Tiered broadband – an upcoming war between content providers, bandwidth providers, and reshaping consumer habits

Briefly, what is tiered broadband? Well, it’s about tiering the pricing of broadband access according to one’s usage habits. So simple. Now, the broadband ISPs or telco providers will meter your Internet usage the same way the utilities company meter your water and electricity. So, in a nutshell, the cable and DSL providers found out that a small percentage – nearly 5% (that what they publish), hog the bandwidth with heavy downloads of movies and shows, games, and other P2P services. So, there should be tiered pricing for byte usage so that it could deter the heavy users and provide a level playing field for the average consumers! Does it sound to you like an ominous bell ringing somewhere very close to your dataport to your computer?

First, let me put forth an analogous argument. We all drive cars and we all fill our tanks with gasoline. Do the gasoline companies like our beloved Chevrons and Texacos restrict customers with gas-guzzling SUVs to tiered gas access at the pump? How come we all walk to the station and can fill our pump to the limits without any kind of caps? And besides, there is no balance check on the pollution that our big vehicles spew out into the environment either. So how come the gasoline industry run a model that works on a equal pricing point for everyone regardless their usage habits? When infrastructure (here gas) dries up, everyone ends up footing the bill.

Let’s just run a small math on what our average daily Internet usage looks like. Assumptions – growing number of users now watch video and TV shows on the Internet through channels like HULU and VEOH. Same users sign up often for QUAD-play services offered by the same cable companies/telcos that include VOIP and other @HOME calling plans (unlimited usage).

1. Average NBC/ABC 1 hour shows on the Internet – 500MB
2. Average Netflix movie downloads regular/HD – 500MB/3-5GB
3. Average application downloads for productivity – 100 MB
4. HULU/VEOH shows over the Interent – 500MB for 1 hour
5. Apple iTune downloads can range around – 100MB – 1GB (for video downloads)

So, if you start metering users for practices that are soon going to demolish the 80-20 rule of 20% heavy users accessing 80% of bandwidth and rapidly percolates through a more common habit across the metropolitan lifestyle, the concept of tiered bandwidth access will just land us back to the early days of AOL online where Internet usage through dial up was billed hourly. We have to realize on thing. Today, broadband is almost a commodity because there are lots of players who have found ways to use the Internet to generate revenue. Now, that all depended on a huge volume of consumers using it in the first place. And what triggered that? When AOL in 1996 first launched the unlimited access plans. That was the tipping point. As users got a taste of the free infrastructure, usage boomed and reached an astronomical magnitude.

I personally do not believe that the operators are trying to stop the heavy users because they want to make a level playing field. Just listen to this – Mr. Leddy of Time Warner said that the media companies’ fears were overblown. If the company were to try to stop Web video, “we would not succeed,” he said. “We know how much capacity they’re going to need in the future, and we know what it’s going to cost. And today’s business model doesn’t pay for it very well.” [read here]….. so you can see that it’s all about the monetization model! 

The other party of interest are the content providers like big labels and other independent content production houses across the world. These content producers are eyeing heavy content usage as their new source of revenue when TV and radio usage are running flat with stagnant ARPU. How would they consider tiered bandwidth as a sweet proposition? Yes, you are absolutely right. They hate it from their guts. Now the interesting part is, these content producers are trying to find a revenue generation model for themselves as well. And they are trying to partner with marketing brands to pay for their production. Intreresting development will take place if they have to incentivize their offering by paying for the bandwidth needed to download their content. Hmmm.. sounds very enticing!! Obviously, the Time Warners realized that as users are more and more accessing heavy content, they can’t make those millions of dollars from total monopoly on their laid cable lines as bandwidth access tops their ARPU generation model. They want to eat a piece of the pie too. More with time, these network providers are figuring that it might be their only way to not being mutated to just a pipe provider with a flat fee model. How will they survive?

So, for now, the war is impending. The key to an amicable solution with the consumers enjoying a great Internet experience like before will be a monetization model (or several) that generates cash through some relationship leverage and revenue share. Let’s keep on working on that -;)

You may also check Marc Cuban’s blog – interesting discussion.