Artificial scarcity in the broadband market

Last week the Wall Street Journal wrote about the introduction of data caps by cable companies. Comcast, AT&T and many other cable broadband providers apply data caps or are experimenting with putting data caps on their connections.

Here are few quotes from the article:

Comcast technically has a 250 gigabyte monthly limit on its 23 million Internet customers but stopped enforcing it in 2012. The company is running a series of trials with a data threshold of 300 gigabytes, and, in some areas, varying thresholds and an unlimited option for an extra fee.

Until recently, all of AT&T Inc.’s broadband offerings had limits ranging from 150 gigabytes to 1,000 gigabytes depending on a home’s connection speed.

For limited plans, AT&T charges $10 for every 50 gigabytes over the limit; Comcast charges the same.

Time Warner Cable says the company’s average household usage in December was 141 gigabytes a month and has grown about 40% a year.

Comcast says its aim is to ensure the heaviest users are paying more than lighter ones, since 50% of its bandwidth is consumed by just 10% of its customers.

AT&T says the change will include offering unlimited data to people who pay an extra $30 a month or who subscribe to DirecTV, which it owns, or its U-verse television service.

This is typical cable company behavior. In many areas, these companies enjoy a monopoly — or in the best cases a oligopoly — on their services. For this reason, these companies are completely focussed on extracting as much as they possibly can from their customers. Since there is no competition to speak of they can charge whatever they want. The pricing game for them is purely about maximization of revenue and ultimately gross margins.

However, the market is changing. Consumers — and especially the younger demographics — are ‘cord cutting’. The cable companies made lots of money with offering Triple Play packages (Internet, TV and telephony) but now they are confronted with changing behavior which leads to price erosion. People who choose to get internet only packages bring in less revenue.

Because of price erosion and declining revenue from their cable subscriptions, these companies need to find a way to combat this. The data caps are introduced for exactly this reason. It’s their way of ‘easing’ their customers to get back to paying more.

Cable companies know exactly how much money they can extract from their customers. Now they find themselves in a situation where that is not set in stone anymore. They’re rethinking how they price and sell their services. They are introducing artificial scarcity in the market to stop the price erosion.

In the worst possible scenario this means we end up paying more for all services. Cable companies will get us back to Triple Play pricing over time and now we will pay companies Netflix, Hulu and HBO separately for their streaming services.

‘Net neutrality’ how lofty in its goals will not bring us anything to prevent that. Ultimately there’s a total lack of competition in the internet broadband market and as long that’s the case, we will end up paying more for less.

This quote from The Verge sums it all up:

So schemes like data caps, which have already been used extensively in the wireless industry to reap as much money as possible from customers, exist solely to frustrate those customers — which is really an incredible situation in a country that ostensibly cares so much about the virtue of competition.