In early June, AT&T (T - Free Analyst Report) announced a major change in its pricing strategy for smart phone-related data services. While existing users of Apple’s (AAPL) iPhone and other gizmos on AT&T’s oft-maligned wireless network can still download all the web stories and videos they want for a flat monthly fee, new customers must choose between two plans with usage caps akin to your typical cell-phone voice-minute service agreement. The company’s base-level plan (“DataPlus”), for example, allows customers to download some 200-megabytes of data for $15 a month. Exceed the initial cap and you’re on the hook for an additional 200 megs and another $15.
AT&T’s decision to put smart-phone users on the meter has raised the prospect that providers of wire-line data services will also end the all-you-can-eat buffet, if you will. Comcast (CMCSA) already has a “soft” cap in place for its 16.4 million high speed-data customers. If a subscriber somehow exceeds a monthly data threshold of 250 gigabytes (equal to approximately 200 standard-definition movies), the wanton downloader can probably expect a warning from the company. A second infraction may prompt Comcast to cut off the offender’s Internet service altogether.
Time Warner Cable (TWC), meanwhile, tried to implement a lower, harder cap but those plans were subsequently shelved amid a huge outcry from politicians and consumer groups in several test markets. Still, AT&T’s move may embolden the nation’s second-largest cable company (with nearly nine million residential high-speed-data customers) to take a second stab at consumption-based pricing.
Supporters argue that hyper growth in overall data consumption will increasingly strain the capacity of wire-line networks and that metered pricing is, therefore, needed to avoid Internet outages. With increased data use, proponents also contend that the “unlimited-use, flat-fee” model is economically unsustainable and a disincentive to future network investment. Too, there is the issue of fairness. An estimated 5% of Internet users account for 50% of overall data traffic. Making these heavy users more accountable seems only right. Indeed, light data users would supposedly save money under some of the consumption-based plans.
So far, however, high-speed-data service (under both the current “flat fee” and “soft cap” models) remains a major growth driver for the cable companies and has yet to show few serious strains from a quality-of-service standpoint or on a profitability basis. Indeed, high-speed-data services remain much more lucrative than the core cable business, largely due to the absence of high programming costs. What’s more, margins continue to expand, thanks, in part, to data-transmission-cost deflation.
The push toward meter pricing may be a “tell” of sorts, indicating increased concern among top cable execs about slowing industry growth. Being able to potentially squeeze more money from existing subscribers is no doubt a strong incentive for the move to “rate and cap”. More important, the transition may have the benefit of limiting competition within the video space. Facing data caps, high-speed Internet customers may be less apt to join online downloadable movie services like the ones now operated by Netflix (NFLX) and Blockbuster.
We suspect that a move to metered pricing would benefit the cable industry. Still, it will probably remain a tough sell to high-speed-data subscribers more accustomed to surfing without limits. However, if wire-line service complaints ultimately reach the volume of those associated with AT&T’s smart-phone network, expect perhaps a reassessment.