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Summary:

Like it or not, the reality is that broadband is becoming an alternate video network, and the video traffic is going to keep increasing, putting the entire business model of cable companies at risk. By responding with bandwidth caps, however, they are trying to put the genie back in the broadband bottle, which in turn risks the entire innovation ecosystem. Continue Reading

It should come as no surprise: Incumbents are beginning to act like incumbents. But while the cable companies are the first ones to jump on the tiered broadband bandwagon, they won’t be the last. Their argument for limiting bandwidth and data transfers based on price sounds like a good idea, especially as a way to get bargain hunters to buy. In the long run, however, tiered broadband is a terrible idea that will bring the innovation inspired by flat-rate broadband to a screeching halt.

Flat-rate broadband – however cheap or expensive (depending on your point of view) it might be – inspired the formation of Skype, YouTube, Facebook, Apple’s iTunes and MySpace, amongst others. It allowed us to freely experiment, to embrace both the applications and the ideas they represented, such as VoIP, online video, digital downloads and social networking.

The emergence of these applications has, in turn, spurred demand for broadband in the U.S., much like the illegal version of Napster jump-started the demand for cable and DSL broadband in the late 1990s. And they’ve helped lift the number of broadband subscriptions to U.S. cable and DSL companies to 69 million by the end of 2007, subscriptions that have brought in enough cash to pay for the cable companies’ foray into voice and to help with their digital transition. Yet now these guys want to slaughter the golden goose. Why?

NO MORE THEIR VIDEO ON DEMAND

The answer is in my living room. Thanks to a fast connection from Covad, I now get my video fix over the broadband pipe. Apple’s iTunes, Jaman, MLB.com, Hulu.com, CBS and scores of other services make it possible from me to watch shows either on my laptop screen or, in some cases, on my big-screen TV via Apple TV.

I used to pay Comcast about $150 a month, but now I pay them zilch, instead forking over a mere $30 a month to Covad. Oops! In the future, the emergence of much higher-speed DOCSIS 3.0 and fiber-based broadband will make it even easier to download or stream videos, which scares the bejesus out of the phone companies. And that is one of the reasons they are introducing tiered broadband.

But consider the bandwidth caps. I asked some of my telecom sources to help me put into perspective the new tiered-pricing structure with which Time Warner Cable is experimenting. TWC’s lowest price tier – 768 kbps at $29.95 a month for 5 Gbytes and $1 per GB – may seem reasonable, but it isn’t.

If you assume that we’re pulling down data at a steady 20 kilobits per second for every second of the month, the total monthly transfer comes to about 6.8 gigabytes. At a higher speed of 768 kbps, that jumps to over 250 gigabytes, and at 1 megabits per second, the monthly download will hit 324 gigabytes. At first blush, those look like awfully generous numbers. After all, who uses their connections consistently?

WHY METERED ISN’T ENOUGH

However, if you take into account our average behavior online, data transfers start to add up really fast. Stacey crunched the numbers yesterday and came up with an interesting conclusion: If you bought the monthly 15 mbps/40 GB transfer option for about $56 a month, you’d get about 40 hours of standard definition video along with enough bandwidth for your normal browsing and surfing habits. That’s just over 75 minutes of SD Internet video every day – two or three shows at best – which means you might need to continue buying the “video connection” in order to watch more television. Sure you can slice and dice the data transfers with other online activities, but this is all about video.

From that perspective, you would think that Comcast’s proposal for 250 GB a month is pretty reasonable. Actually it’s not, especially if you factor in how quickly we’re moving towards HD downloads. With HD, each roughly 2-hour long movie is going to consume about 8 GB, while live sports events, etc., when watched in higher quality can take up some 13 GB. Remember we share our Internet connections with multiple people in a household. So Before you know it, that 250 GB isn’t enough.

Cable companies are trying to convince Wall Street that they need to upgrade their networks to DOCSIS 3.0 in order to compete with telecom operators, especially those with fiber connections. The idea of metered broadband makes the big spending on these networks more palatable for Wall Street.

As for consumers, the cable companies have evoked the P2P bogeyman. I spoke with Time Warner spokesperson Alex Dudley, who claimed that some 5 percent of its user base abuses its network through the use of P2P, causing problems for the remaining subscribers. “Video is the most bandwidth-intensive use right now, and it is not people that go to iTunes but instead it is P2P which sucks bandwidth in the system,” he said. There are some questions about that claim.

My biggest fear is that as these companies try and protect their video revenues, they are
doing more harm than good, and putting roadblocks in the way of interesting services
that make broadband worth having. When I asked Dudley if his company was putting innovation at risk by limiting flat-rate broadband — if they might be throwing the baby out with the bathwater — he noted that many of these startups and services are built on their infrastructure.

“You need to understand that the networks are going to be managed and we need to make profit,” he said. “We are trying to find a balance here, and it is too soon to say that we are throwing baby out of the bathwater.”

Dudley was, however, quick to point out that TWC’s experiment in Texas was just that – a test. If consumers don’t want it, the company is going to back away from it. “I think this is a trial and we are going to learn from this trial,” he said. If the results of our poll are any indication, they would be wise to back away from it — and soon.

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  2. The fundamental problem is that upgrading the infrastructure to support very high demand _all the time_ is a non trivial exercise. A node split esp. on a full plant is non-trivial exercise in expense, not to mention all that backhaul across expensive gear and up to the big I Internet. An 10GigE linecard or port, plus the router allocation, is not that cheap either. Might want to ping juniper or cisco for what that stuff costs. Assuming you can discount 50 points off list, it’s still real capital. A good example would be to look at the capital spending of public cable companies like Comcast, vs. their free cash flow. That exercise would be illuminating – I did a back of the envelope and the return from free cash flow if someone bought the company, would be over 30 years. Not very tempting. As a result, as usage spikes, and buildouts continue, someone somewhere is going to get the squeeze or their stock will go to zero very quickly. Tiered broadband is one way to push out usage before upgrades, or alternatively, get more money to finance those upgrades. It is entirely possible that the first mile is a natural monopoly, and while there are going to be a lot of folks shouting about how it doesn’t cost that much to build out broadband, to them I have only one thing to say – if it was that easy, get a business plan together, fund it, and profit!

  3. Also, your platform doesn’t show comments in RSS readers for some reason, unlike techcrunch. And the thumbs up thumbs down links appear to be broken

  4. Classic telco stuff. Someone does need to disrupt them again and force them to upgrade, otherwise there will be no further innovation.

  5. If it is so costly to upgrade their networks to support greater bandwidth demands (which btw is still a fraction of Asian nations like Japan and Korea today), why do they insist on using their cash flow to buy back stock?!

  6. @brian: because like I said, look at their free cash flow. if they just spent that on builds and not on buybacks, their stock would tank.

    @don jones: precisely, some one does need to disrupt them. Since it appears to be quite an easy job, I am eagerly awaiting the legions of business plans and associated funding.

  7. An interesting observation is that core bandwidth (i.e. bandwidth that is guaranteed all the way to the backbone exchanges) only runs about $10-20 per Mbps-month for any decent sized network operation, and less if you are really big. Or to put it another way, it is costing the telcos on the order of $0.03-0.05 per GB for core, non-oversubscribed bandwidth. The rest is overhead and margin, and the installation charges are designed to cover the overhead; once a circuit is up the overhead is negligible, so the bandwidth billing becomes gravy.

  8. To some extent I can understand why the cable companies are doing this.

    Netflix just unveiled a box to deliver video over your broadband connection. Essentially they are piggybacking on your provider’s bandwidth for nothing to provide a service that directly competes with the cable company’s video on demand service.

    I would probably try to protect my investment as well, unless Netflix was willing to cut me a slice of their box income.

  9. Paul Kapustka Wednesday, June 4, 2008

    Tiered pricing and complaints about how costly it is to build out infrastructure seems to give credence to the opinion that last-mile connectivity should be funded by the government, since it is too important to be left to the whims of Wall Street. These schemes just smell like someone trying to squeeze every last drop out before competition arrives.

  10. I hate to see this being implemented throughout the nation. I’m for Net Neutrality. The United States is known for innovation. By having tiered services, that innovation will no longer exist. We need to upgrade the infrastructure, not squeeze every last drop of money out of the consumers. Oil companies are already trying to squeeze as much as they can from consumers and soon, those cable companies will become the new “oil companies” of next generation. If you look at South Korea’s infrastructure, they have one of the fastest residential broadband services worldwide, but that’s because their digital information infrastructure is superior to the United States. We need to take examples from South Korea and apply it to ourselves. I hope to pay $50 one day…for speeds as fast as T1, like in S. Korea, but with how things are looking, not sure if it’ll ever happen.

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