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Cable Companies on UBB: No Link Between Cost and Price

The cable company submission to the CRTC on usage based billing confirms what has been readily apparent to consumers for some time: there is no link between the prices charged by ISPs for usage pricing and the actual costs to ISPs. According to the cable companies:

In order to be effective as an economic ITMP, the usage based price component needs to be established so as to discourage use above the set limit. The price should incent use in excess of the limit only to the extent that the consumer would gain significant value from that usage. If the price is set substantially below the consumer’s value, it will have little influence on usage. It follows that the price does not necessarily reflect the cost of supplying the network capacity.

In other words, UBB is behaviour based billing, not usage based billing. Notwithstanding the claims about fairness, paying what you use, or costs to the network, overage pricing is not connected to cost or even value – it is designed to price above the real value to stop Canadians from “overusing” the Internet.  

14 Comments

  1. “In order to be effective as an economic ITMP, the usage based price component needs to be established so as to discourage use above the set limit. The price should incent use in excess of the limit only to the extent that the consumer would gain significant value from that usage. If the price is set substantially below the consumer’s value, it will have little influence on usage.”

    A flash of the blindingly obvious. If the cable companies don’t want people to consume more than X, then they need to price consumption beyond X such that the consumer isn’t willing to pay that much. It is a form of the law of supply and demand in economics. In this case it is being used to manage demand to the existing supply levels.

  2. Let me fix that for you.
    In order to be effective as a profit generating scheme, the usage based price component needs to be established so as to force people to go over the set limit. The price should incent use in excess of the limit only to the extent that the consumer would not complain to much. If the price is set substantially below the consumer’s value, it will have little influence on our bottom line. It follows that the price does not necessarily reflect the cost of supplying the network capacity.

  3. @Tracer
    Frankly, it depends on what the rationale is for them to charge for overages on UBB.

    If the rationale is to increase profit, then you are correct.

    However, if the rationale is, as described in the submission, to provide an “economic incentive” for the subscribers to not go over the cap, that is a very different thing. In this situation, it could reduce the frequency with which the company needs to perform hardware upgrades on both the last mile lines and aggregation lines. In the case of cable I include the last mile since, as I understand it, these are generally shared resources between a number of customers. This allows the company to maintain profits as they are not having to buy new equipment and pay for the labour of doing the installation.

    This is a consideration for the cable companies; consider this… They spend a load of money updating the hardware in an area but then Bell comes in and, using bundles, takes a number of the customers serviced by the hardware. The cable company needs to make enough from the remaining customers to pay for the hardware over the useful life of the equipment. In this situation, it isn’t about generating extra profits, it is about maintaining them by extending the useful life of the existing gear.

    Which is it? I don’t know. In fact I suspect that, in the case of the cable companies, it is a combination of the two.


  4. Once again, this is what happens when competition doesn’t exist. Stupid, innovation-hindering practices and rationale like this. Also Anon-K, I find it odd that you would take the cable companies at the word on this, since their practices are in many ways just as bad as Bell and their honesty is just as reknowned. For starters, how about charging for every TV connected to cable in your house?

  5. @Eric L.
    Not sure if your comment came before or after my second comment. If it came before, please look at my second. I don’t take them at their word, however I am acknowledging that the argument has some merit. The job of the company is to maximize the profits for the shareholders. To do that they need to avoid needless expenditures (to protect the existing profits) and to generate new revenues over and above the cost to generate that revenue (to increase the profits).

    The second may not be obvious as I’ve written it… please accept this example.

    I used to work for a high tech company in the telecom sector in Ottawa about 10 years ago. When I started working for them a lot of the revenue was from service contracts with telcos and custom software contracts for equipment manufacturers. Towards the end of my time there the new CEO stopped chasing the custom software contracts in favour of product revenues. Once the custom software contracts ran out he started making a big fuss over an extra $1M of revenue in a quarter… then later that week the financial statement came out and in order to generate the $1M he spent $2.1M. This went on for a few quarters before I left the company (the company went defunct about a year later, go figure). In this situation, he didn’t protect the existing revenue streams and associated profits, and spent more money than was earned chasing new streams.

    As such, I suspect that they are telling a partial truth; I can accept what they say is a factor, but I don’t believe that is the only reason. I won’t toss all of their arguments simply based on their history. However, I will take their history into consideration when evaluating the arguments presented.

  6. Wayne Borean says:

    I think there’s another factor at play
    It’s not about competition, or about profit, at least not directly. It’s about retaining CABLE TV subscribers. Consider Netflix. All you can watch for $8.00 per month, which is far cheaper than the cheapest cable TV package. So how do they compete?

    Simple. They don’t. They prevent you from switching by putting on caps, and making the cost of going over the cap prohibitive. Yes, they started doing this long before Netflix even existed, because they saw this coming, when the first TV shows popped up on P2P networks and Torrent sites. Netflix and Itunes just made it legal, and more convenient.

    So now Netflix has fired a shot back, introducing lower quality video for Canadian customers. Rogers, Bell, Telus, et al must be having migraines.

    What you need to do is make Municipal/Provincial 3G/Wifi an election issue. Talk it up with your candidates. Make sure they know that you support them tabling legislation in the Commons that would instruct the CRTC to set aside spectrum, and to change the rules to make this not only legal, but to also prevent the existing players from interfering with Government players setting up their own networks. Tell them that if they mess up the legislation that they can expect a short term in office. They’ll get the message.

    So will the existing ISPs.

    Wayne


  7. @Wayne: “It’s about retaining CABLE TV subscribers. Consider Netflix. All you can watch for $8.00 per month, which is far cheaper than the cheapest cable TV package. So how do they compete? ”

    Remember that free Over The Air TV existed long before Internet yet cable companies were still able to compete with it.. And OTA TV is completely *free*, unlike an Internet subscription + Netflix subscription… Did you ever notice that there are cable subscribers right under the CN Tower? How comes?

    Nap.

  8. tOM Trottier says:

    Demand pricing is bad public policy
    It seems very short-sighted for a supplier to discourage use of what they supply. If they price above their fixed and variable costs, then the more use, the more profit.

    It is also bad public policy. The internet is just a conduit. Pricing far above cost discourages other transactions, like buying movies or other high-bandwidth items.

    So are the cable companies being stupid? No, they are keeping movie or TV show competitors out. Their internet pricing is all about preserving their cable TV monopoly.

    tOM

  9. Chris Brand says:

    Shaw consultation
    I went to a consultation by Shaw about UBB last night.

    A couple of interesting points:
    - it is indeed just the “last mile” where they see any congestion.
    - that congestion only occurs at “peak hours” (I’m pretty sure they said 5-6pm)
    - they definitely recognise that today’s “super users” (they no longer say “bandwidth hogs”) are tomorrow’s average users
    - they seem open to all sorts of options to manage the congestion they are seeing. They sound like they really are looking for a win-win
    - of course TV takes up 90% of the bandwidth they do have available, but their systems aren’t set up to reclaim that bandwidth
    - they do recognise that you can consume the same amount of bandwidth by constantly streaming internet radio as well as by rapidly downloading some large piece of content, but that the two have very different impacts on the network
    - they clearly heard their customers’ desire for transparency and openness

    It’ll be very interesting to see what they come up with.

  10. Hannah Newman says:

    Another Shaw consultation attendee
    I also went to a Shaw UBB consultation and agree with Chris Brand re: the points Chris made. It is clear that Shaw never anticipated such a backlash (thanks to the CRTC ruling coming at the same time as Shaw started its new regime). I was told in the consultation that Shaw just adopted the “eastern Canada” model of UBB, thinking what was good for Rogers must be good for Shaw.

    I was dismayed to hear how many people are confusing data usage vs. transfer rates and what exactly the caps apply to. Even the Shaw people in attendance were muddling up these 2 things.

    I never did get a proper answer to how Shaw thinks imposing caps will change people’s behaviour, that is, not use the internet at peak time. None of the Shaw people at the consultation had any data to support this view, even after the trial Shaw ran in Edmonton.

    Although I am completely skeptical of Shaw and its intentions, I am, at least, grateful that it is “pretending’” to listen to its customers. Time will tell if it was really meaningful.

    Maybe this is just another example of how things really are different in the west.

    A former Ontario resident.

  11. John Armstrong says:

    CRTC submission written by the kind of fuck who thinks “incent” is a word

  12. Once again, Bell’s logical disconnect between charging heavy users more but not refunding light ‘email checking grandmas’ is conveniently disingenuous.

    If the network needs to be expanded for future technologies then everyone should be paying for it, add $2 to every subscriber and be done with it, but make sure it goes to infrastructure, not dividends & bonuses.

  13. Wayne Borean says:

    I think there’s another factor at play
    @Nap Remember that free Over The Air TV existed long before Internet yet cable companies were still able to compete with it.. And OTA TV is completely *free*, unlike an Internet subscription + Netflix subscription… Did you ever notice that there are cable subscribers right under the CN Tower? How comes?

    Simple Nap, Convenience and selection. If you are sitting right next to the CN Tower, your reception of a lot of stations, like the ones from Buffalo will be spotty due to geography (you are in a low zone). In Richmond Hill (which is in a high spot) we got Buffalo fairly well. Cable evened that out, and also gave you APTN, the Food Network, CNN, and lots of other options.

    And proved to the RIAA that you could compete with free. The problem is that a new, lower priced competitor has come on the market, and the current cable companies are scared. How much do they pay for the right to carry those specialty channels? How much does each lost customer cost them? When can they no longer afford Channel X, and how many more additional customers does it cost them?

    When it hits a certain point, it’s going to become a feedback loop, as the specialty channels jump ship to Netflix and it’s imitators.

    Wayne

  14. Netflix and anti-competitive measures.
    I think Wayne hits it on the head re: netflix. There are new internet business models and services popping up all the time, and since our big internet providers are selling competing services they certainly want to make sure that they have a clear advantage by putting a cap or surcharge on services that don’t come from them. Teksavvy et al. have no such duplicity, they are only interested in providing the best internet experience at the most competitive price point. It’s clear that these tied monopolies need to be ended if Canada is not going to fall behind other countries in the new digital age. We need innovation here at home.