It's a simple principle of economics: competition and more customer choice results in lower prices.
And so it is true of broadband services. With about 65 percent of the U.S. population now subscribing to broadband, cable operators and telephone companies are duking it out for new customers. The companies are offering cut-throat prices and new promotions to win over new subscribers.
For consumers in areas of the country where competition is heating up, the savings can be huge. For example, Verizon Communications, which has been losing DSL customers to competitors, this week announced aggressive new promotional deals for its high-speed DSL and Fios, fiber-to-the-home Internet services, as it tries to tempt new subscribers.
New Verizon DSL customers can get six months of free Internet service if they commit to a one-year contract. The company also announced a slew of deals for Fios customers, including one that offers new Fios TV subscribers who sign up for service as part of a bundle, free multiroom DVR capability for three months.
These deals sound terrific to consumers, like me, who live in markets with at least two broadband competitors. But for millions of Americans living in rural regions of the country and for people living in some urban areas, where carriers don't find it profitable to offer service, only one choice of Internet provider exists today.
And as a general rule of thumb, these consumers aren't usually offered enticing promotional deals or discounts on service. In fact, on average they pay much more for their services than people living in more competitive markets.
A task force at the Federal Communications Commission that is developing a national broadband policy highlighted this fact as a major barrier to universal broadband access during an open meeting at the commission on Wednesday.
The group also noted that broadband service providers tend to deploy service in higher income neighborhoods where more people are likely to sign up for service over low-income areas. As a result these markets generally have only one provider. What this means is that lower-income people, who have less disposable income, are often the ones forced to pay higher prices, while people who have more money pay lower prices for service.
Big savings in the Big Apple
To test this concept and to see if I could significantly put a dent in my monthly expenses, I decided to investigate my own broadband options in New York City, where I have lived and been a cable subscriber for nearly 12 years. With a little bit of leg work, I quickly discovered, I could save nearly $700 in one year by switching broadband providers.
I currently pay about $147 a month for cable TV and broadband service from Time Warner Cable. This bill does include two DVRs, two remote controls, and HBO channels and on-demand services. But it does not include taxes or a home phone service.
I live on the Upper West Side of Manhattan and even though I have seen Verizon putting fiber underneath the street on my block and even though my inside sources at the company have told me that two central offices near my neighborhood are currently being upgraded this month to provide Fios TV service, I am still not yet eligible for Fios service.
The only option I have from Verizon right now is DSL service. With the new six-month broadband-for-free promotion, Verizon is offering a triple play package that includes 3 Mbps or 7.1 Mbps DSL, DirecTV Plus DVR package, and Verizon's unlimited local and long-distance calling plan for $70 per month for the first six months.
During the second six months of this annual plan, the bundle with up-to-3 Mbps service is $99.99 per month. And for the faster 7.1 Mbps broadband service, the price is $109.99 per month after the first six months.
Factoring in the first six months of free DSL service in this total package, my average monthly cost would be $90 per month for home phone, broadband, and subscription TV services. This is an average savings of $57 per month over my current service, and a yearly savings of about $684.
I called Time Warner Cable to see if the company could beat Verizon's price. The best price offered to me for the same exact package, which includes one set-top box with DVR service, was $119 per month before taxes. The only difference in this package is that I would not have to sign a contract, but the price would be guaranteed for a year. The representative I talked with on the phone offered to give me free Showtime service for a year to sweeten the deal. Even at this price, Verizon's offer is still $29 a month cheaper than Time Warner's revised service. In total, I would still be saving $348 for the year.
But there is one catch to Verizon's deal. Verizon guarantees the price of the bundle for a year. And if customers cancel the service during that time period there is an early termination fee. But DirecTV requires users sign a two-year contract. And pricing on the TV service is not guaranteed during the second year, which means it could go up significantly in 2011.
What's more, if Fios becomes available in my building, I can upgrade my Internet and phone services at no penalty. And I would be eligible for whatever special deal Verizon might offer me. But I would have to pay a penalty to DirecTV if I terminate my TV service early to get Fios TV.
Still, with a yearly savings of almost $400 to $700 sitting on the table, I'd be a fool not to make some kind of change now. But just imagine if there was a third or even a fourth competitor in my market? The savings could be even greater.
More competitors lead to lower prices
According to a Pew Internet and American Life Project study released in June, the more competitors there are in a market, the cheaper the price of the service for consumers. In the survey, about 21 percent of high-speed Internet users said they had only one choice in broadband provider. And on average these customers spend about $44.70 a month on high-speed Internet service. About 69 percent of respondents said they had two choices in broadband providers, and on average they spent about $38.30 on Internet per month. Average prices fell yet again for the 17 percent of respondents who said they had four or more broadband provider choices. The average amount they paid for service was about $32.10 per month.
What this tells us is that more choices matter. And when broadband service providers are forced to compete, consumers get better deals.
This basic thesis was also the conclusion of a recent study (PDF) commissioned by the FCC and conducted by Harvard University's Berkman Center for Internet & Society. This study concluded that that other countries have faster and cheaper Internet access because there is more competition. The report went on to conclude that this new competition was made possible by regulatory policy that promoted open-access rules or rules that force service providers to share their infrastructure with competitors.
"The lowest prices and highest speeds are almost all offered by firms in markets where, in addition to an incumbent telephone company and cable company, there are also competitors who entered the market, and built their presence, through use of open access facilities, " the report says.
The report has gotten plenty of criticism. AT&T and the National Cable & Telecommunications Association have filed letters warning the FCC against applying the findings to its national broadband policy. The NCTA said the FCC should be careful in accepting these results when past attempts here in the U.S. to impose open access rules have failed.
Whether open access rules really create more competition is debatable. But one thing that cannot be debated is the effect that more competitors have on prices and the quality of service in the overall market.
With this in mind, I hope that the FCC's new national broadband policy, when it's finally presented to Congress in February, will do more than simply ensure everyone in the U.S. has access to at least one broadband provider. I hope the plan also includes aggressive measures to encourage competition among two or more companies in as many markets as possible.
Clearwire investors are pumping in another $1.5 billion into the venture to help pay for the company's nationwide 4G wireless network, according to The Wall Street Journal.
The article cites two unnamed sources "familiar with the matter," who said that Sprint Nextel, Comcast, Intel, Time Warner Cable, and Bright House Networks have all agreed to contribute an additional $500 million to the cause. Google, which had initially invested with these other companies, is not participating in this funding round, the article said.
Sprint and these other partners invested about $3.2 billion in Clearwire about 18 months ago when a new joint venture was developed to build the Clearwire network.
In addition to cash, Sprint also gave Clearwire access to its 2.5 GHz spectrum. Sprint, Comcast, and Time Warner have already begun reselling the Clearwire WiMax service in areas where Clearwire has already built its network.
Clearwire now offers service in several cities including Baltimore, Las Vegas, Chicago, and Philadelphia.
There is little doubt that consumers' appetite for faster wireless speeds is growing. But Clearwire is building its network using WiMax technology while its major competitors, Verizon Wireless and AT&T, have chosen to use a competing technology known as LTE or Long Term Evolution.
Verizon is already building its LTE 4G network and will have commercial deployments in 2010. AT&T plans to continue upgrading its 3G network with newer technology, but has said it eventually plans to move to LTE. Most other major wireless operators around the world have also settled on using LTE for their next generation networks.
Clearwire does have a good head start in terms of deployments. But it's unclear if that will be enough to beat competitors, such as Verizon Wireless, in the long run.
But in order for Clearwire to even have a chance in competing with Verizon and AT&T, it will need a fully built nationwide network. And that takes a lot of money; money that Clearwire is spending very quickly. As of the second quarter of 2009, Clearwire had projected a cash burn of $1.5 billion to $1.9 billion for 2009. The company said in August it had burned through $646 million of its cash. But as it spends money, the company is also losing money. For the second quarter, Clearwire announced a net loss of $73.4 million on revenue of $63.6 million.
Clearwire will report third quarter earnings on Tuesday.
The Google factor
Google's decision not to invest in the next round of investment could be an indication that the search giant is losing faith in the technology. In a recent interview with CNET News, Andy Rubin, who heads up Google's mobile operating system division, said Google is planning its mobile future around LTE and not on WiMax.
That said, a Google spokesman told Reuters that the company still supports Clearwire's efforts to build a high-speed wireless network using WiMax. But the spokesman said the best way for Google to offer support is through product and strategic cooperation rather than investing more money.
Google also recently announced a strategic partnership with Verizon Wireless. The companies worked closely to launch a new 3G wireless Android device called the Droid. And the two companies will likely work closely to develop other new products and services on Verizon's new 4G network.
By contrast, Clearwire's other investors have far too much at stake now to abandon the network and the WiMax technology.
Intel has been a big backer of WiMax from the beginning. And the company has already invested millions of dollars in developing products. Sprint has also bet big on the WiMax technology, and the company is too far down the WiMax path to completely drop it. The cable companies Comcast and Time Warner, which are reselling Clearwire's service to their cable customers, have no other choice at this point, but to stick with the WiMax plan. The last thing these companies want to do is build their own wireless network, and they desperately need a wireless broadband service to compete with their phone company rivals.
Time Warner Cable will soon be offering a 4G wireless broadband service using Clearwire's WiMax network.
CEO Glenn Britt told investors during Time Warner Cable's second-quarter earnings call on Wednesday that the company will begin reselling wireless service through Clearwire starting this fall in Dallas and Charlotte, N.C.
Clearwire uses a technology called WiMax, which offers faster speeds than current 3G wireless technologies, but offers wider coverage than other high-speed wireless technologies such as Wi-Fi. Clearwire claims that it can provide up to 4 megabits per second for downloads and 500 kilobits per second for uploading, which is more than double what consumers can expect using a 3G wireless connection.
Britt didn't disclose product offerings or pricing, but he said that investors will hear more details about the new service later. But it's likely that Time Warner will bundle the 4G wireless service into its cable modem broadband services.
"We see wireless as complementing wireline," he said.
Time Warner Cable invested in Clearwire in 2008 joining fellow cable company Comcast, as well as tech giants, Google and Intel. The companies contributed a total of $3.2 billion to the new company. Sprint Nextel also invested in the new Clearwire and is allowing it to use its 2.5 GHz wireless spectrum to build the nationwide network.
Clearwire's service is up and running in a few cities, including Atlanta, Baltimore, Las Vegas, and Portland, Ore. And the company has plans to roll it out in more markets this year and into 2010.
Comcast has already begun reselling the Clearwire WiMax service, which it calls High-Speed 2go, in Portland and Atlanta. Comcast is offering the service at the promotional price of $49.99 per month for a year.
Sprint Nextel is also reselling the Clearwire WiMax service in certain markets, such as Baltimore. The Sprint service offers laptop users the option of using the 4G WiMax network where it's available and Sprint's 3G wireless network where it's not available.
Clearwire also sells service in every market where it's launched. The service called Clear starts at $20 per month for in-home wireless broadband. And its mobile Internet plans start at $40 per month. Customers can also get a day pass for $10. The company also allows customers to add voice service to their in-home package for $25 per month.
Time Warner Cable has put the brakes on a trial that was testing its new "consumption-based billing" system for its broadband service, the company said Thursday.
Chief Executive Glenn Britt said in a statement that there has been "a great deal of misunderstanding" by consumers and lawmakers who have criticized the plan.
Britt said that the company still believes that consumption-based billing may be the best way to handle rising network costs among its heaviest bandwidth users. But he conceded the company will not proceed with tests until it consults further with customers and interested parties.
Sen. Chuck Schumer (D-N.Y.) and Rep. Eric Massa (D-N.Y.) announced Time Warner's change of heart during a rally in Rochester, N.Y., the Rochester Democrat and Chronicle reported earlier on Thursday.
Massa, who represents Rochester, was an early opponent of the plan and has promised to introduce legislation that he has said would protect consumers against companies introducing tiered services, such Time Warner's proposed billing plan.
Massa is still not giving up on his legislation that would ban metered billing.
Time Warner had quietly been testing its metered billing service in Beaumont, Texas, since last year. But last week, the nation's second largest cable provider said that it was planning to expand the test of the bandwidth caps to other cities, including Austin, San Antonio, Rochester, N.Y., and Greensboro, N.C.
The way the plan worked is that Time Warner would cap data downloads and uploads at 10 gigabytes to 60 gigabytes a month with prices ranging from $25 to $65 per month, depending on the region. The company also planned to introduce a new plan that would have offered 100GB of downloads for $75 a month. Additional downloads would be charged $1 a GB with a cap of $75 on the extra fee, essentially making an unlimited plan cost $150 per month.
Time Warner said that it was testing metered billing because some of its subscribers were using an inordinate amount of bandwidth. And as more video and peer-to-peer services come online, the company said that it needed a new business model to handle the rising cost of maintaining and managing its network.
But consumer advocates have argued that Time Warner is simply trying to protect its cable TV business by making it very expensive for users to watch competing video services online. Public Knowledge, one of the more vocal opponents to Time Warner's metering plans, was pleased with the company's decision to table the tests.
"The company properly listened to its subscribers, the public, and policymakers, all of whom were highly critical of the proposition in the first place," Gigi Sohn, president and co-founder of Public Knowledge, said in a statement. "It quickly became clear the plan had nothing to do with managing Time Warner's network, and everything to do with increasing profits at the expense of captive customers in an uncompetitive broadband market."
Time Warner Cable's plans to cap broadband speeds and charge $150 a month for unlimited broadband downloads has caused quite a stir among consumers and politicians.
U.S. Rep. Eric Massa of New York is promising to introduce in Congress that will curb the use of tiered broadband services in areas where there is only one service provider. And angry consumers have taken to the blogosphere to express their outrage at a new plan that would theoretically charge them more on a per Gigabyte basis for downloads than they'd et from other services.
Last week, Time Warner Cable, the nation's second largest cable operator, said that it plans to expand its test of using bandwidth caps for its broadband data service. Last year, the company began testing broadband services in Beaumont, Texas that allowed 5 to 40 gigabytes of uploading and downloading a month. Now the company is planning to expand the test to other cities this year including Austin, San Antonio, Rochester, NY and Greensboro, NC. The company also has plans to increase the caps to between 10 GB to 60 GB a month with prices ranging from $25 to $65 per month, depending on the region.
Time Warner also said that it would introduce a new plan that offers 100 GB of downloads for $75 a month. Additional downloads would be charged $1 a GB with a cap of $75 on the extra fee, essentially making an unlimited plan cost $150 per month.
By comparison, Comcast's service, which costs $43 a month, has a bandwidth cap of about 250 GB per month. And Verizon Communications' cheapest broadband package with its fiber-to-the home Fios service costs $45 a month and has no download limit.
Time Warner's plans ignited a firestorm of protest among consumers and consumer advocates, who believe the company is unfairly hiking prices on broadband services for some subscribers. And Congressman Massa has called the plan, "nothing more than a large corporation making a move to force customers into paying more money."
Time Warner's Chief Operating Officer Landel Hobbs, tried to explain the company's position in a letter posted on April 9. Hobbs said that the reaction to reports of the new tiered offering are overblown. But he said the company has heard the "passionate feedback" and is taking steps to address the concerns. And he outlined some minor changes.
For example, the company will also offer a new $15-a-month plan that is suitable for light e-mailers. The service offers download speeds of 768 kilobits per second and a 1 gigabyte monthly cap. And it will offer a new 50Mbps download and 5Mbps upload service over its new DOCSIS 3.0 infrastructure in some trial markets for $99 a month.
Hobbs explained that bandwidth usage is growing about 40 percent a year on Time Warner's network and the company has to come up with a new business model to handle the added cost of handling so much traffic.
"As a facilities based provider, we've built a network that must be maintained and upgraded," he said. "We have increasing variable costs and we have to continue to invest in the network itself. "
Indeed, managing bandwidth has become a big deal for broadband providers over the last couple of years. Comcast got into hot water two years ago when it was caught slowing down BitTorrent traffic on its network. The Federal Communications Commission said that Comcast's actions were illegal, and the cable company has reformed its practices.
Time Warner believes the metered approach will help it better manage traffic on its network, and control bandwidth bogs who use an inordinate amount of bandwidth on the network.
But the truth is that today Time Warner's customers aren't using that much bandwidth anyway, according to an article published a couple of weeks ago by Business Week. Of the 10,000 subscribers in the Beaumont, Texas trial, only about 14 percent exceeded the cap and had to pay the additional fees, which totaled on average about $19. The company also learned that the top 25 percent of users consumed 100 times more data than the bottom 25 percent of users, which suggests a pretty big gap in how consumers are using broadband.
For now, the trials appear to be angering consumers, who likely aren't breaking these caps anyway. But the very idea that the company could meter its traffic may be enough to cause some subscribers to cancel their service and sign up with a competitor that offers no caps. And for those customers who don't have a choice of another provider, Time Warner's trials may spur a more aggressive eye from lawmakers, who would want to curb the use of these caps.
AT&T is looking to put a kibosh on the proposed merger of Sprint Nextel's nationwide WiMax assets with those of Clearwire.
On Thursday, the nation's largest phone company filed a petition with the Federal Communications Commission, asking it to deny approval of the merger.
Sprint Nextel announced in May that it was teaming up with Clearwire to form a new joint venture that would combine both companies' WiMax assets to create a nationwide broadband wireless network. The deal, which has been valued at about $14.5 billion, is being backed by cable operators Comcast and Time Warner, as well as Intel and Google.
The FCC, which is currently reviewing the merger, must give its blessing for the deal to be completed.
In its filing, AT&T argues that the proposed merger, "openly state[s] that they (Sprint Nextel and Clearwire) intend to compete with other national wireless providers--including AT&T--yet they fail to make the required showings necessary for the commission's review."
It's funny that AT&T is putting up any kind of stink to the merger, considering that the company exists in its current state only because of several massive mergers in the past few years, including the multibillion dollar merger between AT&T and BellSouth, which put full ownership of the wireless operator under one owner, and the purchase of wireless assets from rural operator Dobson Communications last year.
But it's clear that AT&T is nervous about the new Clearwire's plans. AT&T is currently still deploying 3G technology throughout its territory and is busy upgrading its existing network. But it is years away from taking the next big leap toward building a 4G network, which will use a competing technology known as Long Term Evolution, or LTE. By contrast, WiMax technology is available and working today. And regardless of the outcome of the merger, Sprint expects to launch its first WiMax deployments in September. What's more, devices supporting WiMax have already been developed and will hit the market by year's end.
While analysts still aren't sure whether WiMax will survive in the long run as a mobile technology here in the U.S., it appears from AT&T's latest moves that it's at least a little bit scared that the new Clearwire network, with backing from heavyweights like Intel and Google, could get enough traction to threaten its current and future wireless business.
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