Netflix viewing seen swelling cable bills next year

By Alex Sherman, Bloomberg News
Posted Dec. 01, 2011, at 8:52 a.m.

NEW YORK — Time Warner Cable and U.S. pay- TV companies, weighing how to profit from surging Internet demand spurred by Netflix and Hulu, are on the verge of instituting new fees on Web-access customers who use the most.

At least one major cable operator will institute so-called usage-based billing next year, predicts Craig Moffett, an analyst with Sanford C. Bernstein & Co. in New York. He said Cox Communications, Charter Communications or Time Warner Cable may be first to charge Web-access customers for the amount of data they consume, not just transmission speed.

“As more video shifts to the Web, the cable operators will inevitably align their pricing models,” Moffett said in an interview. “With the right usage-based pricing plan, they can embrace the transition instead of resisting it.”

U.S. providers like Time Warner Cable have weighed usage- based plans for years as a way to squeeze more profit from Web access, and to counter slowing growth and rising program costs in the TV business. While customer complaints hampered earlier attempts, pay-TV companies are testing usage caps and price structures that point to the advent of permanent fees.

“We’re basically a broadband provider,” Peter Stern, chief strategy officer for New York-based Time Warner Cable, said Nov. 17 at the Future of Television conference in New York. “As a convenience for our customers, we package and distribute television and provide service around that.”

Rogers Communications, the largest Canadian cable company, has been billing broadband customers based on consumption since 2008. U.S. providers AT&T and St. Louis- based Suddenlink Communications are experimenting with usage-based plans.

Cable companies see usage-based billing as a way to limit the appeal of online services like Netflix and Hulu, and reduce the threat from new entrants like Amazon.com and Google.

“It’s the reason why Apple or Google would inevitably be reticent about committing a significant amount of capital to an online video model,” Moffett said. “You can’t simply assume just because you can buy the content more cheaply, you can offer a product that’s cheaper to the end user.”

Netflix and Hulu’s subscription services have driven up Web usage at peak hours once reserved for watching TV. Google, Amazon, Apple and premium channels HBO and Showtime have also put shows online and followed viewers onto mobile devices like iPads and Android tablets.

While demand for Web service grows, cable operators are battling to preserve profit in the mature pay-TV business and withstand competition from satellite carrier DirecTV, Verizon Communications’s FiOS and AT&T’s U-Verse. Programmers like ESPN are also demanding higher fees.

Time Warner Cable, the second-largest U.S. cable operator behind Comcast, lost 126,000 pay-TV accounts in the third quarter.

The incentives to focus on Web access are compelling. Cable’s broadband gross margins are about 95 percent, versus 60 percent for video, according to Moffett. As programming costs increase nearly 10 percent a year, video margins are crimped, he said.

Time Warner Cable is testing meters to measure broadband consumption for the purpose of tiered pricing, Chief Executive Officer Glenn Britt said in June. In April, he said usage-based billing is “inevitable.” A previous attempt in 2009 was abandoned amid customer complaints.

“Some form of usage-based billing might have some utility for customers who use the Internet very little, or only use low- bandwidth applications like email,” said Alex Dudley, a Time Warner Cable spokesman.

Federal Communications Commission Chairman Julius Genachowski publicly supported usage-based pricing in December, a victory for cable companies concerned that usage-based billing would run afoul of net neutrality rules prohibiting Internet services from favoring one form of content for another.

While lower caps may slow the online shift, cable companies won’t be able to stop it. According to media researcher SNL Kagan, about 12.1 million U.S. households will receive TV shows and movies from Internet services rather than a traditional pay TV provider by 2015, up from 2.5 million homes at the end of 2010, SNL Kagan estimates.

Cable’s best option is to find ways to profit from the online shift, said Moffett. If the companies were to lose all of their video customers, the revenue decline would be more than offset by a lower programming fees and set-top box spending, he said.

“In the end, it will be the best thing that ever happened to the cable industry,” Moffett said.

http://bangordailynews.com/2011/12/01/business/netflix-viewing-seen-swelling-cable-bills-next-year/ printed on November 25, 2014