Time Warner Cable Experiments With Usage-Based Pricing

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Market
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Trefis
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Time Warner Cable

Time Warner Cable (NYSE:TWC) is finally testing out customer response to its broadband usage-based pricing. Video consumption has been shifting to the Internet lately, driven by the success of companies such as such as Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Hulu, and this is causing increasing load on the available bandwidth. Such a change is expected to bring operational challenges as well as profit opportunities for broadband service providers. Time Warner Cable has stated that it will give a discount of $5 to its broadband subscribers who use less than 5 GB of data each month. [1] This offer is applicable only to users who subscribe to its standard broadband services (excluding Turbo, Extreme and Wideband).

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This is a relatively subtle way by Time Warner Cable to test customer response. Instead of saying that the subscribers will be over-charged for extra use, the company is saying that the users will get a discount for controlled use. That’s a positive way to introduce change. If consumers do adopt the pricing, it will definitely help broadband companies in terms of price charged per GB of data. The direct impact on average revenue per user (ARPU) is difficult to forecast as it could be a mixed bag depending on how the adoption of new pricing pans out.

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Firstly, the discount could lead to lower ARPU from those who tend to use limited data. And secondly, rather than paying extra charges, some of the heavy data users might shift to higher-priced tiers that are exempt from overage charges and offer much higher speed and, thus, a better user experience.

So which of the above two is the likely outcome?

We expect the immediate impact of usage-based pricing on ARPU will be mixed and difficult to predict due to the limited roll-out, but over time it will act as an incentive for people to upgrade to Turbo, Extreme and Wideband data services.

To give perspective, we estimate that broadband is the most valuable business for Time Warner Cable, constituting about 42% of its value. It is therefore crucial for the company to get the business model right for the future.

Our price estimate for Time Warner Cable stands at $65.67, implying close to 15% discount to the market price.

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Notes:
  1. Time Warner Cable rolls usage-based billing option in southern Texas, testing waters for broader launch, FierceCable, Feb 28, 2012 []