The days of unlimited home Internet access for a set price may be coming to an end.
Comcast (NASDAQ:CMCSK) Executive Vice President David Cohen predicted at a conference May 14 that in five years' time the company will have "a usage-based billing model rolled out across its footprint," CNN Money reported. He did not offer specifics or reveal how far along Comcast is in the process of implementing limits with fees for overages. Cohen did say the company would look to set the limit at a level where most customers would not be affected.
Cohen suggested that the limit could be set between 350 gigabytes and 500 gigabytes per month, according to CNN Money. That would allow a user to stream between 70 and 125 HD movies, the web site reported.
Comcast has already tested 300 GB limits in a handful of markets with customers paying an extra fee of $10 per 50 GB of data. Basically if this practice becomes the norm the broadband business would look a lot more like the mobile phone business where overage fees have traditionally been a huge source of revenue. Overage fees are attractive to service providers because in most cases users don't know they are incurring them. Under usage plans with caps that have overage penalties, a company can charge a manageable upfront price but protect itself (or penalize heavy users, depending upon your perspective) on the back end.
What Cohen said
Comcast is in the midst of trying to win regulatory approval for its proposed $45 billion merger with Time Warner Cable (NYSE:TWC), which would give the combined company 33 million cable customers and a similar number of broadband customers. One of the fears regarding the merger is of course that the company would raise prices for customers. Cohen publicly suggesting what amounts to a price increase implies that implementing a limit/fee for overage plan is something the company considers a necessity whether the merger goes through or not. ComputerWorld reported on what Cohen said.
The right way to do this is to use usage-based billing...on the last mile and to do it in a fair and non-discriminatory fashion. ... That is the way you can deliver the equity proposition that heavier users pay more. ... It really has nothing to do with [buying TWC]. It's a generic industry-related issue. [It's not] an open Internet issue.
We have a series of pilots. ... We think what we are doing is totally appropriate. ... I think we are approaching this in the most responsible and rational way that you can approach it. ... More than 98% of our customers are not affected by this. ... We are very comfortable with the way we are proceeding.
Cohen is clearly floating the plan before the company faces regulatory hearings so regulators are not broadsided by the news.
Why is this happening?
Before streaming video became popular it was relatively impossible for an individual family to consumer the amounts of data that are now the norm. Because of this data caps were not really needed. Now, the rise of Netflix (NASDAQ: NFLX) has changed the overall picture of how people use the Internet.
Sandvine, a Canadian networking services company, reported recently that "Netflix increased its share of fixed-line Internet traffic in North America in the first half of 2014, accounting for 34% of data flowing to consumers during peak times, up from 32% in the latter half of 2013," the Associated Press reported. The networking company also found that file sharing (often used by people pirating content) fell to 8.3% down from 31% in 2008. Sandvine suggests that the need to pirate has lessened because so much content is now available from legitimate sources.
What's impacting Comcast and what might force the company to add data caps with overage charges is cord-cutters -- people who drop their cable subscription in favor of streaming services and other Internet-based content. Cord-cutters were the top 15% of heaviest users of streaming audio and video. The group accounts for an astounding 54% of all Internet traffic "consuming on average 212 gigabytes of data per month. That would be roughly equivalent to watching 100 hours of video per month," Sandvine said
The same customers no longer paying Comcast for cable are the people using the most bandwidth. It makes sense for the company to want to charge more for the people putting the most strain on its system. Comcast must tread lightly though because even though most people won't see their bills rise due to a cap there will be a perception that the company took something away. It's sort of like a restaurant capping free refills at four. Even though you only planned to get two, the change is noticed and could create ill will.
Comcast probably needs to do this
In many ways Comcast is taking a bullet for all Internet service providers. If a small (but growing) number of users account for a disproportionate amount of data then it makes sense to charge those users more. Many homes have at least two options for broadband service and a cap/added fee plan by Comcast may cause some customers to jump to another provider (like a phone company offering DSL service). If that happens too often, it seems likely that all ISPs will have to move to a similar pricing model or the companies that don't charge above a certain usage level will be left with all the heaviest users/worst customers.
Streaming and cord-cutting are likely to increase as more people become comfortable watching television shows and movies through services like Netflix and Hulu. Delivering streaming content (or any data for that matter) has a cost and Comcast is right to pass that cost on to the heaviest users. Implementation of a cap, however, should be slow with intent and pricing made very clear. Comcast would also do well to provide easy ways for customers to know where their consumption stands in relation to the limit. The company should also make paying for extra data an opt-in where customers clearly know a fee will be incurred.
Unlimited Internet may very well go the way of unlimited wireless phone data where if anyone offers it at all they are the exception. Still the proposed Comcast plan offers a lot of data before overage fees kick in and if the levels stay at the ratios Cohen floated it shouldn't affect most people.
Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.