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Why Monthly Broadband Usage Caps Won't Really Work (But Usage-Based Billing Will)

You’re a broadband provider. Do you want to portray yourself as (a) an unabashedly greedy monopolist/duopolist or (b) a clueless monopolist/duopolist whose lame network can’t meet demand?

Or what the heck, take them both, and maybe even throw in the idea that cable and telco TV providers are hoping to inhibit usage of Internet alternatives to their multichannel video packages.

These are the explanations offered by various bloggers for why Internet service providers are looking at consumption-based billing, as indicated in recent posts by GigaOm’s Stacey Higginbotham and BroadbandReports’ Karl Bode.

The idea of charging broadband customers based on what they use is still in play, even after Time Warner Cable’s famous P.R. disaster earlier this year that practically resulted in congressional hearings (see Time Warner Cable: Three Mistakes on Usage Pricing).

More recently, Verizon has revealed that it’s philosophically on the same page as TWC. Verizon’s Richard Lynch in September said that “a flat-rate infinitely expandable service is unachievable” (see Verizon CTO: Metered Bandwidth Is Inevitable). Charter CEO Neil Smit told Bloomberg yesterday that the MSO is going to be looking at consumption-based billing, too.

To Higginbotham, Verizon’s acknowledgment that some kind of usage-based pricing is on its way “was kind of like watching your favorite indie rocker sell out. Why would Verizon, which is building out a fiber-to-the-home network, plan to eventually move to some sort of consumption model?” (Which is actually pretty funny. Now I’ll be thinking of the FiOS guys as über-nerd rockers We Are Scientists.)

Her answer: Verizon just wants to make more money by charging more for the same service.

But is that all there is to it? To me, consumption-based billing models are inevitable mainly because Internet demand is shooting through the roof. Internet bandwidth usage is expected to grow at a 40% compound annual growth rate from 2008 to 2013, according to Cisco’s VNI forecast — quintupling over that time period.

Today’s broadband networks — not even FiOS — are not constructed to deliver peak theoretical demand and adding more capacity to the home or farther upstream will require investment.

Moreover, monthly usage caps alone — e.g., Comcast’s 250-Gigabyte per month limit — will ultimately not do anything to address the congestion introduced by higher and higher per-user bandwidth consumption.

Why? Because, according to recent analysis of Internet usage patterns, there’s a “primetime” for broadband consumption, which a huge monthly cap won’t do anything to address. A monthly 250 GB cap only filters out the bit junkies who are literally sharing terabytes of stuff; granted, they unequivocally use more than their fair share but capping them doesn’t solve long-term congestion issues.

Network-management equipment vendor Sandvine says that between 7 and 10 p.m. in any given region around the world, the usage profile among all users was roughly equivalent, mainly thanks to the explosive popularity of Internet TV and online video (see Video-On-Demand Now 27% Of Internet Traffic: Study). That means in that primetime window, you and I use the same amount of bandwidth as the overall heaviest users (”bandwidth hogs”) who use their connections 24 hours per day.

“From 7 to 10 p.m., we’re all consumption kings,” Sandvine CEO David Caputo told me. “Bandwidth caps don’t do anything for you.” The implication of this finding is that “the Internet is really becoming like the electrical grid in the sense that it’s only peak that matters,” he added.

One thing is clear: broadband providers will need to invest in more capacity to meet the ever-growing peak demand in the primetime hours, even if they try to shift usage that’s not time-sensitive (i.e. peer-to-peer file sharing) to off-hours.

Then we’re back to the original part of this discussion.

Is it fairer to recover that necessary investment in additional capacity from the heaviest users, who are driving the most demand? Perhaps ISPs will introduce a time-of-day surcharge, so from, say, 7-10 p.m. you’d pay a premium for higher-speed access.

Or, do you think spreading the cost across all subscribers, thereby raising the flat-rate pricing for everyone, is the better option? Note that Comcast did this to an extent when it raised the monthly lease fee for cable modems by $2 (to $5), citing costs associated with its DOCSIS 3.0 buildout.

If, on the other hand, you want to pretend that all-you-can-eat plans are sustainable at today’s price tiers, you’d be kind of clueless.