Time Warner’s Pricing Scheme – The Cost of Local Monopolies

Time Warner’s latest internet pricing scheme just gets worse.

The latest price schedule starts pricing at an incredibly expensive $15/GB for 1 GB/month with overage costing $2/GB with the top rate of $75 for 100 GB/month, with overage of $1/GB capped at $75 – this means $150 for unlimited downloading.

Let’s not kid ourselves – this has more to do with lack of competition and fears of programming cannibalization than anything to do with network expense. According to this article:

“Pretty much the fastest consumer broadband in the world is the 160-megabit-per-second service offered by J:Com, the largest cable company in Japan. Here’s how much the company had to invest to upgrade its network to provide that speed: $20 per home passed.”

There is a fast broadband technology called Docsis 3 which delivers high speed services over cable. This technology apparently is not all that expensive to implement and Comcast and Cablevision are upgrading their networks with it. Pricing outside the US for high speed service is very attractive – Japan’s 160 Mbps service costs about $60 per month and in the Netherlands it costs about $107 for 120 Mbps.

The key factor to consider is that the incremental cost to provide these services is minimal, while Time Warner claims that its pricing scheme is driven by network cost considerations. Many observers who know much more about the cable biz than I are casting a very skeptical eye on these claims. Consider that TW will not implement this scheme in markets where Verizon offers their fiber-based service (FIOS) and you begin to appreciate how the lack of competition affects users.

The icing on the cake for me is what Jim Blackley, Cablevision Systems Senior Vice President of Corporate Engineering and Technology, said:

“We literally don’t want consumers to think about how they’re consuming high-speed services. It’s a pretty powerful drug and we want people to use more and more of it.”

Now why would Cablevision take this stance compared to TW’s obsession with metering? Actually it’s pretty simple:

Broadband has the highest profit margins of any product cable companies offer

Read it again and you begin to understand something about the economics. The marginal cost to provide high-speed bandwidth is low and decreasing. TW would have you believe the opposite. In competitive markets, TW will not implement tiered pricing. Cablevision want users to get drunk on bandwidth.

The mind boggles when two companies in the same business implement opposite pricing models. Something’s rotten in the state of Texas and let’s hope it does not spread.