Today a gem from the Ellis archives. I argued in the post below that applying bit caps to broadband service and demonizing heavy users was short-sighted, because some day we’ll all be bandwidth hogs. And that limiting consumption was a dumb business model for any ISP trying to upsell customers to broadband from dialup. Like, why would you want to make your new sub afraid to use her service? At the time, before the scary video exaflood that will destroy the Internet, the big ISPs were just trying to find more ways to feed the ARPU monster. Business as usual. They tried out capping, then withdrew for a few years because they couldn’t find a palatable way to rationalize it. Then along came traffic congestion and the CRTC helped turn traffic management into a revenue stream. Only in Canada. Did I mention I wrote this piece in June 2002?
How to Make Friends with a Bandwidth Hog
Broadbanders have been living in a fool’s paradise. We’ve been coasting on a nice value proposition: unlimited Internet access through a persistent connection for around 40 bucks a month. So nice we roared ahead of the U.S. by 2-to-1 on per capita penetration, making Canada home of the Broadband Internet.
But not for long. Just as broadband was giving Internet players a first shot at sustainable transactional revenue, the warring cable and telco camps discovered they had a common enemy: their own customers. Trial balloons in the press blamed “bandwidth hogs” for eating up margins and spoiling the fun for everybody else. Apparently the lure of “unlimited” access was a pig in a high-speed poke.
The ISPs, as everyone now knows, are going to protect themselves and their more reasonable customers by raising prices, a move intended to “curb” those bandwidth hogs. If this meant a few dollars a month more for unmetered service, there’d be no story. Even the introduction of different service tiers, including a new lite service for newbies, isn’t that big a deal, since tiering is inevitable as a technology matures. Think cable TV, which tells us a lot about what the Web will look like once the transactional revenue model takes hold.
No, what’s making headlines is bit-capping, which is turning out to be as popular as knee-capping. It’s also a huge mistake. Consumer advocates and other critics point out the ISPs are breaking their promise on unlimited access. And the fact the major residential broadband providers come exclusively from the incumbent telco-cable duopoly makes the increases even harder to swallow.
Worse than it sounds
But it gets worse. Tiering and bit-capping aren’t part of a classic battle between subscribers and ISPs. This is ISPs working hard against their own interests – killing the golden goose that will make the Internet the paying transactional proposition it’s destined to become.
ISPs are getting kicked in the head from two directions at once. Because they’ve been selling unlimited access at a fixed retail price, they have customers who’ve taken them at their word and allegedly eaten up their margins. On the other side, the ISPs haven’t been able to make up these bandwidth losses by selling their customers on paid content and services. So while they wait for online content to become a business, the ISPs will try to contain costs by “curbing” some bandwidth hogs and realizing incremental revenues from others, those who exceed their caps, knowingly or not.
One ISP spokesperson told the press that as much as 70% of their network capacity gets consumed by a mere 10% of their customers. Other percentages have been bandied about, intended to reinforce the point that heavy users constitute a minority and should have to pay their own way.
Whatever the issues in making the hogs pay, let’s be clear that what they’re doing is simply following the good old 80-20 rule. This rule applies in a very consistent way to other media, not the least of them TV. While the “average Canadian” watches 22 or 23 hours of TV a week, the fact is that 80% of all the hours of TV tuning are accounted for by the top quintile of viewers – that would be the 20% of viewers slumped potato-like on their couches all night long. The broadband Internet hasn’t suddenly changed human nature. Bandwidth hogs come from a long line of distinguished 20-percenters, give or take a few percentage points. And, as we note below, that makes them the customers to watch.
In trying to match tiers to customer segments, the ISPs are aiming for more than just cost containment. They also want to hook up more subscribers by lowering the price point for the entry-level service, based on the assumption that broadband would blossom if only it could be made cheaper. But price is just a red herring for the many people who simply don’t get the utility or value proposition behind broadband. This is a very common problem in the marketing of new technologies: most consumers don’t see what all the fuss is about when you’re trying to sell them another digital black box.
Even if lower entry-level prices do bring in some new customers (and the publicity alone ensures that), the ISPs are left with the dilemma of the value proposition. What is it? And in particular, what is it for a new onliner whose idea of “faster” is 30-frame a second NTSC video? Bandwidth is definitely a problem in the current tiering strategy, but it isn’t the real story. It’s only a symptom of a deeper malaise, which stems from what subscribers are not doing with their bandwidth.
Where’s the money?
The key to the bandwidth problem lies in the misguided idea that “content is king.” Everybody loves to love content – by which Web operators usually mean ad-supported, professionally produced content. But unlike conventional media such as film and TV, the Internet is both interactive and intensely personal. And true to form, the results of our fall 2001 NMP survey showed conclusively that subscribers don’t get broadband for the content. Our respondents indicated that speed itself, along with the always-on feature, far outweighs any form of third-party content as a signup incentive, be it software, video, music, games – or, most significantly, the content provided by the ISP. Broadbanders want broadband so they can keep on doing all the things they were already doing, only faster.
These results don’t mean broadbanders aren’t interested in third-party and rich-media content. What they do suggest, however, is that the large integrated ISPs greatly overestimated the short-term value of such content to their subscribers – especially ad-supported content. Paid content, sold in tiers, will eventually be the core business of the Internet, but only after the TV hucksters and copyright lawyers get out of the way.
Meanwhile, everybody’s now stuck with yet another Internet transition, this one from bandwidth as a scarce commodity to bandwidth as the free razor that will sell the blades. This leaves the major ISPs facing a risky temptation: to charge all the market will bear for bandwidth hoggery. The big ISPs would love to get rid of subscribers that use a disproportional amount of bandwidth because they’d save money – in the short run. The risk, however, is this will be a Pyrrhic victory because they’ll end up killing off their best potential customers. The future of the residential Internet business has nothing to do with selling bandwidth and everything to do with selling content and services. It’s like dialtone or bank accounts. You have to provide them to be in the game, but the real money is in the value-added services bought and paid for by the customers who are heavy users of long distance, calling features, loans, mortgages and so on.
The same principle applies to the Internet business, though this may be hard to see at a time when the transactional model is still in its infancy. On the other hand, it’s not hard to see that the best potential customers for paid content like games, movies and music are the folks who are downloading them in droves today – those pesky bandwidth hogs. It certainly isn’t the dialup users who check for email a couple of times a week and otherwise stay away from the computer to watch TV.
What this group of heavy users needs is more bandwidth, lots more. What they don’t need is bandwidth rationing – or a message from their ISP that by wanting to do a lot online they can expect to be treated like “hogs.” Our onliner survey data also shows convincingly that, compared to dialup users, broadbanders do more of everything online, in addition to having a well developed taste for advanced technologies like home area networks, HANs.
Letting the pig out of the poke
High-speed tiering is an idea whose time has come. In its current incarnation, however, it looks like the right idea is being put into practice for all the wrong reasons. Instead of opening up the residential bottleneck, the incumbent ISPs are squeezing it even harder. Instead of making it easier for newbies to see the benefits of broadband, they’re rationing lite bandwidth to the point where many will just shrug it off. Instead of encouraging the online-friendly home by supporting technologies like HANs, they’re busy focusing on short-term cost containment.
We therefore find ourselves in the absurd situation of having to cope with bandwidth scarcity in the last mile and an alleged bandwidth glut in network backbones. Bandwidth scarcity will have a stifling effect on the growth of the transactional Internet, especially if coupled with disincentives like bandwidth caps. The problem with caps or quotas is only partly a matter of actual dollars going out the door. Some subscribers will balk at the amounts being charged for data transfers beyond their limit; some will go ahead and pay what they have to. But it’s the psychological effect that will do the real harm – the feeling you can’t just relax and enjoy the connection you’ve paid for, since you’re not sure what the next ISP bill will bring, relief or sticker shock.
Assurances from the ISPs notwithstanding, many subscribers are going to feel unconvinced that their usage is being metered and billed accurately. Caps will turn back the clock to the dialup days when metering made being online a much more constrained activity, certainly not one that encouraged people to try out all the functionality of browsers and other software, or experiment with new services. ISPs need to eliminate bandwidth caps, create more flexible tiers and make more bandwidth available on every tier, especially the lite tiers so new subscribers can see some evidence of a “fast” connection. Then ISPs can get down to the challenge of planning for the long-term revenue model: low-cost or free bandwidth, as the platform for the transactional Internet and paid content and services.
D.E., June 2002