable bunch, so if you are in the network business, please share your own experience in the comments.)

I’ve mainly been looking at the costs that will increase as the bandwidth used by customers goes up. So I haven’t looked at overhead, marketing, customer service and so on. All of the discussion of cost is complex because much of the infrastructure at these providers is shared between video, phone and Internet service.

Still, there seem to be two major buckets of expense to consider: the cost of local networks that connect to people’s homes and the cost of the bandwidth that link those networks to the Internet. The local costs are larger, but falling faster with new technology.

Local Network Costs

Think of a broadband Internet provider like a river of bandwidth that divides into smaller and smaller tributaries as it flows from a regional hub through neighborhood facilities until it trickles a stream of connectivity into each home. Each connection in this network, and each node where connections are split into smaller streams, has a set capacity.

Most of the network for any Internet provider is high-capacity fiber optic cable. But the last link, running from a neighborhood office or a small device hung on a phone pole—runs over cable TV or phone wires. In a cable system, there is a fixed amount of bandwidth that is shared among all the customers in a node, often about 500 homes.

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World’s Fastest Broadband at $20 Per Home
By Saul Hansell
New York Times

If you get excited about the prospect of really, really fast broadband Internet service, here’s a statistic that will make heart race. Or your blood boil. Or both.

Pretty much the fastest consumer broadband in the world is the 160-megabit-per-second service offered by J:Com, the largest cable company in Japan. Here’s how much the company had to invest to upgrade its network to provide that speed: $20 per home passed.

The cable modem needed for that speed costs about $60, compared with about $30 for the current generation.

By contrast, Verizon is spending an average of $817 per home passed to wire neighborhoods for its FiOS fiber optic network and another $716 for equipment and labor in each home that subscribes, according to Sanford C. Bernstein & Company.

Those numbers from Japan came from Michael T. Fries, the chief executive of Liberty Global, the American company that operates J:Com.

His larger point: “To me, this just isn’t an expensive capital investment,” he said.

The experience in Japan suggests that the major cable systems in the United States might be able to increase the speed of their broadband service by five to 10 times right away. They might not need to charge much more for it than they do now and they’d still make as much money.

The cable industry here uses the same technology as J:Com. And several vendors said that while the prices Mr. Fries quoted were on the low side, most systems can be upgraded for no more than about $100 per home, including a new modem. Moreover, the monthly cost of bandwidth to connect a home to the Internet is minimal, executives say.

So what’s wrong with this picture in the United States? The cable companies, like Comcast and Cablevision, that are moving quickly to install the fast broadband technology, called Docsis 3, are charging as much as $140 a month for 50 Mbps service. Meanwhile other companies, like Time Warner Cable, are moving much more slowly to upgrade.

Competition, or the lack of it, goes a long way to explaining why the fees are higher in the United States. There is less competition in the United States than in many other countries. Broadband already has the highest profit margins of any product cable companies offer. Like any profit-maximizing business would do, they set prices in relation to other providers and market demand rather than based on costs.

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Cable Giants Continue Hoping No One Will Notice Their Attempts to Destroy the Internet
By Tana Ganeva

Last week, a full-on customer revolt forced Time Warner to cease their metered billing program — a system in which Internet users sign up for differently priced broadband plans and pay extra if they exceed their bandwidth limits. The plan was an infuriating inconvenience (e.g. rip—off) premised on the ethical business concept that you can arbitrarily jack up prices on a product if a heavily-monopolized marketplace leaves customers with little in the way of consumer choice.

Seems like a sweet idea. Except that Time Warner customers, media reform groups and tech bloggers inundated both government Representatives and the company with complaints. Soon, members of Congress were winning easy points by vocally criticizing Time Warner. On April 15th, CEO Glenn Britt announced that the company was dropping metered billing.

Anyway, not having learned anything from Time Warner’s epic fail, AT & T continues to maintain metered billing in Reno, Nev., and in Beaumont, Texas., which signals the cable giant's hopes that the infuriating, universally despised program might just work for them. Except that AT&T risks becoming even more hateable than Time Warner.

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