Internet service providers are facing a quandary. Back in the late ’90s, in hopes of boosting their businesses, they stopped charging people by the hour for online access and began offering unlimited, always-on broadband connections. The freedom to surf for as long as one wished and the faster load times (does anyone else recall the amazing speeds of the U.S. Robotics 56k modem?) attracted more and more households to the web. According to Nielsen data, between 2000 and 2006 broadband subscriptions grew from less than 10 percent of the country to 69 percent.
Today, that growth has started to stagnate. Only about 75 percent of the population is online and, of those who aren’t, 17 percent say they don’t see the point of getting connected. It’s not a question of access either; only 1.3 percent of those that aren’t online and are interested in broadband don’t have access to it, according to a Pew Internet and American Life study issued in January. So broadband providers, eager to show revenue growth in a relatively stable market, are trying to squeeze more money out of the existing subscriber base.
While some providers are experimenting with offering premium services like faster speeds at higher prices, others such as AT&T and Time Warner Cable are trying to revoke the all-you-can-eat broadband plans to which we’ve become accustomed. But when it comes to metered broadband — charging customers based on the amount of data consumed — just about everyone loses. Even the carriers.
Carriers Win the Battle But Lose the War
Metered broadband, which Time Warner Cable tried and AT&T is still trialing, can cut consumers’ usage while still boosting a provider’s own sales. Certain consumers can also be winners under these plans provided they find themselves paying less than before for their broadband service and have no desire to move up. After all, there are still people out there using dial-up. But it’s those bandwidth indifferent consumers that are going to cost the carriers as time moves on.
In markets where consumers have a choice between ISPs, heavy users are likely to leave the rationing carrier, leaving it with a user base that fundamentally doesn’t need or desire a lot of bandwidth. There are three problems with alienating your heavy users. One is that as services such as online video and bandwidth intensive applications proliferate, ISPs with caps will be forced to raise their caps to keep up with the times, but their user base could abandon the service when faced with price hikes needed to fund upgrades to the network.
There’s also the issue of network traffic. A network costs money to own and operate, even when the pipes are empty, so it’s in an ISP’s interest to keep them full. Having lots of traffic flowing from its network to other networks also helps it offset the costs of peering arrangements. And finally if carriers implement pricing change rather than a business model change, they are accepting their dumb pipe status and just milking it for all it’s worth. Like the large American car companies, they will fail to deliver the next generation of services, and will fall behind.