Time Warner Bandwidth Cap Points Industry Toward Utility Pricing

Analysts say the value of the Internet means providers can sell bandwidth much like utility companies sell electricity or municipalities sell water.

Time Warner Cable's expansion of its bandwidth cap testing marks the evolution of the Internet to a utility, like water and energy, where people pay for what they use.

People who have used the Internet for years have grown accustomed to paying one monthly price for unlimited access. However, that model is no longer sustainable as the increasing number of devices and people place higher demands on bandwidth, a finite commodity. Without controls, Internet users could experience "brownouts" as early as 2012, according to Time Warner chief operating officer Landel Hobbs.

The profit opportunity is also a major draw for cable and telecommunications companies. Capping bandwidth would enable networks to serve more people with minimum degradation while also allowing providers to get top dollar from the heaviest users -- in the case of Time Warner, as much as $150 a month for unlimited use.

Besides Time Warner, Comcast is also looking at bandwidth caps and has already imposed a 250-GB monthly limit for residential use. AT&T is reportedly considering a 150-GB cap.

But Time Warner is among the most aggressive and it appears bandwidth caps are inevitable for its customers. Through the rest of the year, the cable company will be taking the model from Texas to New York and North Carolina. In announcing its plans this week, Time Warner drew waves of protest on the Web and sparked a letter-writing campaign by Free Press, asking Congress to investigate.

Indeed, Rep. Eric Massas, a N.Y. Democrat, plans to introduce a bill that would prohibit "unfair tiered price structures from Internet providers."

However, Kyle McSlarrow, president and chief executive of the National Cable and Telecommunications Association, a trade group that counts Time Warner as a member, pointed out that the industry has spent "hundreds of billions of dollars" in the deployment of broadband, doubling or tripling speeds in the last few years.

In defending Time Warner, McSlarrow said in a blog posting: "Time Warner Cable has merely suggested that they are interested in conducting a limited set of trials of a new pricing model -- in a careful and transparent manner -- that may serve the vast majority of their customers better by reflecting the growing reality that some consumers utilize far more high-speed bandwidth than others."

Gartner analyst Elroy Jopling believes people will eventually have to pay for the amount of bandwidth they use. "The Internet has become a utility," Jopling told InformationWeek. "You nearly can't live without it."

As such, Internet providers are in a position to sell bandwidth much like utility companies sell electricity or municipalities sell water. "If you water your lawn every day, then you have to pay for it," Jopling said. However, in imposing caps, cable and telecommunication companies need to follow the 95-5 rule. "You are going to irritate customers," Jopling said. "But hopefully only 5% that use the system and not the other 95%."

As an example of a relatively smooth transition to tiered pricing on bandwidth use, Jopling pointed to Rogers Communications in Canada. The cable company's new pricing model was easy to understand, and the company made sure to explain exactly what customers would get for their money -- that is, how many videos, songs, and e-mail they could download or send without going over their limit.

In addition, Rogers sent notices via e-mail and a browser alert when customers reached 75% of their cap. Finally, the price was reasonable by local standards: $44 a month for the maximum service of 95 GB.

In the United States, however, bandwidth caps are relatively new and the transition is just beginning. How it plays out will depend on how well network providers, which have monopolies in some areas of the country, communicate the change and impact on their customers, while charging prices that don't appear excessive to most people.

InformationWeek has published an in-depth report on rich Internet applications. Download the report here (registration required).

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