Fiber is the future, and North State is on board.

North State, which includes Greensboro in its service area, began deploying fiber to the home in 2009 because it was losing out to the cable companies with its DSL-only option. Tucker declined to tell me how many customers it currently has, but he says it’s now the No. 1 provider of broadband in a region that includes Time Warner Cable and AT&T as well as smaller cable companies. “We said we want to be the broadband market leader and the way to do that in late-2009 was with fiber to the home,” Tucker said.

Now North State offers an 80 Mbps down/30 Mbps up for consumers at a 12-month introductory price of $49 a month, which is about what I pay for 12-13 Mbps down/ 2Mbps up cable broadband from Time Warner here in Austin. However, the most popular package North State sells is a 30/30 Mbps symmetrical package, although he didn’t disclose penetration or take rates. Tucker also noted that the company is still supporting its 10 Mbps DSL business in its service area, but he doesn’t plan on making more investments in the technology. “Back in 2003 and 2004 and 2006, we were out there shortening loop lengths, building out fiber to the node and all that, but now we’re going to stick with maintenance,” Tucker said.

To cap or not to cap? That is the question.

North State doesn’t currently have a broadband cap, as Tucker believes the fiber network can withstand the speeds that today’s traffic requires. However, Tucker says, “We believe ultimately that is the direction the broadband market will go.” When pressed on the subject, Tucker says, “As over-the-top video becomes more and more prevalent and there’s more HD and bigger broadband requirements, the broadband market will move to some kind of cap or metered service.”

However he couldn’t explain precisely why this would need to happen. “The networks are expensive. We are providing bandwidth for all these wonderful things that are showing up on the Internet and that is costly,” he said. “This market is highly competitive and we have to get some money from somewhere to pay for these networks. All of it is not falling on the user.” But when asked if his financial models could support the delivery of more traffic he said that, “in a multi-product scenario, yes it does. We look at the whole household and the revenue we’re getting out of the households.”

When I asked if that meant North State could only recover costs and make money off a user that subscribed to multiple services, Tucker appeared to backtrack. A user that subscribed to broadband alone would suffice, he said. He then implied that part of the issue around capping was because some people use so much more than others. “All the rich content that’s showing up on the Internet is driving tremendous demand on our network, and we want our customers to have access to that.” He continued, “There are those that are more bandwidth-heavy users, and we need to strike a median on who’s paying for what, and that’s where we see that capping may come in.”

However, Tucker was very clear that North State wasn’t capping service now — and that it may never cap or meter service. However, one could hear the amazement in his voice when we discussed what people were doing over the network.

“I don’t think anyone could see what we would drag across these pipes, and people thought the unlimited model would be fine,” Tucker said. “But this is evolving and it’s something that we’re all having to deal with. We’re a broadband company, and we want people to do what they want to do, and we want to deliver value to our shareholders.”

As people consume more bandwidth, it may well be smaller ISPs such as North State that are answering to private shareholders in highly competitive markets, that show us exactly what networks are capable of, both in terms of technology and in delivering profits.

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Starting in June, Shaw’s standard 7.5 Mbps plan will come with a 125 GB cap (up from 60 GB). Meanwhile, its low-speed 1Mbps “lite” offering will have a 30 GB cap (up from 15 GB), and premium customers with a 25Mbps plan will now have a 250GB cap (up from 100GB). Customers that exceed the cap will automatically be bumped into the next tier, but revert to their previous subscription package once the month is over.

Those caps mimic similar restrictions put in place by U.S. ISPs. Comcast is restricting its customers to 250 GB per month, and AT&T recently introduced a 125 150 GB cap. There’s been a debate on how generous 125 GB per month really is, especially when Netflix subscribers with connected devices use around 80 GB on average per month. However, raising the cap of the standard plan from 60 GB should go a long way toward easing concerns that even moderate Netflix usage could lead to customers being penalized by their ISP.

Fears like these have been a real concern for Netflix. The company went so far as to lower its default video quality in Canada, and it’s offering Canadian customers the option to disable HD streaming completely in order to avoid costly overage fees. Netflix has also told Canadian regulators that billing users that exceed their cap per gigabyte, as it’s being done by Shaw’s competitor Bell Canada, is essentially a money grab.

ISPs claim bandwidth caps are about dealing with network congestion, but critics have argued that it’s really about keeping potential competitors to pay TV services in check. Shaw’s most recent broadband plan changes seem to support this claim: The cable operator is also introducing a number of new plans with caps as high as 1 TB, and even two unlimited data plans. However, these new plans are only available to customers who also get their TV service through Shaw.

Image courtesy of Flickr user LWY.

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Ed.: This is the second of a two-part post. The first post ran on Saturday.

In yesterday’s post, I outlined arguments from a much lengthier analysis (PDF) regarding recent carrier announcements concerning tiered pricing for broadband services. Not only is such pay-per-use a clear trend, but arguably the natural outcome of rational consumer decision-making, as light users actively choose not to subsidize heavy ones by paying for more capital-intensive resources than they use. However, if pricing plans are no longer “unlimited,” but increasingly granular and usage-sensitive, one can predict massive disruptions in the current ecosystem and reversal of some trends of the last few years. However, as with all such shifts, this will create new opportunities and drive new technology breakthroughs. Here are some thoughts on such a future:

• Fewer Ambient Applications. There will be less live streaming video from coffee pots. In other words, less passive push, more active pull.
• Truth in Labeling. Foods and beverages need to disclose calories from protein, fat, and carbohydrates. Apps and content may need to disclose total data transferred or peak data rates. Drugs need to disclose potential side effects (may cause congestive heart failure), apps and content may need to do the same (may cause congestive network failure).
• Certifications and Guarantees. It’s easy to blame a network provider for high charges, but you don’t blame the electric company when your kids leave the lights on or the water company because a broken faucet ran up your bill. Similar to Energy Star labeling for appliances, programs may be developed to certify “bandwidth-efficient” endpoints. Or, guarantees: “This app will never transfer more than 50 MB per month or double your money back.”
• Real-time and Projected Monitoring and Billing. Taxis provide visibility into the amount owed in real-time. You have electricity, gas, and water meters at your house. Providing ubiquitous access to your current data consumption, rated to provide visibility into your projected bill, is next. You may be calling from the airport to tell the kids to turn down the resolution on their web video.
• Price Caps. The EU has already been active in capping roaming fees and monthly bandwidth charges.
• Network Enhancements and Trade-Offs. The same way that increased gas prices drive fuel efficiency, usage-sensitive pricing will drive enhancements in compression algorithms, less chatty protocols, and less predictive caching. Drivers pay thousands more for hybrids to save on gas, similarly, it may be worth spending processing resources to save on network resources.
• Application Design Changes. Rather than dumping a voluminous amount of data, expect more, well, more buttons, such as at the top of this article, requiring continuous positive acknowledgement. Higher interactivity demands lower latency, therefore greater application dispersion.
• Increased Caching and Premises Appliance Sharing. No matter how many times my kids stream the same movie, our players fetch all of the content anew. Expect more caching, subject to laws and DRM. And, expect players from various manufacturers to query each other.
• Congestion Pricing. A number of cities have instituted dynamic congestion-based pricing for tolls and roads, and it has been proposed to do the same for the Internet. Simplified congestion pricing might mean free nights and weekends. They knew to wait until after 9:00 p.m. to call Aunt Martha, and may learn to have an immersive multi-screen 3-D, high-definition video call with her after 9:00 p.m. as well.
• Security. Letting your neighbor tap into your wireless access point may not seem like such a good idea anymore. Expect more users to turn security on, and more access point vendors to focus on simplicity and usability of security administration.
• Peer-to-peer. If letting your neighbor uncontrollably increase your monthly data bill is unwise, perhaps neither is letting everyone on the planet using your peer-to-peer client do the same. Some telcos are implementing edge optimization for content delivery, using peer-to-peer in the set-top box. Usage-sensitive plans will drive a need to differentiate traffic which a user generates vs. traffic that the provider generates.
• Intelligent, Policy-Based Optimization. Better to cache that movie now or download it tonight, when the forecast is for a twenty percent chance of lower data transfer rates? A predictive optimizer that believes rates will drop but knows you won’t stay awake long enough to watch the movie anyway may make the decision for you.
• End-to-End Open Interoperability and Integration. Some TVs can talk to media players via “HDMI Consumer Electronics Control,” others can’t. Expect device manufacturers to increasingly support interoperable control so that a streaming media player doesn’t rack up charges when no one is watching.
• Conservation Culture. People have learned to turn their thermostats down in the winter, and to wait for sales on Black Friday and Cyber Monday. Lack of concern for usage under flat-rate plans is sometimes referred to as “moral hazard,” but I would just describe it as “rational indifference to consumption at zero marginal cost.” Reduced consumption is a well-known effect of metered pricing.
• Cost-Based Adaptivity. Technologies such as Scalable Video Coding degrade gracefully to smaller screens and lower frame rates and quality due to network congestion. Future technologies may do the same based on real-time network data pricing.
• Return to Ownership. Recent trends have favored on-demand rental over ownership. Shifting breakeven points may cause these trends to moderate or even reverse. Don’t toss that DVD shelving unit yet. If you can rent a house with an option to buy, perhaps similar models will emerge where streaming a movie will entitle you to a discount on purchasing it on physical media.
• Shifting Business Models and Ecosystems. People who drive to the video store for a DVD (as some still do) expect to pay for the data transport costs (e.g., fuel, car wear and tear). People who rent by mail expect that the cost of delivery and return postage is borne by the video service. Expect a variety of customer-pays, provider-pays (i.e., bundled pricing), and advertiser or other third-party supported models to vie to become accepted industry practice, although in any event, the consumer ultimately pays with either eyeballs or hard dollars. Creative partnerships between content providers and network service providers will also materialize. “With connection charges, this movie will cost $1.57 to view. This offer expires in five minutes and prices are not guaranteed until you press ‘Watch Now.’”

The counter-argument to this whole chain of thought is that the cost per bit (stored or transferred) is approaching zero. That sounds compelling, but the inverse of that argument is that the amount of bandwidth per user is approaching infinity, so the real question is which trend outweighs the other. The answer can be found in the fact that carriers’ annual capital expenditures are well north of a hundred billion dollars globally on network infrastructure and they’d like to see a return on that investment.

Many industries have providers offering pay-per-use and/or flat-rate plans. Other industries seem to gravitate to unlimited pricing, and then swing back to usage-based models. The evolution of pricing models for fixed and mobile bandwidth will offer challenges to some businesses, but opportunities for others to differentiate themselves with greater transparency or by developing new features and products that implement some of the ideas above.

Joe Weinman leads Communications, Media, and Entertainment Industry Solutions for Hewlett-Packard. The views expressed herein are his own.

Image courtesy Flickr user mugley.

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Exactly 20 years ago this month, Tim Berners-Lee invented the browser, HTML, and the World Wide Web, but things really took off six years later when America Online switched from pay-by-the minute dial-up to unlimited flat-rate plans, causing usage per sub to more than triple (PDF). Recently, however, wire-line and wireless providers are circling back, either trialing or instituting tiered or pay-per-use pricing, and in the world of cloud computing, pay-per-use is touted as a major benefit. Pricing plans may seem like an arcane topic for marketing professionals, but are driving fundamental questions regarding global capital expenditures and the sustainability of the current content and network ecosystem. If pay-per-use prevails, what are the implications on industry structure and new business opportunities?

For the record, I like unlimited Internet access just as much as anyone else. However, such plans appear to be on their way out, and here’s why. As I’ve explored in ”The Market for Melons” (PDF), pay-per-use is not an evil plot by greedy robber barons, but a natural outcome of independent, rational consumer choice. Consider a town with an all-you-can-eat (flat rate) buffet and an a la carte (pay-per-use) restaurant. Smart shoppers on diets will save money by patronizing the a la carte restaurant, whereas heavy eaters will save money by visiting the buffet. As patrons switch, the average consumption of the buffet will increase, driving price increases for the luncheon special, causing even more users to switch to pay-per-use.

Bottom line: it is not the proprietors driving this dynamic, but the customers themselves acting out of pure, rational self-interest—light users, by deciding not to subsidize the heavy ones, foster the vitality of the pay-per-use model. As the spread in bandwidth consumption increases between frequent digital movie streamers or videoconferencing users and lightweight occasional emailers, rational light users will want to migrate to pay-per-use. Of course, people aren’t always rational, and consumers often prefer to overpay for flat-rate (PDF) rather than save money but risk bill shock.

Under conditions where buyers are coldly rational, active decision-makers, consumption levels are dispersed, prices are a non-trivial portion of income, and the industry is highly competitive, pay-per-use will tend to dominate. When behavioral economics come into play and emotions and cognitive biases are taken into account, switching costs are high, there are no meaningful differences in consumption levels among consumers, and/or there is a single dominant player, flat-rate may prevail. And, there may be a pendulum effect as marketers attempt to differentiate their offers from prevailing practices.

A large number of business models from the “over-the-top” providers of content, applications, and services have been predicated on zero marginal cost to consumers for data usage. It’s not only an access issue; consider the current Comcast / Level 3 disagreement regarding payment for core backbone bandwidth. What might happen if pricing plans, instead of being “unlimited,” become increasingly granular and usage-sensitive? In tomorrow’s post, I’ll predict possible implications, ranging from cultural changes, application and architecture shifts, and industry ecosystem and business model transformation.

Joe Weinman leads Communications, Media, and Entertainment Industry Solutions for Hewlett-Packard. The views expressed herein are his own.

Image courtesy Flickr user mugley.

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One of the reasons so many consumers view metered billing negatively is that early attempts to implement it have been somewhat crude. For example, most metered billing incorporates a flat price up to a ceiling (the “cap”) and a per-gigabyte (GB) charge above that level (the “meter”). Criticism of such an approach rightly points to the following deficiencies:

• Most non-technical consumers don’t know what a gigabyte is. Head over to the computer section of any Best Buy, for example, and you’ll see hard drive capacities expressed in term of photos, songs or movies. If retailers have figured out how to speak the language of the average consumer, why can’t broadband operators?
• Even technical consumers (myself included) have no idea how many gigabytes they consume in a given month. As a result they’re unsure if they’ll be penalized for their usage or not.
• Most offerings fail to provide consumers with real-time visibility into monthly usage — which is appalling given the tools available to most wireless users.
• Just as electric utilities are trying to encourage energy consumption during non-peak hours, cap-and-meter models treat a byte at 3:00 a.m. as having the same cost as a byte at 7:00 p.m.

Arguably the fairest approach would be one in which the entire bill is variable and in which unit (per-byte) cost declines as usage increases. Fair in that all users pay relative to the quantity of resources they consume but, like any good business relationship, heavier users enjoy volume discounts. This approach might seem too radical for all involved, however; even consumers who save money may look askance.

So assuming the above problems could be ameliorated, and further assuming that the “cap-and-meter” approach is the one that prevails, what exactly is a fair cap?

In 2009 the average U.S. broadband household downloaded 7.27 GB/month, according to market research firm IDC, a figure it expects to grow to 12.5 GB/month by 2013. However, looking at the average is deceiving because the mean is undoubtedly much lower. Using a simple “80/20 rule” (20 percent of the users consume 80 percent of the traffic) results in the top 20 percent of users downloading 29.1 GB/month (growing to 50.3 by 2013) while the lower 80 percent download 1.8 GB/month (growing to 3.1 by 2013). A 90/10 split results in the top 10 percent of users downloading 65.4 GB/month (growing to 113.2 by 2013).

These back-of-the napkin numbers don’t conclusively show exactly what a cap should be but they do suggest that it should high (say at least 30 GB and probably more like 65 GB) and also that it should be indexed to increase annually as average traffic loads increase. Without indexing the cap consumers would encounter the same problem many encounter with the alternative minimum tax.

Yet while capping and metering is not the best approach to usage-based billing, it seems to be the train that’s leaving the station. Broadband service providers have rolled out caps ranging anywhere from 5GB to 250GB; those at the low end would be well advised to push them higher, unless their real goal is to encourage heavy users to churn off their networks.

Kevin Walsh has over 25 years of telecommunications and networking industry experience and is currently an executive at Zeugma Systems.

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