Cable Companies Need To Think Twice About This Idea

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

How many people really love their cable company? It's okay, I'll wait...hmm...we could be here for a while.

If you ask ten people what they think of their cable company, it's likely that at least nine will have something negative to say. The public has been constantly bombarded by a stream of changes and increased charges over the last few years. Apparently now cable companies are testing out an idea to price Internet usage based on a tiered pricing structure tied to the amount of data used. Considering this is one of their few growth areas left, why would the industry think this was a good idea?

Why Should Cable Internet Subscribers Care?

According to a USA Today article, cable companies are testing this idea because the amount of Internet data consumed is only going to increase going forward. According to a study by Cisco Systems, the average worldwide household uses about 26.2 GB of data per month today, but by 2016 this number could jump to 84 GB. With the proliferation of tablets, smartphones, connected video game systems, and computers streaming games and videos, increased data usage shouldn't be a surprise.

Comcast (NASDAQ: CMCSA) and other cable companies are suggesting the same theory that the wireless industry used to move to tiered pricing. AT&T and Verizon basically said that there were a small percentage of data hogs ruining the party for everyone. For most people this change hasn't been that big of a deal, as smartphones still are not the primary way that the majority of people consume their data. In fact, we have been almost trained to wait until we get to a place with Wi-fi to do things like watch videos, download apps listen to music, and more. If the cable industry has its way, that could all change.

There Are Already Limits? Says Who?

Most consumers who have high-speed Internet at home don't even think about data limits. In the past, AT&T and Time Warner Cable (NYSE: TWC) tried to cap broadband usage, but had to step back when consumers voiced their displeasure. To be fair, several companies do have data caps, but saying they are minimally enforced is almost laughable. Comcast has a soft cap of 250 GB in many markets, but most customers are unaware of this limit. CenturyLink (NYSE: CTL) has monthly caps of 150 GB to 250 GB too. Cable companies say that the vast majority of their subscribers are nowhere near these data caps. For instance, Comcast says their average user is only consuming 8 GB to 10 GB of data a month.

How Much Data Do We Really Use?

The website Clicker.com ran a test of three different video choices to try and get an idea of how much data is consumed by certain activities. Since many wireless data plans are set at 2 GB, the idea was to see how many hours of video the average person could watch before they would hit this 2 GB limit. It was determined that about 17 hours of YouTube, 13.65 hours on Netflix (NASDAQ: NFLX) and 10.24 hours on the ABC App for iPad would each equate to about 2 GB of data. If 8 GB to 10 GB of usage is average, this means a customer could watch about an hour of Netflix per day during the month and still have plenty of data left over for e-mail, web surfing and more. This assumes about 6 GB of data used by Netflix and the remaining 2 GB to 4 GB available for other activities. Using this example, it sounds like most households probably would never get close to a data cap of 150 GB or more, but that's not the point. The point is perception is everything, and customers are just waiting for a reason to cut the cord.

This Would Be A Hard Pill For Customers To Swallow:

If the cable industry went with tiered pricing, two things would likely happen. First, there would likely be an outcry from consumers who would see this change as yet another company trying to be greedy.

Second, the announcement would I'm sure set off a wave of complaints and protests from companies that would be directly affected. Netflix comes to mind first, as the company's streaming ambitions would be directly affected by limits on how much their customers can use the service. Amazon would be another loud voice of complaint, because of the potential affect not only on Amazon Prime members' inability to stream unlimited video, but also because this would affect digital sales. Google would also be vocal, because of both its YouTube business and because this would also affect sales at Google Play.

Conclusion:

Most everyone knows that cable companies are losing subscribers on the video side in droves. Comcast lost 176,000 video subscribers in its last quarter, but offset this by gaining 156,000 Internet subscribers. Time Warner Cable saw similar results with cable subscribers down, but residential Internet revenues increased 13.5% and business Internet revenues increased 26.6%.

If cable companies insist on tiered pricing for high-speed Internet, there is no doubt there will be backlash. What these companies might not expect is that this could cause one of their last growth drivers to disappear. Cable companies have been offsetting video losses with Internet subscriber gains. Tiered pricing is likely to make customers take a second look at other options. If you are an executive at Comcast or Time Warner Cable, do you want to risk runoff in both video and Internet subs?

There is also a challenge of cable companies suggesting that higher data usage means higher expenses. In its last quarterly earnings report, Comcast generated $5.3 billion in free cash flow. Time Warner Cable generated 38% more free cash flow on a year-over-year basis. Do these results sound like companies that are struggling? I don't think so.

If the cable industry takes this step, expect defections to other options. Trying to nickel and dime customers in an industry where your reputation isn't sterling is not a good plan. Cable companies need to think twice about this idea.

Interested in Additional Analysis?

If you’re an investor in retail stocks, you have to look at Amazon.com, the company intent on disrupting the entire sector. Whether you’re researching Amazon itself or one of the companies it's taking sales from, you need to understand the company and its prospects. That's why the Fool has created a new premium report on Amazon, sharing everything investors must know. The report also has you covered with a full year of updates, so click here now to get started.


MHenage owns shares of CenturyLink. The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services recommend Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure