Internet Costs Drop Companies Raise Prices

As Costs Fall, Companies Push to Raise Internet Price
Internet service providers want to end the all-you-can-eat plans and get their customers paying à la carte.

But they are having a hard time closing the buffet line.

Faced with rising consumer protest and calls from members of Congress for new regulations, Time Warner Cable backed down last week from a plan to impose new fees on heavy users of its Road Runner Internet service.

The debate over the price of Internet use is far from over. Critics say cable and phone companies are already charging far more than Internet providers in other countries. Some also wonder whether the new price plans are meant to prevent online video sites from cutting into the lucrative revenue from cable TV service.

Cable executives say the issue is not competition but cost. People who watch or download a lot of movies and TV shows use hundreds of times more Internet capacity than those who simply read e-mail and browse the Web. It is only fair, they argue, that heavy users should pay more.

“When you go to lunch with a friend, do you split the bill in half if he gets the steak and you have a salad?” Landel C. Hobbs, the chief operating officer of Time Warner Cable, asked recently in a blog post defending the company’s now abandoned plan.

Still, critics say the image of Internet providers as restaurants about to go broke serving an endless line of gluttons simply does not match the financial or technological realities of the industry.

They point out that providers’ profit margins are stable, and that investment in network equipment is generally falling.

These plans to charge for above-average Internet use “are unjustifiable for almost everywhere in the country except for rural America,” Richard F. Doherty, the research director of the Envisioneering Group, a consulting firm that studies cable technology.

Cable or telephone networks have little in common with a restaurant, the critics say, because there is no electronic equivalent of food to buy. If all Time Warner customers decided one day not to check their e-mail or download a single movie, the company’s costs would be no different than on a day when every customer was glued to the screen watching one YouTube video after another.

That is because their networks are constantly being expanded to handle ever-greater peak periods. It is the modern equivalent of how the old AT&T was said to have built the long-distance network to handle the number of calls expected on Mother’s Day.

“All of our economics are based on engineering for the peak hour,” said Tony Werner, the chief technical officer of Comcast. “Just because someone consumes more data doesn’t mean they drive more cost.”

Yet even as the providers continually upgrade their networks, the cost of the equipment needed to do so is shrinking steadily, reflecting the well-worn economics of computing.

Indeed, the equipment needed to add capacity to any household costs a fraction of one month’s Internet service bill. Comcast, the nation’s largest cable provider, has told investors that doubling the Internet capacity of a neighborhood costs an average of $6.85 a home.

The cost of providing Internet service is about to fall even more, as cable companies install new technology, called Docsis 3, that will both increase their capacity and allow them to offer much faster download speeds.

So far, however, companies in the United States have chosen to use Docsis 3 as an opportunity to offer far more expensive Internet plans. Comcast has introduced a new 50-megabit-per-second service at $139 a month, compared with its existing service that costs about $45 a month for 8 megabits per second. Time Warner just announced it will charge $99 for 50 megabits per second.

By contrast, JCom, the largest cable company in Japan, sells service as fast as 160 megabits per second for $60 a month, only $5 a month more than its slower service.

Why so cheap? JCom faces more competition from other Internet providers than companies in the United States do.

Cable systems in the United States use the same technology and have roughly the same costs. Comcast told investors that the hardware to provide 50-megabits-per-second service costs less than it had been paying for the equipment for 6 megabits per second.

Questions about the speed, availability and affordability of Internet service in the United States will be central to the study Congress has required from the Federal Communications Commission next year. And cable and phone executives are worried that the commission may call for more regulation of Internet service, which currently is free from any government price controls.

Time Warner Cable abandoned its plan to expand a test of what it called “usage-based pricing” in four cities after Senator Charles E. Schumer, Democrat of New York, announced his opposition to the idea in a meeting with Glenn A. Britt, the company’s chief executive.

Bailed Out Banks Reduced Lending

Bank Lending Keeps Dropping
Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions.

The Journal’s analysis paints a starker picture of the lending environment than the monthly snapshots released by the government and is a reminder of the severity of the credit contraction. One reason for the disparity: The Treasury crunches the data in a way that some experts say understates the lending decline.

The Obama administration is scrambling to defuse a backlash surrounding the bank bailout. Political disquiet over banks’ perceived lack of lending, as well as their spending on bonuses and perks, has provoked skepticism about the administration’s ability to revitalize the banking system. Any evidence that banks are lending less could reinforce criticism of the program, and put pressure on plans crafted by Treasury to unfreeze credit markets and support bank balance sheets. With bailout funds dwindling, one option the Treasury might pursue is to turn loans into common equity.

Speaking in Trinidad on Sunday, President Barack Obama said that he’ll require “accountability” for the U.S. banks receiving bailout money, and that he would not put taxpayer money into a “black hole.”

In a news release Wednesday unveiling the February lending numbers, the Treasury touted “the relatively steady overall lending levels.” Without the capital injections, lending would have suffered a far-steeper drop, it said. “Within this challenging environment, the February survey shows that banks extended only a slightly smaller total volume of loan originations in February than January.”

The Treasury analyzed the monthly percentage change in the amount of new loans at each of the top 21 recipients of taxpayer funds. It then calculated the median change in lending at the 21 banks. (The median is the figure that falls directly in the middle of a string of numbers.) By that measure, the Treasury said, lending dropped 2.2% in February compared with the prior month.
[Bank Lending Keeps Dropping]
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Using the same raw data, the Journal’s analysis focused on the total amount of new loans by the 21 banks, a more comprehensive measure. In February, that total fell 4.7% from January, more than double the government’s estimate of the decline in the median. The Treasury hasn’t released its own tally of the October to February decline.

A Treasury spokesman said that “no one metric can accurately capture lending activity across the nation. That’s why we provide the data set in full.” He said that “the declining levels of lending obviously reflect current economic conditions. But Treasury firmly believes that lending levels would be much lower” without the government’s capital injections.

The level of lending is an important factor in determining how fast the economy will turn around. It’s also key for the government in deciding whether to allow individual banks to repay federal funds. If the Treasury believes doing so will diminish the economy’s lending capacity, it could take a hard line on repayments.

Banks defend their lending, saying they’re eager to issue new loans, refinance existing ones and modify those in danger of default. Complicating their efforts, bank executives say, is a decline in demand among consumers and businesses.

The lending data indicate that consumer loans, especially mortgage refinancings, are accounting for an increasing portion of bank lending. In February, nearly half of lending by the 21 banks was to consumers, up from about one-quarter in October. But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. Commercial lending slumped by about 40% over that period, the data indicates.

One factor that may have depressed commercial borrowing is a partial thawing of bond markets, where some big companies raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, but still only about half the level of last May, according to Thomson Reuters.

The Treasury’s monthly snapshot of lending at the top 21 TARP recipients, the only standardized source of data on loan origination, is part of the administration’s effort to be more transparent about the myriad bailout programs.
More

* Sortable Chart: Lending by TARP Recipient Banks

According to The Journal’s analysis of the Treasury’s data, 19 financial institutions made or refinanced a total of $226.3 billion of loans in October. In February that figure had fallen to $174.2 billion.

To reach that figure, the Journal made several adjustments to Treasury’s data. It excluded American Express Co., which received TARP funds midway between October and February. It also excluded Wells Fargo & Co., which acquired Wachovia Corp. at the end of 2008 and doesn’t break out how much of its 2009 lending volumes stem from that purchase. American Express and Wells Fargo were both included in the Journal’s separate measurement of lending changes between January and February. PNC Financial Services Group Inc.’s numbers were boosted by its acquisition of National City, but the likely effect on the total is minimal.

Some changes in loan volume may reflect seasonal factors. In February, home-equity loans were a bright spot because consumers like to borrow to remodel ahead of warm weather. The number of student loans fell, which is typical during February.

Of the 19 banks, the only ones to originate more loans in February than October were BB&T Corp., a regional bank based in Winston-Salem, N.C.; Wall Street giant Morgan Stanley; and State Street Corp., a Boston-based company that provides financial services mainly to institutions and wealthy individuals.

One of the banks showing the biggest lending decline was J.P. Morgan Chase & Co. In October, the New York bank made or refinanced $61.2 billion in loans. That figure declined 35% to $39.7 billion in February.

J.P. Morgan executives defend their lending levels. In the first quarter, the bank extended about $150 billion in new credit to consumers and businesses, “despite the fact that loan demand has dropped dramatically,” a spokesman said. In March, the spokesman said, J.P. Morgan made $65.5 billion in new loans — slightly more than it made in October.

The Treasury’s conclusion that lending has dropped only modestly is partly the result of its focus on the median monthly change at the top banks, rather than the change in average or total lending. Thus, for the month of February, the Treasury based its report on the 2.2% drop in loan origination at PNC, which fell at the midpoint of the 21 banks that the Treasury surveyed.

Statisticians sometimes use median figures to avoid having data distorted by outliers on either end of the spectrum. Treasury officials have been concerned about the month-to-month volatility in the bank data and are still developing how best to present it.

Tom Fullerton, an economics professor at the University of Texas at El Paso, defended the use of the median, citing the monthly volatility in bank-lending data.

But other experts say the average would provide a more accurate measure lending. Economist David Boyum says using the median does not answer the fundamental question: “What has happened to overall lending?”

banks

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