Time Warner Cable is starting small in a bid to bill broadband subscribers differently, but there could be big implications for such streaming services as Netflix if it expands across the MSO’s customer base.
Launching in just a handful of markets in south Texas, Essentials Broadband offers a $5 discount for staying under a 5-giga-byte cap. An online meter helps subs monitor their own consumption because exceeding the limit will cost a sub $1 per gigabyte, with a maximum $25 charge. (A two-hour movie in high-definition takes up roughly 3 gigabytes, depending on how many megabytes per second the content is streaming.)
To hear TW Cable tell it, the departure from the customary unlimited package is a way for the MSO to hold onto cost-conscious customers. “It’s a terrific opportunity to keep more customers with us if they’re light users and want to keep some money,” said TW Cable chief financial offier Irene Estevez at the Deutsche Bank Media and Telecommunications Conference on Tuesday.
But others suggest the Texas deployment is likely just the beginning of what could be a broader industrywide shift to the more profitable model of usage-based pricing — a foray being advanced more delicately than the first time TW Cable attempted to roll it out in the same state three years ago, only to be buried by angry bloggers and politicians decrying monopolistic tactics.
“Over a period of years, as the market becomes more accustomed to (usage-based pricing), we expect these plans to become the rule rather than the exception,” said Bernstein Research analyst Craig Moffett in a research note.
This time around, TW Cable is making Essentials an optional plan and guaranteeing an unlimited offering will always be available. But by making consumers mind their viewing time, metered billing could seriously undermine the value proposition of the subscription VOD model employed by Netflix or Hulu Plus, which is predicated on offering consumers all-you-can-stream rights for a monthly fee.
It’s a factor that’s been lurking for Netflix for a while now, cited often by the stock’s most notoriously bearish Wall Street analysts, including Wedbush Securities’ Michael Pachter and Janney Capital Markets’ Tony Wible.
Netflix has been vocal in its opposition to metered billing in recent years, alleging MSOs are seeing the costs of maintaining bandwidth fall despite the explosive growth of the streaming service’s content in their pipelines. While Netflix founder Reed Hastings didn’t address the issue head on Tuesday at the Morgan Stanley Technology, Media & Telecom conference in San Francisco, his irritation was evident when an analyst questioned the “financial pressure” Netflix was putting on Internet service providers.
“Yeah, that 92% Comcast operating margin is really under a lot of pressure,” he cracked. “There is no financial pressure on ISPs.
“For its part, Comcast isn’t moving ahead with any metered billing plan of its own right now, though at the same Morgan Stanley conference, Comcast CFO Michael Angelakis applauded TW Cable. “I give them credit for trying different things,” said Angelakis, who conceded his company isn’t prepared to take such a risk yet. “We have real momentum in that business and the goal is to keep it.”
TW Cable is coming off a fourth quarter in which it reported an impressive 44% increase in net income, powered in large part by the addition of 117,000 broadband subs, for a total of 9.8 million. Given the MSO has only about 2 million more customers for its video service, which has been steadily eroding, it’s no wonder CEO Glenn Britt last year publicly indicated that broadband is truly the company’s core offering.
While metered billing is common for wireless broadband, the wireline variety is traditionally unlimited in the U.S., though smaller MSOs like Charter and Suddenlink are in that business and AT&T DSL has inched toward it with monthly usage caps. In Canada, Rogers Communications imposed caps that forced Netflix to lower the resolution of its video in order to get under 25 gigabyte limits.
Ironically, video programming has prompted metered billing because MSOs need to compensate for the hefty price increases they are asked to swallow by the very same content companies who license fare to the streaming services clogging the broadband pipeline. The margins on cable’s broadband business are much bigger than in video precisely because MSOs don’t have to pay for the content they deliver.
While it’s certainly possible in the short term that few subs would opt in to Essentials because it would curb their video habits, the prospect remains that metered billing could expand into enough homes that it becomes a ceiling thwarting Netflix’s own growth — a crucial ambition for a company aiming to double or triple its base in order to afford its skyrocketing programming bills.
“This will not impact Netflix yet because its not targeting their customer,” said Vijay Jayant, an analyst with ISI Group. “But eventually it could be a limitation on their business because then consumers won’t be just paying a flat rate plus $8.”
Netflix comprises about 32% of Internet traffic during peak hours, according to measurement firm Sandvine, which sets up something of a chicken-and-egg dynamic between the Los Gatos, Calif.-based service and broadband providers: If SVOD services like Netflix are driving up the costs of broadband infrastructure for MSOs, metered billing would help defray that expense. But MSOs can also contain the amount of TV and movies consumed by imposing metered billing.
It’s no coincidence TW Cable is calling its metered-billing package Essentials, the same brand name the cable operator uses for a discounted tier of TV channels it introduced last year. But the TV version of Essentials is not understood to be a popular product or a thinly veiled tool for conditioning subs for a metered future. Even if TW Cable says the unlimited product isn’t going anywhere, they haven’t said same about its current price point in the $40 per month range. Moffett projects unlimited will gravitate toward an “ultra premium” model that will be far more expensive but not anytime soon.
Essentials could also help broadband fend off cheaper DSL offerings, though this is increasingly becoming a losing battle in the U.S. Moffett projects cable’s national share of the broadband market to rise to nearly 70% by 2020, while DSL’s share will drop to 8.8% by the same year.