Comcast, Charter, and the future of usage-based broadband pricing

With little fanfare, two big changes came to the world of fixed broadband pricing in the last month. First, the Federal Communications Commission (FCC) approved Charter Communications’ merger with Time Warner Cable and Bright House Networks, subject to (inter alia) the company’s agreement to refrain from usage-based pricing for seven years. Second, Comcast Corporation raised its monthly data plan from 300 gigabytes to 1 terabyte in those markets where the company offers usage-based pricing plans, and capped its overage fees at $200 per month. These are important developments, not just by themselves but also with regard to what they say about each other and what they reveal about the future of usage-based broadband pricing.

The case for — and against — usage-based pricing

As we have noted many times before at TechPolicyDaily.com, there is nothing inherently anti-consumer about usage-based pricing. Rather, it is one of many potential methods for a broadband company to spread its network costs across its customer base. Unlimited flat-rate pricing charges customers equally regardless of use, meaning that lighter users pay far more per gigabyte of service than power-users. Usage-based pricing addresses this potential inequality by shifting more network costs onto those who use the network the most. In most cases, this means assessing a per-unit overage charge once a user exceeds a particular threshold. Usage-based pricing can also help deter overconsumption on congested networks (which explains in part why the practice is ubiquitous among wireless providers). Of course, like many business practices, usage-based pricing can also be used anticompetitively by a company with market power. Critics’ primary concern is that broadband companies with cable affiliates may use usage-based pricing to deter customers from consuming Internet-based video services such as Netflix rather than traditional cable bundles.

Regulatory and market developments

Though the Open Internet order took a neutral stance on usage-based pricing, the commission thought the potential for anticompetitive abuse was strong enough to warrant intervention in the Charter merger. The company built a strong case against usage-based pricing, citing its prior experiments and explaining that it sought to market unlimited data plans as a competitive advantage. It also offered a three-year moratorium on usage-based pricing. The commission extended that commitment to seven years, citing the company’s incentive to protect its cable operations from Internet-based competition. But contemporaneous market developments suggest that perhaps the commission’s concerns were overstated and that its regulatory intervention was premature. For the past few years, Comcast — the nation’s largest cable and broadband provider — has been experimenting with usage-based broadband pricing in certain markets, covering approximately 15 percent of the company’s footprint. On April 29, the company announced that it would raise the overage threshold in those markets from 300 gigabytes to 1 terabyte per month. As the company’s press release notes, 1 terabyte is enough to stream 700 hours of HD video, play 12,000 hours of online games, and download 60,000 high-resolution photos. It is almost 17 times as much data as the average household uses in a month and would affect less than 1 percent of the company’s users. Netflix CEO Reed Hastings hailed the move on Twitter as “huge for me as a Comcast customer. Now I’ll never be able to watch enough to hit my cap.” Comcast’s move came a month after AT&T raised its monthly limits to 300 gigabytes, 600 gigabytes, or 1 terabyte, depending on the customer’s speed tier. Comcast has also capped overage charges at $200 per month, and both companies offer an unlimited data option for a small additional fee. It is fair to assume that Comcast’s move is a competitive response to AT&T’s offer — the same type of competitive pressure that we see with regard to speed tiers. In other words, market dynamics appear to be disciplining usage-based pricing and giving consumers what they need — why else would Comcast, which stands to lose the most from over-the-top competition, adopt a limit that even Reed Hastings finds generous? These competitive moves may also signal a shift away from usage-based pricing in the fixed broadband space. For 99 percent of Comcast customers, 1 terabyte is so far above their monthly usage that the offer effectively serves as an unlimited data plan. Charter, Verizon, and several other competitors have eschewed usage-based pricing. It appears that, at least for now, most fixed broadband providers have determined that it is better to price-discriminate against power users with speed tiers rather than overage charges, and that there is sufficient fixed broadband capacity to meet consumer demands without using price to manage congestion. Of course, usage-based pricing remains the standard for most wireless plans. In the short run, the market may reach an equilibrium reminiscent of telephone service at the end of the twentieth century, when many consumers received free unlimited local calls but paid tolls for (at least some) long-distance calls. But as this discussion suggests, the costs and benefits of usage-based pricing are context-dependent and subject to change when underlying drivers change. In this dynamic, competitive landscape, providers should be allowed the agility to adjust their offerings in response to these changes. Regulators should remain vigilant in investigating specific product offerings that they suspect are anticompetitive. But absent proof of actual consumer harm, the commission should continue to allow broadband providers to experiment with new and potentially more efficient ways to meet consumer needs through innovative pricing plans.

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