Old school thinking in new broadband pricing strategy

I read a story this morning at the New York Times about Time Warner’s plans to change broadband subscriptions into rate plans where additional fees kick in when a user passes a provided limit in bandwidth. From the NY times article:

Time Warner said on Wednesday that it was going to start testing a new rate plan in Beaumont that would limit the amount of bandwidth each customer can use each month before additional fees kick in. Alexander Dudley, a Time Warner spokesman, said that the exact terms had not been set, but that packages would probably offer between 5 gigabytes and 40 gigabytes a month. The top plan would cost roughly the same as the company’s highest-speed service, which typically runs between $50 and $60 a month.

Scott Karp points me to an excellent older article written by Robert Cringley in which we find the following quote:

The Internet as we know it is a shell game, with ISPs building their profits primarily on how many users they can have practically share the same Internet connection. Based on the idea that most users aren’t on the net at the same time and even when they are online they are mainly between keystrokes and doing little or nothing when viewed on a per-millisecond basis, ISPs typically leverage the Internet bandwidth they have purchased by a factor of at least 20X and sometimes as much as 100X, which means that DSL line or cable modem that you think is delivering multi-megabits per second is really only guaranteeing you as much bandwidth as you could get with most dial-up accounts.

This bandwidth leveraging hasn’t been a problem to date, but it is about to become a huge problem as we all embrace Internet video. When we are all grabbing one to two hours of high-quality video per day off the net, there is no way the current network infrastructure will support that level of use. At that point we can accept that the Internet can’t do what we are asking it to do OR we can find a way to make the Internet do what we are asking it to do. Enter Google and its many, many regional data centers to fill this gap.

Robert’s article shows us that Google is making the right moves. They are already controlling more network fiber than any other organisation.

The cable operators, Time Warner included, are old school thinkers. Not only do they rarely deliver on their bandwidth promise to a customer, what is even worse is that they can’t control the quality of the bandwidth for their customers. If, for example, I want to download a large file which is located somewhere in the US, I can have all the bandwidth I need here in the Netherlands, but that file is still crammed through a few scarce fiber cables in the ocean.  If the bandwidth is exhausted there, then my end of the line isn’t really an influential factor in download speed. I might be paying for 20Mb/s download but I rarely get that!

The cable operators are saving a lot of costs by this shell game. When confronted with users that don’t follow the rules they have thought of (I bet they didn’t think that users would download 10-50 Gb per month using video and torrent applications), the cable operators simply fall back to the simplest and yet so outdated and consumer limited thinking business model of a tax on bandwidth. If you use more, you pay more. It is in essence a punishing tool, if you don’t behave according to our rules, you get punished. It is also scarcity thinking. Trying to make a profit by making something scarce is a bad, bad idea.  It gives the cable operator a false illusion that they are in control of that scarcity.  But with all the competition around, that model is bound to fail. And it is a model which basically limits the freedom of your customer.

Just like in any (web 2.0) business model  cable operators need to really look and understand their customer behavior, and start providing them value. Value can always be monetised, scarcity only if you are the only one controlling it. By understanding what customers want, the cable operators can start building rate plans that monetise the value the cable operator provides to its customer.

It is precisely for this reason I believe Google is trying to get a firm grip on broadband capacity via its regional data center strategy. As a customer, I’m not interested in the broadband limit I get from a provider. I’m interested in getting the content I want from the Internet immediately. I don’t like it if I have to wait very long to get content on my PC or screen. I don’t like it when a video that is streamed to me suddenly stops for a minute or so. I do not understand that my upload speed is significantly lower than my download speed. In this age of USG having an asymmetrical performance, favoring downloads over upload really sucks. I’m interested in keeping spam out of my mailbox. I want unlimited download and storage capacity for e-mail and other content. I want backup facilities for important stuff. I want to be able to connect as many as 10-20 or 100 computers to my network at home. I want easy installation procedures, and if needed an engineer that drops by my house to provide me service. I want to be able to attach my Internet capacity to any TV screen in my house so that I can get Internet content on my TV.

I could probably go on for a while. I understand that the cable operator isn’t capable of supplying me all these things. But, the thing is, I’m willing to pay for them, as each of these services provides me value! So Time Warner, stop messing around with rate plans that limit my experiences on-line. Star providing me value and you will see that a customer is willing to pay for that. Limiting bandwidth is old school thinking.

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This entry was posted in Broadband rate plans, Google, NY Times, scott karp, Time Warner, user generated content, web 2.0 and tagged , , , , , , . Bookmark the permalink.

2 Responses to Old school thinking in new broadband pricing strategy

  1. rolfsky says:

    Metered costs also kick in when the marginal costs of delivery approaches zero. I pay for my gasoline, electricity and natural gas by the unit because delivering me X quantity costs those companies essentially the same as 100X. The ISPs got stuck because by over-selling their bandwidth, their marginal costs are no longer zero for some customers. (More accurately, some customers degrade service for other customers.)

  2. Alexander van Elsas says:

    @rolfsky That is a good observation. Interesting enough, for non-tangible services (such as Internet access) people will probably feel ripped off when they pay by the unit (as the perception is that Internet is free). They understand they need to pay for a gallon of gas, but fail to understand why a bit or a byte also costs money.

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