Usage-based Internet Charges Get Backing from FCC Chairman (CMCSA, NFLX, TWC, CVC, T, VZ, VOD)

At a meeting of cable industry executives in Boston yesterday, FCC Chairman Julius Genachowski said the he supports usage-based pricing for Internet service to “help drive efficiency in the networks.” Genachowski also said that the usage-based pricing scheme would encourage competition and be better for customers.

Whether or not that’s true is certainly arguable. What is not arguable is that usage-based pricing is better for cable operators and for wireless carriers. Comcast Corp. (NASDAQ: CMCSA) last week said that it planned to drop its 250-gigabyte data plan and introduce a new pricing scheme that would allow its customers to consume 300 gigabytes of data at a base rate and pay $10 for each 50 gigabytes customers use above that limit. The usage-based plan could squeeze streaming video providers like Netflix Inc. (NASDAQ: NFLX) that have built their entire business models on essentially unlimited bandwidth. Streaming a 2-hour movie in HD consumes about 4 gigabytes.

It’s probably only a matter of time before other cable providers like Time Warner Cable Inc. (NYSE: TWC) and Cablevision Corp. (NYSE: CVC) adopt similar plans. Wireless carriers AT&T Inc. (NYSE: T) and Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD), appear set to announce shared data plans that will allow more than one device to share usage on a single data plan. The carriers already charge more for usage above the plan limit.

Genachowski appears to believe that usage-based plans will level the playing field between the cable operators and the wireless carriers. Time Warner Cable experimented with a usage-based plan in 2009, but decided not to adopt the plan because customers hated it. Customers will still hate the plans, but without FCC backing customers no longer have any heavyweight help.

Comcast and the other cable companies will argue that the 300-gigabyte limit affects a small number of very high usage customers. They will also argue that by adopting a usage-based plan the vast majority of customers will pay less. But the data plan will also include internet access from computers, smartphones, and tablets, as well as Wi-Fi access from the local coffee shop.

Comcast has not yet announced pricing for its usage-based plan, but the odds of prices actually dropping don’t seem particularly good. Especially because the company is throwing in another 50-gigabytes of usage.

Cable companies need to prevent customers from “cutting the cord” and choosing to use their wireless data plans to drive home entertainment. An Internet TV box that really works is their biggest nightmare.

But if the cable guys and the wireless carriers can grab enough wireless spectrum and do enough cross-licensing deals and keep the content creators happy, the cost to consumers will not fall. The cable and wireless industries will appear to be competitive, but they’ll really operate an oligopoly and some small carriers and cable companies will be allowed to stick around to make things look good by providing service to low density markets. If the FCC really wants competition in the wireless business, then the agency better stick up for consumers, not cable or wireless providers.

Paul Ausick