Wednesday, March 16, 2011

Rural Broadband Usage: To Cap or Not To Cap?

...The question is, should rural broadband providers start thinking about implementing monthly consumer data usage caps? Possibly... One thing is for sure, a new pricing model is necessary so that rural providers can increase revenue and return on investment, and possibly even reduce financial reliance on government subsidies (which might be gone soon anyway).

AT&T's big decision this week to start capping wireline broadband at 150 GB for DSL customers and 250 GB for premium U-verse customers is certainly worth a hearty debate between broadband customers and broadband providers. On one hand, customers have grown accustomed to unlimited broadband use from basically all providers, and it has really only been the wireless providers who have made headlines recently for taking away the precious unlimited plans--primarily in response to the explosive growth of smart phones and corresponding strains on network capacity. Wireless broadband is a relatively new technology for many consumers, so the "shock factor" of taking away unlimited plans is not as severe as it is with DSL, cable or fiber-based broadband, where consumers have never even considered anything less than unlimited use. On the other hand, there are no rules saying that broadband providers must provide unlimited broadband capacity to all consumers, and a company that invests millions (or billions) of dollars into state-of-the-art broadband infrastructure for the benefit of consumers has the right to recoup those costs and make a reasonable profit. Unlimited plans were a wonderful way to attract consumers and get people excited about using the Internet, but the business and technology cycle is at a point now where it is not practical or sustainable to continue unlimited plans indefinitely. There are very few practical businesses where customers can consume a product or service on an unlimited basis forever (example: utilities). Increasing broadband capacity is very expensive for providers, and continual capacity increases cannot go on indefinitely every few years without some significant changes in the pricing strategy.  The obvious solution is that the more you use, the more you pay (within reasonable limits of course).

One problem is that consumers and content sources are acting as though the transmission pipe in between is not as important as it actually is, and the content industry is going directly for the consumer's dollars and cutting the transmission provider out of the equation. Netflix is the obvious example--rural providers may experience nearly 1/4 of their peak time capacity going to consumers watching Netflix movies; yet the provider is not compensated proportionally by consumers nor content provider. Online video is only going to grow exponentially in the near future, so why can't broadband providers start reaping the benefits considering they enable the transaction between consumer and content to occur in the first place?

Consumers are going to be angry about data caps at first, but in reality caps probably won't even impact most consumers' bills at all. Internet capacity is not proportionally used by all customers; there are usually only a few percent that use a tremendously high volume of capacity on a regular basis. According to a FierceIPTV article, the AT&T caps will probably only impact about 2% of customers and most average customers only use about 18GB per month. Still, the idea of "unlimited" has a certain appeal and provides a sense of security and care-free attitude of entitlement for consumers. Providers may assume that implementing caps will cause churn, but this need not be the case.

There are also some key issues regarding customers' access to information and basic knowledge about broadband capacity and usage. There aren't any labels on websites saying "You are using X megabytes by looking at this website," like calorie and nutritional information on food and beverages. A consumer has to be fairly tech-savvy to even understand data usage and figure out how to monitor their own consumption, and then they have to actually care enough to make the effort to pay attention (also like food labels, you can put it there but ultimately it is up to the customer to read it, process the information, and make a good decision about consumption). I admittedly have a cynical attitude towards the "normal" Internet consumer. I literally would not expect a "normal" consumer to even know what a gigabyte means, or know the difference between DSL and cable Internet. The engineering behind telecommunications is mysterious and confusing even for me sometimes, and I'm supposedly getting a telecommunications engineering master's degree. By this logic, I would not expect the average consumer to have any clue how much data capacity they consume each month. I know my wireless data usage is usually around 150-300 MB per month, and I think I use my wireless data quite a bit. I actually don't know how much DSL data I use each month, but I am going to try to find out soon because I am curious to see if I would fall into the "over 150 GB per month" category. I watch my classes online, so I would bet my usage is high, although I don't think it is 150 GB. As pointed out in a FierceIPTV article, "You'd have to be rolling an HD movie a day, every day of the month, through Netflix to even tickle the 150 GB cap."

How does this impact rural broadband providers? .

I cannot stress how important it is for rural providers to start "thinking outside the box" for new sources of revenue with the impending threat of USF and access charges being taken away, as well as the inevitable transition away from per-minute voice pricing. It is a scary statistic that some rural providers receive over 50% of their annual revenue from subsidies, and it is a sad fact that some of these companies will not survive if those subsidies are taken away. This just illustrates how important it is to do some planning and experimenting now with new ways to generate income, before it is too late. Will customers like data usage caps? No, they will not. However, rural telecommunications providers have the unique benefit of being intimately involved in the lives of most of their consumers, where managers of rural telephone companies can take the time to sit down face-to-face and explain new pricing models to concerned customers. Rural providers can educate consumers about how they can monitor their broadband data usage, and notify consumers before the limit is reached to avoid those angry visits or phone calls from customers claiming they "didn't know." Due to the tight-knit provider-customer relationship in rural areas, rural customers may be likely to listen and ask questions, rather than just getting angry at a large faceless corporation and fleeing to a competitor. Finally, price differentiation can actually be a winning strategy for many companies who come up with new and creative ways to charge for services, so it is not unreasonable to think that some rural companies could even capitalize on a capped usage pricing strategy somehow and gain a strategic competitive advantage. 

For further reading:
FierceIPTV: "AT&T Set to Roll Out Internet Usage Caps in May," Jim O'Neil
The Wall Street Journal: "AT&T Web Customers Face Data Caps," Roger Cheng
Connected Planet: "AT&T Set to Roll with DSL, U-verse Broadband Usage Caps," Dan O'Shea (Interestingly, if you look at the comments on this last article, you will see exactly how customers are reacting to the caps, with comments like "I will promptly cancel my AT&T service," and "If AT&T can't handle the bandwidth, then get out of the business." Unlimited broadband capacity is not a right, it is a priviledge that broadband providers have extended beyond its useful and profitable lifespan--so consumers: get used to changes in broadband pricing!)

Edit: There is a great post on the Innovation Policy Blog sponsored by the Information Technology & Innovation Foundation (ITIF) that really clearly explains how a consumer would literally have to watch Netflix online for 7 hours a day every day in order to exceed AT&T's cap, which makes the criticism about this pricing strategy seem really unnecessary and unwarranted. Additionally, I wrote last month about my disdain for digital piracy and the costs it imposes on broadband networks, and I believe that capped usage strategies will not only send a message that digital piracy will not be overlooked by network providers, but that consumers who engage in this behavior will pay for their actions. Since the appeal of digital piracy is free content, it is possible that some people may even abandon large scale digital piracy rather than pay overage charges to ISPs. Here's hoping anyway...

Cassandra Heyne

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