The real strategy behind tiered data plans

Over the past year, Comcast and other broadband providers have been forcing tiered data plans on customers. The New York Times recently speculated that these plans might be part of a strategy to stunt the growth of internet video.

The best way to figure out what these companies are really doing is to read Wall Street analyst reports. For example, here’s what a prominent Wall Street analyst recently said:

Most cable companies we met with have embraced tiered data plans, with tiering starting to move to total monthly usage rather than tiered speeds. The minimum tiers are set higher enough at this point that they impact only 1%-2% of users. However, we believe the concept is to establish an early precedent of usage tiers and then let the average consumer usage patterns move in their direction over time, as usage is growing 60% per year. This puts in place an effective long-term hedge against internet video. [emphasis added]

- Goldman Sachs research. “Americas: Communication Services”, May 23, 2012

In 2011, Comcast generated $55B in revenue and $8.4B in pre-tax profits. Goldman rates the stock a “buy” because Comcast “pushed through rate hikes on both video and broadband access across two-thirds of the [customer] base in Q1 2102″ (Goldman Sach, “Comcast Corp”, May 2, 2012).

http://twitter.com/aortenzi Anthony Ortenzi

I think they know they may eventually be forced out of the licensing-middleman business they keep having to renegotiate, and want to ensure that bytes have a high enough margin to replace it.

We desperately need transit to be provided by third parties and an opening up of the DOCSIS portion of things like the CLEC/ILEC DSL business was 10-15 years ago.

http://www.cdixon.org/ chris dixon

Agree, except the whole idea is to not sell bits. That’s the definition of dumb pipes. What they want to do is add usage caps and then exempt providers like Netflix, Apple etc if they pay them some fee that is proportionate to the profits those companies are collecting. The ideal gatekeeper pricing is to take, say, 50% of all profits. But you can’t price according to profits until you discriminate different kinds of bits.

http://www.justanentrepreneur.com Philip Sugar

This is why I think content and carriage should be split.

http://www.cdixon.org/ chris dixon

Totally agree. The opposite of what happened with the Comcast-NBC merger.

http://twitter.com/mitmads Mads

Since consumers are used to unlimited plans. Even though the minimum tiers are set high enough, if the differentials between the tiers are aptly priced, my hunch is that the (consumer) self-selection will be skewed towards high-end plans. So even to start with it may be rightly anchored, so the movement wont be that difficult.

http://www.cdixon.org/ chris dixon

hm, not sure I follow your argument.

http://twitter.com/mitmads Mads

Since we are used to unlimited plans, if the pricing is done right the carriers can make us choose the high end plan without much difficulty. This is like cable cos saying for a few $ more you’ll get 15 channels and we’ll be inclined to choose that plan. So, making “average consumer usage patterns move in their direction” shouldn’t be that difficult.

And though tiered pricings are designed to make consumers self-select and get the entire spectrum of consumers, since we are already used to the unlimited plans, the majority of the consumers will be going towards high-end plans (hunch).

http://www.cdixon.org/ chris dixon

Yeah, their plan is clearly to “boil the frog”- start it out where on top 1% is affected but eventually have caps on everyone. The caps aren’t the real point though – it’s ultimately about gaining leverage against internet services so they can charge them on a per-use basis. It’s a very clever way of undermining “net neutrality.” Unfortunately most people in the tech world are falling for the trick and still think this has to do with e.g. the expense of building infrastructure. If that were the case they would be doing congestion based pricing. And, empirically, it’s not the case. These companies are extremely profitable already.

http://www.justanentrepreneur.com Philip Sugar

I have no love whatsoever for cable companies.

However, you have to look at the history. They lost money for decades and invested billions in infrastructure.

Are they extremely profitable now? Yes. But no different than a venture backed company you didn’t make those investments without the expectation of a good return.

So complaining about how much money they make isn’t a compelling argument for me.

Discussing whether they have a monopoly and should be regulated because they are able to use the right of ways, that we can discuss.

http://www.cdixon.org/ chris dixon

I’m not complaining about them making money. I think 1) they do have regional monopolies (e.g. at home and work I have only a single broadband provider), 2) price is almost never driven by cost. the argument that they have to raise prices to cover increasing bandwidth costs is a red herring 3) people should be aware of their real goals and then decide whether as monopolies, regulators should get more involved.

As you can probably tell, I think regulators should get involved, as use-based pricing will be disasterous for US internet innovation.

http://www.justanentrepreneur.com Philip Sugar

I don’t care if there is use based pricing. I don’t feel like subsidizing somebody else. Bottom line a router can only handle so much traffic. Those are the facts. I don’t go to buffets in Vegas for just this reason.

What I do care about is if it used to discriminate because they care about protecting content.

I think technology people say use based pricing will kill innovation they come off as whiny.

Steven O Noble

Comcast, AT&T and other ISPs compete with netflix, amazon, hulu, etc. It behooves them to artificially raise prices for their competitors.

http://www.cdixon.org/ chris dixon

Yep. And/or take a big chunk of their profits by forcing them to pay to be exempt from bandwidth caps.

Augie Smith

Gaming, maps, and streaming music also suck up data. Why does Goldman single out video?

http://www.cdixon.org/ chris dixon

Exactly! Because it has nothing to do with bandwidth. None of this has to do with the cost of bandwidth. It has to do with internet video taking away their real business – selling cable TV.

Augie Smith

It would be interesting to see what percentage of data is spent through streaming channels netflix, hulu, et. al. as compared to the percentage of video streamed through ancillary data-sucks like rich advertising and news stories on NYTimes or CNN. Maybe ComScore’s Mobile Metrix has the data.

http://www.cdixon.org/ chris dixon

Heavy video use should take far more data than, say, rich display ads.
http://about.me/jelpern Jordan Elpern-Waxman

It’s well over half. The other stuff is peanuts. http://m.techcrunch.com/2011/05/17/netflix-largest-internet-traffic/. Keep in mind that’s over a year old.

http://www.facebook.com/patrick.newbery Patrick Newbery

The key term is hedge, as GS points out, and not stunt (a la NYT). Cable saw the need to move towards IP-based infrastructure a while ago. It’s the capacity of the pipe that determines what content and services customers can access and experience with a quality of service that makes sense.

About 9 months ago, the CTO of TWC spoke about the future of cable and the fact that people will always need large capacity pipes regardless of who they are getting content from. Getting people used to paying for usage is smart, as it allows for network operators to insulate themselves from changes in the price that can be gotten for content. It’s not just to prevent people from getting content from other sources.

Who owns the pipe enabling the future connected home is the battleground, not who is the consumer paying to watch bad sit-coms and reality TV.

http://www.cdixon.org/ chris dixon

I agree they ultimately wouldn’t want to prevent users from getting content. What they want to do is charge based on use type. The same way they charged per text message and not per bytes sent in the text messages. Ideal pricing for a bandwidth provider takes some portion of revenues of the content providers, not some portion of revenues based on bits. Bits are too crude a proxy for revenue.

http://about.me/jelpern Jordan Elpern-Waxman

The hedge is that if they lose their cable TV business to internet video they will be making up the difference by charging for the additional bandwidth. That’s a hedge in the true financial sense of buying inversely correlated assets. You don’t hedge to prevent an outcome from happpening, you hedge so that if it does happen you are covered financially.

I’m not saying cable doesn’t wish internet video would go away, but they know that it’s not. This means that someone will have to pay for the “carraige” of internet video, either the consumer or the internet video company. Suddenly internet video networks like YouTube, Hulu, and Netflix start to look just like cable networks, hearkening back to the days when cable networks used to pay the MSOs for carraige rather than vice versa.

http://www.cdixon.org/ chris dixon

I agree that’s what hedge means, but I really doubt the cable companies think charging equally for bits of video, games, web surfing etc will make up for their cash cow cable business. For it to be an “effective” hedge (Goldman’s words), they need to be able to get a piece of the video service providers revenues. Hence their strategy to back into revenue sharing with video service providers by throttling their bits and then forcing them to cut deals.

http://about.me/jelpern Jordan Elpern-Waxman

There are some interesting implications of OTT on the cost structure of the MSO business when you look at retrans, but I haven’t run the numbers. I guess the real question is whether you think it’s a problem that they are imposing caps – regardless of the reason – or just part of the course of ordinary business.

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Thumbed from mobile

http://sisyph.us/ ErikSchwartz

The MSO’s cost structure is based on tiered volume. Unlimited data (both in broadband and even more so in wireless) was a temporary marketing construct trying increase adoption of data in an era when growth was slow. Now that there is huge demand for data services unlimited data will go away.

http://www.cdixon.org/ chris dixon

pricing is never about cost, it’s about willingness to pay.

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