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Why Metered Bandwidth Pricing Is Inevitable

Time Warner Cable is taking one for the team.

The cable operator is catching heat for daring to suggest that it’s fairer to charge for a shared resource — high-speed Internet access — based on how much of it you use.

As heard (misheard?) by populist politicians, anticable bloggers and ordinary consumers, that sounds like: Big Bad Cable Corp. wants to (a) gouge you and/or (b) ensure you never cut the cable TV cord by making it economically unattractive to watch online video.

Fundamentally, though, it’s a bad idea for ISPs to continue charging a single rate for all customers regardless of how many bytes they eat.

Why? Because usage is trending to currently unsustainable levels, as Internet video drives a huge explosion of traffic.

Global IP traffic will increase by a factor of six from 2007 to 2012, when different forms of video will account for nearly 90% of all bandwidth, according to Cisco’s Visual Networking Index research project. But Internet networks built 10 years ago were not designed for high sustained bit rates. The architectures back then assumed bursty access to Web pages (text and images) and e-mail traffic.

So massive upgrades are indeed going to be needed in the coming years to meet demand. Something has to give.

As Insight CEO Michael Willner wrote in his blog yesterday: “Opponents [of TWC’s billing plan] hang their hat on the argument that they deserve flat rate billing just because they always had it. That’s how companies — no — that’s how entire industries become obsolete. Refusing to change with the times is a recipe for disaster. Just ask the auto industry.”

Here’s where we come to the part where it’s fairer to reallocate pricing for tiers based on usage. Time Warner Cable COO Landel Hobbs has offered the lunch metaphor: “When you go to lunch with a friend, do you split the bill in half if he gets the steak and you have a salad?”

In other words, as customer usage profiles start to diverge dramatically, spreading costs across all subs is a very bad value for those who don’t use the Internet as much.

(As a side note, this rationale sounds similar to the case for a la carte programming: Why should I pay to subsidize my neighbor’s ESPN habit? Expect to see this issue continue to smolder or flare up in the next few years.)

TWC, to be sure, has made mistakes in handling what was already going to be a dicey issue.

For one thing, the multiple tiers and caps are much too confusing. They should have started with two plans: One capped at whatever, and a higher-priced unlimited plan. Instead it’s making customers do the math — not the friendliest way to do this, as Pali Research’s Rich Greenfield has pointed out.

Also, the company divulged its plans to expand consumption-based billing through BusinessWeek, rather than making a formal announcement, and customers were left without any info directly from the company about what to expect and when.

That’s because the MSO wanted the latitude to modify the tiers and terms as the tests evolved — as it did, in fact, do on Thursday. (See Time Warner Cable Tweaks Bandwidth-Billing Plans.)

But some of these P.R. pitfalls are an inevitable part of shifting to new pricing models. Which means every broadband provider in the United States, and even other countries where the norm is flat-rate all-you-can-eat broadband, owes Time Warner Cable a debt of gratitude.