US cable operators are beginning to roll out usage caps on their broadband services (see a recent report here) – in other words, users will be charged overage when they go beyond a specified limit. The question is whether this is sensible business, or just paranoia.
From a pricing perspective, the cost per bit roughly doubles (or more) after the cap. If you’re paying $50 per month for 250 gigs, and then you pay $10 per 50 gigs beyond that, it’s a 100 percent increase in price. Whether that’s excessive is a subjective matter. Bottom line is, if those 50 extra gigs were free yesterday, but cost $10 today, most customers probably want to know why.
John Brooks, vice president – analytics solutions, for Subex says that the overage pricing is “modest in comparison to the amount of gigabytes the users are able to receive” but points out that “operators are being put in a difficult position of trying to meet growing capacity demands, while maintaining quality service levels, with no change in revenues.” Pricing for broadband hasn’t changed while broadband usage has continued to explode. The problem from the operator’s perspective is that they are battling negative price pressure in the face of increasing demand for their service. Brooks rightly points out that “this formula doesn’t work for any business model.”
As operators make this pricing change, it’s often being dubbed as “usage based pricing” which it isn’t. True usage based pricing would be metered usage billed on a per unit basis – like per minute voice was once billed. In reality, this is overage billing…until the overages happen every month. “Usage based billing is customer-derived – if the customer thinks it is usage based (as opposed to value based) then it is,” writes Hugh Roberts, an independent communications industry expert and analyst. “They are no longer overage as they happen routinely, therefore to the customer it becomes ‘usage based’. The problem comes when (operators) try to combine usage-based with pay-per-view. Will customers accept paying twice?”
There’s one model that seems to make sense here, but whether it’ll pass regulatory muster probably remains to be seen. If I’m a heavy Netflix user, I’m the kind of person who’s going to pay overage. So if my cable operator comes to me and says “look, give us the $8 per month you’re giving Netflix, get our movies-on-demand service, and we’ll let you use all the broadband you like with overage” that would seem to close the loop. However, cable operators just began rolling out TV Everywhere offerings as part of their Pay TV subscriptions. Which will drive up broadband usage. Which may incur overage charges. Which means TV Everywhere isn’t “free” anymore, but it’s billed in a back-door kind of way.
So cable operators, please be up front with your customers. You may get so paranoid fighting off the likes of Netflix, Skype, and Google that you forget the whole point of competing with them is to keep your customers and keep them happy.