Cable companies move to tiered pricing

It was running at about half the speed they were used to, he says. Within a week, Time Warner e-mailed him an offer to "Increase your Road Runner speed!!!" by signing up for a more costly business-class service.

"They never guaranteed us a set speed, so no one could complain about the loss," Williamson, of Pinellas County, Fla., wrote in an e-mail. But Time Warner will probably lose his business, since he's now looking into getting DSL (digital subscriber line) service. "I won't be pushed into this new scheme," he said.

Williamson and hundreds of other customers have been complaining about the slower speeds and poorer service of high-speed Internet access since being transitioned from the now defunct Excite@Home service to the cable companies' networks. Before its collapse last fall, Excite@Home had 4.1 million customers and controlled about 45 percent of the U.S. home-broadband market.

Now those customers are being hit with a double whammy: The cable companies want to charge them more for slower services.

On Monday, Rogers Communications of Canada became the latest cable company involved in the Excite@Home collapse to hit customers with a tiered pricing plan. Rogers is charging $24.99 for slower speeds and $44.95 for higher speeds. Before it went to tiered pricing, Rogers charged a flat fee of $39.95.

Also this week, U.S. Sen. John McCain asked for an investigation into why cable rates continue to climb faster than the rate of inflation. The ranking Republican of the Committee on Commerce, Science and Transportation asked the General Accounting Office and the Federal Communications Commission to look into the rising rates, pointing out that cable rates have risen 36 percent--almost three times the rate of inflation--since the passage of the Telecommunications Act of 1996.

Even before rates became an issue, there was a huge uproar over a decline in service. Comcast and AT&T cut download speeds from Excite@Home's 3 megabits of data per second to 1.5mbps.

In retrospect, some analysts are questioning whether the companies lowered bandwidth rates so they could start charging more for it later.

"Excite@Home gave them a great excuse to do it; it was conveniently timed for them," said Mark Kersey, an analyst at La Jolla, Calif.-based research firm ARS.

Other cable companies have also adopted tiered pricing plans, or say they plan to implement them soon.

Cox has been testing a tiered plan in various markets since late last year, and Charter Communications says it has always charged different prices for various speeds.

AT&T, Comcast and Time Warner have all said they are considering starting tiered pricing plans, but they would not release details. AT&T and Comcast, which had 1.6 million Excite@Home customers between them, agreed in December to a $72 billion merger.

The cable companies say the plans are good because they give customers a range of options and note that the people who use the most bandwidth make up only a small fraction of their clientele. But some customers see it as a way for companies to make money from so-called bandwidth hogs, who got better service for less money under the old plans.

Analysts say the move is a little bit of both. But both cable companies and analysts agree that the move to tiered pricing is inevitable.

"This is a fair mechanism; it's more efficient for the industry," said David Joyce, an analyst at Guzman & Co. "This is the next step for cable companies, to better allocate the use of bandwidth."

Two types of pricing changes are being implemented: Some companies are offering tiered-pricing plans that allow customers who want less bandwidth to pay less money; others are implementing the more controversial "bit caps"--plans that charge customers more if they go over a certain data-transfer rate per month.

When tiers flow
Cox, which had 555,000 high-speed Excite@Home customers, has tiered pricing in Las Vegas, Texas, New England and parts of some other states. The $26.95 service offers 256 kilobits of data per second as a downstream speed and 56kbps upstream, and its original "flagship" service offers 1.5 megabits downstream and 128 kilobits upstream for $34.95.

Charter, which had 145,000 Excite@Home customers, said it has always had tiered plans, with three levels of service in all its markets: a 256-kilobit downstream speed for $24.95 to $29.95, a 512-kilobit to 768-kilobit downstream speed for $34.95 to $39.95, and a 1-megabit to 1.5-megabit service for $49.95 to $75.95. Spokesman Andy Morgan said about 10 percent of Charter's customers use the highest-speed service, while the rest are split about 50-50 between the other two tiers.

Rogers, which switched 422,000 Excite@Home customers to its own network, has the slowest speeds for its low-priced plan: 128 kilobits downstream and 64 kilobits upstream. The company wouldn't give details on the speed of its more expensive service. Rogers spokeswoman Taanta Gupta said a third level of service, for the 5 percent of its users who take up the most bandwidth, is being considered.

AT&T didn't give details about its plans, but said last December that just 1 percent of its customers use 16 percent of the network capacity.

"Obviously these people have a need for more bandwidth, and we're going to charge more for more bandwidth," said AT&T spokesman Andrew Johnson.

For unhappy customers, the choices beyond cable can be limited. From cable, the people who use the most bandwidth may be inclined to switch to DSL, particularly with cable speeds slowing and prices rising. Light bandwidth users, or price-sensitive customers, may switch to the slower dial-up. The number of high-speed users has been hit hard by the tech downturn, with former dot-com employees turning off their home accounts or businesses no longer paying for employees' at-home access.

Rogers' Gupta said the tiered pricing with its lower price for people who use less bandwidth is actually an effort to keep a certain segment of the company's customers from switching back to dial-up. "That's where most of the customers who cancel their high-speed service go," Gupta said.

Said ARS's Kersey, "This is absolutely a way for them to target the 50 million dial-up users out there." But the higher fees and slower speeds may mean an exodus from cable.

"In fact, I'm surprised more people didn't make the switch to DSL at the time" of the initial transition from Excite@Home, Kersey said.

Reversing that traffic, or getting dial-up users to upgrade to cable, is tougher.

"You're going to have to get prices down in order to get dial-up customers to migrate to broadband," said Imran Kahn, an analyst at research firm The Yankee Group. "Consumers with broadband available to them eight hours a day at work don't want to go home and go online again."

The tiered pricing also gives the cable companies a powerful tool to lure customers up a notch.

"It works like cable TV: If you give someone a free-preview weekend, they see 'The Sopranos' once, and then they want it all," said a representative for Cox, adding that Cox has offered some customers in the Las Vegas market trials of its higher 3mbps speeds over the weekends.

Bit caps may nibble away at customers
Though tiered pricing is openly discussed, few cable companies admit to considering bit caps, which would allow the companies to charge customers if they were to go over a certain data-transfer rate. The move would target some of the most popular Web tools and uses--rich media content such as transferring songs, movies or photographs.

Although a Cox spokesman said that the company doesn't have a bit cap, Kersey said the fine print on some of its contracts sets a data-transfer cap of 1.87 gigabits per month. The spokesman said the service used to have a bit cap, but he didn't know of any such limit currently in place.

Both Rogers and Time Warner are considering a bit cap, according to their representatives. A Time Warner spokesman denied a recent report that said a bit cap would definitely be in place later this year. The report started a long string of angry postings accusing the cable companies of charging for something that doesn't actually cost them any additional money.

But Cox's chief technology officer, Chris Bowick, disagreed. "It does cost more for a company to transfer more data, because as data-throughput rates increase, on an individual or an aggregate level, you need more equipment in place, bandwidth has to increase, and speed has to increase," he said.

As far as how they plan to proceed, cable companies are being cautious. AT&T said it is going through extensive customer surveys before deciding how to charge, and Cox said it's still making an effort to understand consumer behavior as it revises its pricing plans.

"The fear among cable companies is that they're going to incur the wrath of these higher-bandwidth users," Kersey said. "The first reaction from these guys is that the companies are doing this just to get money out of them, and there's an element of truth to it."

The decision by Time Warner customer Williamson to not pay for an upgrade illustrates that fear.

"Now I understand the throttling back of our speed," said Williamson, who hopes to speed up his "EverQuest" adventures. "They were setting us up. It's a game, really."