Time Warner Cable Tries Usage-Based Billing Again as an Option

Time Warner Cable Inc. is testing consumers’ appetite for prices based on their broadband Internet usage again, making the offer an option to avoid protests that led it to abandon a similar plan three years ago.

The second-largest U.S. cable company will give southern Texas customers the choice to pay less for broadband if they consume lower levels of bandwidth, according to a company blog entry on Feb. 27. Customers will save $5 on their monthly bill if they accept a five gigabyte cap -- the equivalent of streaming two high-definition full-length movies.

Facing the prospect of some consumers watching all their video online and eventually dropping cable-TV, Time Warner Cable is looking for ways to preserve revenue without antagonizing its other broadband subscribers. The ability to increase the so-called cord cutters’ Internet bills is a primary basis for investing in cable stocks long term, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York.

“By one reading, Time Warner Cable is bending over backward to emphasize this is customer friendly, but by another reading, Time Warner Cable is simply afraid of their own shadow,” Moffett, who rates the stock “outperform,” said of Time Warner’s optional pricing program. “I suspect a little bit of both are true.”

The key feature to the roll-out is choice, Irene Esteves, Time Warner Cable’s chief financial officer, said Feb. 28 at an investor conference. In 2009, the New York-based company abandoned a test to charge customers for the amount of broadband they used, without an opt-out clause, after consumers opposed the plan.

Giving Flexibility

“It’s all about giving them flexibility,” Esteves said. “It’s a terrific opportunity to keep more customers with us, if they’re light users and they want to save some money.”

Esteves and Time Warner Cable Chief Executive Officer Glenn Britt have said consumption-based billing is inevitable for the industry. Charging consumers for the amount of broadband they use may help the industry protect revenue if companies such as Apple Inc. or Google Inc. move to offer cable-like products over the Internet.

AT&T Inc.’s U-verse and Suddenlink Communications, the seventh-largest U.S. cable carrier, have introduced caps in certain regions, charging penalty fees if consumers exceed them. The monthly limits are 150 gigabytes per month in the most restrictive plan, or 30 times more than Time Warner Cable’s cap.

Extra Fees

Time Warner Cable subscribers will be charged $1 per extra gigabyte over the cap, up to a maximum charge of $25 per month. Time Warner Cable’s unlimited plans start at $34.95 a month for 12 months.

“If you watch online video, you should not opt for this option,” said Vijay Jayant, an analyst at ISI Group in New York.

Comcast Corp., the largest U.S. cable company, has for years swatted away the idea of charging by usage, although CFO Michael Angelakis indicated on Feb. 28 that Time Warner Cable’s option plan is intriguing.

“I noticed that Time Warner Cable came out with something yesterday, which we’ll explore,” Angelakis said at an investor conference. “Don’t know exactly how that will work, but I give them credit for trying different things.”

Time Warner Cable doesn’t need to force a change in broadband pricing to all of its 10.3 million subscribers yet because the company still isn’t seeing any evidence of cord-cutting, said Esteves. The usage-based option will be “incrementally profitable” because some customers who may have shut off Time Warner Cable service may now stay with the company, Esteves said.

The company will probably extend the optional broadband pricing plan to more markets, said Alex Dudley, a spokesman. The constraints on adoption are technological rather than strategic, he said. To measure broadband usage, Time Warner Cable has developed meters that calculate household bandwidth usage.

Time Warner Cable fell 0.2 percent to $79.34 yesterday in New York. The stock has gained 9.9 percent in the past year, while the Standard & Poor’s 500 Index rose 2.9 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE