The Real Culprit Behind TimeWarner’s Pricing Strategy

TimeWarner Cable made a lot of news over the last few weeks when they introduced their tiered pricing strategy for high speed data services.   The plans ranged from $15 to $150/month depending on the amount of bandwidth consumed.  Their argument was that:  1) as a facilities based provider, the growth in network usage is forcing their costs to go up, which they need to recoup;  and 2) this should reduce the bill for the many customers that don’t use even the lowest level of usage (so the poor user saves) and affect the super users who extract massive benefits for the network (and the rich user pays).   From TWC’s COO, “When you go to lunch with a friend, do you split the bill in half if he gets steak and you have a salad?”   I’m not opposed to the rationale in concept, but I do think there are several issues with it. 

Plenty of people have talked about how the magic of photonics over fiber based plant has reduced the marginal cost of adding bandwidth fairly significantly.  Bandwidth has an advantage over Moore’s law, in that it has two dimensions which can demonstrate improvement:  concurrency of streams (number of waves sent over a medium) and rate of modulation/encoding of those streams (10Gb/s, 40 Gb/s, 100 Gb/s, etc).  That multiplication creates huge drops in the cost of providing an incremental bit. 

More telling to me is how vehemently the Cable industry fought a-la-carte pricing for television.  This was the idea of forcing the MSOs to allow consumers to pick the channels they wanted to subscribe to and only pay for those a-la-carte, rather than the current model of buying a monolithic stack of hundreds of channels, where the vast majority are never consumed.  In the interest of philosophical consistency, wouldn’t the a-la-carte argument be just as eligible for the “consumption based pricing” label as the data plan argument?  I tend to think so, and can only reason that it’s simply not in their economic interest to offer that argument. 

Clearly, the industry has no interest in shooting its cash cow in the foot.  It is only natural to fight the mandated a-la-carte pricing.  But the industry can also not be blind to outside threats.  The availability of premium shows online in high quality over the Internet, the rise of on demand time and place shifted viewing, and the high broadband penetration rate has created a competitor to the proprietary, linear world of COAX.  I tell many people that if were not blocked by TimeWarner, I would have little reason to pay the $160/month I currently pay for cable television and high speed data.  I’d be able to watch live streaming sports via ESPN360 or CBSSports for March Madness, and I’d watch the 5-7 shows I DVR online at HULU, Boxee, or some other destination.  All of a sudden, my $160/month bill would be compressed to just over $40 for unlimited data access. 

I’m sure the executives at the various cable companies have also done that math.  And I believe they see customers doing it at a much more rapid pace.  What better way to ensure one’s revenues are not cannibalized, and in fact be allowed to thrive, than to introduce consumption based pricing for data.  In order to stream a few HD shows a few times a month would automatically push one into the $150-200/month category group of consumer.  At that price point, the MSOs are absolutely indifferent to whether I watch my shows over their proprietary network or over the Internet on my data pipe.  You can go a-la-carte but pay them just as much.  In fact, they probably are incented to switch me over for revenue generation and cost efficiency gains – it’s way more profitable for them! 

The path ahead will be tricky.  TimeWarner has already rescinded plans for testing of tiered pricing, because of the consumer fury it has set off.  If they move too quickly, they risk net neutrality legislation being thrust upon them.  Better to let consumers think they won and come out with another plan, lest their hands get tied.  But I think we are crazy to think tiers won’t be introduced somehow in the future.  The MSOs are too smart to let their analog dollars get turned into digital quarters.

What do you think?  Am I being too skeptical?

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2 thoughts on “The Real Culprit Behind TimeWarner’s Pricing Strategy

  1. Max Kalehoff says:

    Go Verizon FioS! And go Boxee and others who are innovating on behalf of the consumer first. The fringes are disrupting the incumbent monopolies and duopolies, and prompting consumers to really notice greedy intent among cable operators, and be enticed by the promise of awesome new services.

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