Will Time Warner’s Capped-Video Option Help Save Cable?

People increasingly prefer to stream video online, suggesting TWC's discount-rate data cap plan won't stem the tide

Ten years ago, the high-speed Internet business was simpler. There were fewer service areas for broadband connections, dial-up Internet was still a viable source of revenue for telecoms, and it was easy to charge flat rates for data. There were far fewer people transferring large amounts of data on a regular basis.

Today there are more than 20 million people out there streaming video through Netflix (NASDAQ:NFLX) while downloading four games to their Apple (NASDAQ:AAPL) iPads while updating Windows through Microsoft’s (NASDAQ:MSFT) website on their laptops. People are transferring a lot more data and cable Internet providers are still trying to figure out how to charge for it. Time Warner Cable (NYSE:TWC) sees profit in charging for that bandwidth a la carte.

Here come the days of the metaphorical Internet man coming to read your meter.

Here’s how the Internet provider is dipping its toe into the perilous pool of charging for usage-based Internet access. As detailed on the company’s blog, Time Warner subscribers in south Texas will be able to pay a lower fee if they accept a cap on their usage: By agreeing to a 5-gigabyte data limit, they’ll get $5 off a monthly bill. Ten years ago, a 5GB cap wouldn’t have seemed outrageous to most users. Today, as Bloomberg pointed out, users burn through 5GB of data by streaming just two HD movies.  Each gigabyte over 5 will run users $1, and they’ll be cut off at 25GB.

Bandwidth buster

Streaming video online is really a driving factor in Time Warner’s decision to try to create an incentive for subscribers to limit their net usage. The aforementioned Netflix, Amazon (NASDAQ:AMZN) Instant Video, Hulu, and many other services have already impacted traditional cable and satellite television services. Now Apple, Microsoft, and Google (NASDAQ:GOOG) are all in the process of starting their own Web-based, cable-style television services (some rumored, some not).

The specter of “cord cutting” looms large over Time Warner Cable, and the thinking is that if users pay less for limited Internet usage in addition to cable TV packages, they’ll do their watching through the old fashioned set-top box in the living room. The company’s fears are well founded: TWC lost 129,000 video subscribers during the fourth quarter alone.

A perception problem with data caps

Time Warner needs to tread very carefully, though, or it will lose more than just cable subscribers. For years now, Web users have been vocal opponents of usage-based billing and attempts to cap data. Time Warner attempted to introduce usage-based billing in 2009, but consumer outrage prompted the company to abandon its plans. The same thing happened to competitor Comcast (NASDAQ:CMCSA) when rumors swirled that it intended to start billing based on usage, but Comcast gave up those plans by December 2010. As reported by Stop the Cap, a consumer advocacy group devoted to blocking usage-based data plans and data caps, Comcast applauded Time Warner’s announcement but shied away from saying whether or not it would follow suit in the future.

Time Warner Cable’s hope is that, by positioning this new pricing plan as just one option among many, including the $34.95 unlimited data package it will still offer, the company will avoid the subscriber vitriol that forced it to give up the data-cap ghost back in 2009.

On the other hand, inciting consumer wrath might be the least of Time Warner’s worries. The company needs to get used to the fact that people will be paying for Internet-only, not cable, in the future as viewing habits change.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media, https://investorplace.com/2012/03/will-time-warner-s-capped-video-option-help-save-cable-twc/.

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