At least one major cable operator will institute so-called usage-based billing next year, predicts Craig Moffett, an analyst with Sanford C. Bernstein & Co. in New York. He said Cox Communications Inc., Charter Communications Inc. (CHTR) or Time Warner Cable may be first to charge Web-access customers for the amount of data they consume, not just transmission speed.
As more video shifts to the Web, the cable operators will inevitably align their pricing models, Moffett said in an interview. With the right usage-based pricing plan, they can embrace the transition instead of resisting it.
Rogers Communications Inc., the largest Canadian cable company, has been billing broadband customers based on consumption since 2008. U.S. providers AT&T Inc. (T) and St. Louis- based Suddenlink Communications LLC are experimenting with usage-based plans.
Cable companies see usage-based billing as a way to limit the appeal of online services like Netflix and Hulu LLC, and reduce the threat from new entrants like Amazon.com Inc. (AMZN) and Google Inc.
The incentives to focus on Web access are compelling. Cables broadband gross margins are about 95 percent, versus 60 percent for video, according to Moffett. As programming costs increase nearly 10 percent a year, video margins are crimped, he said.
Time Warner Cable is testing meters to measure broadband consumption for the purpose of tiered pricing, Chief Executive Officer Glenn Britt said in June. In April, he said usage-based billing is inevitable.
Charging by Web usage, cable companies may discourage customers from dropping traditional pay-TV service and slow the growth of Netflix, Hulu and an expanding list of online alternatives, Moffett said.
The possibility of usage-based pricing has brought protests from Los Gatos, California-based Netflix and warnings from Charlie Ergen, chairman of rival Dish Network Corp. (DISH), which operates the Blockbuster movie-rental business.
Cables best option is to find ways to profit from the online shift, said Moffett. If the companies were to lose all of their video customers, the revenue decline would be more than offset by a lower programming fees and set-top box spending, he said.
In the end, it will be the best thing that ever happened to the cable industry, Moffett said.