Matching Big ISP Tactics

There are three billing practices that are routine for the large ISPs that smart competitors avoid. First is offering special low prices to attract new customers. The second is bundling, which means giving a discount to customers buying multiple products. Third is what has become known as hidden fees, where there are routine monthly fees that are not included in the online advertised price offers to customers.

A lot of smaller ISPs wonder if they should match these same tactics. The argument for copying the tactic is that it allows advertising rates that can be compared to what the big companies advertise. The main argument against matching these tactics is that the practices are deceptive, and customers have made it clear that they don’t like these tactics. Fiber overbuilders tell me that the first customers they win in a new market are those who feel deceived and mistreated by the bigger ISPs.

Big ISP online advertising has felt sleazy for many years. I wrote a recent blog where Charter in Los Angeles offers customers drastically different introductory rates depending upon neighborhood – with the highest rates being offered to the neighborhoods with the highest level of poverty. It’s common to see broadband specials advertised for less than half of the list price. A customer has to click through multiple levels of footnotes to find out the rate at the end of the special – if it is online at all. It’s not hard to think that somebody could be attracted to low rates without understanding that big increases will be coming in a year or two.

Bundling is an interesting pricing strategy. Customers are given a discount for buying multiple products but are never told which products get the discount. If a customer tries to drop one of the bundled products, they inevitably find that the dropped product had all of the discount and the customer usually ends up paying full price for the products they don’t drop. This tactic is intended to bully folks into not breaking the bundle.

Hidden fees are just plain sleazy. A customer buying an online cable product will get socked with a range of hidden fees on the first bill. While they thought they were buying a $40 cable package, the first bill could easily be $60 or $70. The most common hidden fee for broadband is usually a high rate for the cable modem, which can be over $15 per month. Even more expensive are data caps, which can significantly add to the monthly bill.

The majority of the small ISPs I work with don’t use these tactics. They understand that these tactics are what drive consumers to seek them out. Most of the small ISPs I know have the philosophy of charging the same fair rate all of the time.

But I’ve seen ISPs that start with the simple, fair rate philosophy and get sucked into offering discounts to try to win new customers. Their marketing folks become convinced that matching the big company techniques is the only way to get new customers. I’ll grant that mimicking the big guys is probably the easiest sales technique, but acting like the big ISPs is a poor long-term tactic for many reasons.

  • Promotional rates tell customers that rates are negotiable, and once an ISP goes down that path, customers will ask for breaks forever. Many consumers are used to negotiating with the big ISPs and will do so with the small ISP as well.
  • These tactics tell customers that your rates are too high and that the real rate is the discounted rate. Customers who are too timid to negotiate for lower rates feel cheated.
  • Unplanned discounts can be devasting to cash flows and meeting financial objectives. If your business plan and budgets are based upon a specific set of rates, then giving discounts lowers the average revenue per customer. Do the math and consider what happens if the average revenue for all of your customers drops by $5 or $10.
  • Matching the big ISP tactics also attracts customers who will drop an ISP for a small discount elsewhere. Every few years, they will compare you against the competition and will take the best offer. ISPs with fair rates tell me that they rarely lose a customer to special rates – and that might be because they don’t attract customers who get a thrill out of bartering.
  • Finally, special discounts complicate your dealing with customers. The ISP now has to track when special promotions are finished and notify customers that rates will increase. This likely means having to talk with most of your customers, and calls to the call center will skyrocket. It’s important to remember that most customers view the perfect ISP as one they never need to talk with.

I’m a huge fan of keeping things simple because I have seen so many ISPs that thrive with the philosophy. The danger of mimicking the big ISP tactics is that the public will see you as just another untrustworthy ISP.

 

Regulating Hidden Fees

Some of the big telcos and almost every large cable company uses what the industry calls hidden fees. These are fees that are not mentioned when advertising for a service but are put onto customer bills. The cable companies have the most egregious fees, in many cases over $20 per month for new video subscribers.

There is a class action lawsuit in California that shows why ISPs are not worried about using hidden fees. In times past, when the big companies were regulated, they might have been ordered to make a 100% refund of a fee that regulators decided was questionable. But the only realistic remedy against ISPs that misbill customers is a class action lawsuit or the rare ruling against a single ISP by the Federal Trade Commission.

There has been a class action lawsuit in California about the ‘administrative fee’ that AT&T charges to wireless customers. That fee started at $1 per month in 2013 and was raised to $1.99 in 2018. There is no basis for this fee – it’s just a portion of the cost of service split off into a separate charge. This lets AT&T advertise rates for $2 less than the actual fee charged to customers. Somebody buying a $60 advertised plan will actually pay $61.99 because of this fee.

The Verge reported earlier this summer that AT&T and the plaintiffs in a class action lawsuit reached an agreed settlement, and AT&T is refunding $14 million to California wireless subscribers who make a claim. The class action lawsuit claimed that AT&T billed the fee without notifying the public or advertising the fee. But even in agreeing to the settlement, AT&T refused to admit any wrongdoing and says it fully disclosed all fees.

This award shows why big carriers can bill hidden fees with impunity. The typical settlement for a customer that makes a claim under this lawsuit will be between $15 and $29, which is far less than the average amount of this fee collected by AT&T in California at $180 per subscriber. The worst part of the settlement is that AT&T will continue to bill the fee, so they’ll recover any settlement from customers over the next year. AT&T also knows that most eligible customers won’t make a claim. It was reported that AT&T notified customers of the possible claim by text – which many people assume is spam. The settlement only applies to California customers and not folks in the rest of the country. This is a minuscule slap on the wrist to AT&T.

Class action lawsuits are not a great tool for punishing bad behavior by carriers. Lawyers taking on these issues are taking a big chance that they will lose. Anybody filing such a suit has to spend a lot of time on discovery, made worse because carriers will typically drown plaintiffs with mountains of documents in response to data requests. The lawyers employed by large corporations are generally the best around, and many class action suits never reach completion. In this case, the class action lawyers will receive $3.5 million from the settlement – but they likely spent a lot of money over many years to get the case to a settlement.

The real solution to holding ISPs accountable is strong regulation. In an ideal world, the FCC or the California Public Utilities Commission would have ordered a full refund to customers that were harmed by misdeeds by a carrier. I didn’t do the research in writing this blog, but I assume that neither regulatory body felt it had that authority in this instance – or else they chose not to take it on. That’s certainly not surprising on the Federal side since the FCC under Ajit Pai prided itself on a shift to light-touch regulation – which is a euphemism for basically no regulation at all. When I broke into the industry in the 1970s, regulators would have made a carrier rebate every cent of an overbilling, so carriers were cautious about trying something like the administrative fee.

It is within the purview of the Federal Trade Commission to tackle this sort of issue, but the agency only has the manpower to pursue a limited number of cases against bad behavior of industries of all types. Companies like AT&T know that the risk of having an issue like this brought before the FTC is tiny. And even if it happened, the company would not likely have to return all of the improperly charged fees.

Hidden fees are an interesting issue because it’s clear that hidden fees give carriers a marketing edge when competing against companies that don’t have hidden fees. The intent of carriers is to hide the fees or at least make it hard for a prospective customer to know about the fees. The issue with hidden fees is not that a company divides a fee for service into several pieces – it’s that the full fees are not disclosed. ISPs and carriers are not the only ones using hidden fees, and President Biden said last month that the administration is going to crack down on hidden fees from the airline and travel industry.

Pushback Against Hidden Fees

Cable companies have become notorious for billing hidden fees – fees that are not clearly identified when new customers sign for service. Hidden fees have been around for a long time, but in recent years have exploded. The motivation for having hidden fees is clear – it lets a cable company advertise the base fees that don’t include the hidden fees. But it’s an odd shell game since customers find out about all of the hidden fees when they get the first bill.

There is interesting pushback against Cox Communications where multiple customers are taking Cox to arbitration and claiming they were not told about the hidden fees when they subscribed for service. I wrote a blog about arbitration recently and described how over 100,000 customers have taken Intuit to arbitration because the company advertised free tax filing, which isn’t available. Intuit tried to reach a settlement with customers, but a court ruled that they were stuck with the binding arbitration rules they had forced onto customers. Intuit offered a settlement of $40 million to customers, but if they lose the arbitration cases and have to pay court fees, it could cost the company $175 million.

Something similar is happening with Cox. The Hattis and Lukacs law firm from Belleview, Washington, has assisted 295 Cox customers to file a binding arbitration complaint against the Cox hidden fees. The law firm says it plans to bring many more thousands of suits.

The Cox customers seem to have a legitimate complaint. I looked at the Cox website the basic Cox Contour cable package is advertised as low as $53 per month. You have to dig deep into the small print to understand that charges can be a lot higher. The Cox hidden fees are not insignificant. Consider the following:

  • The broadcast fee is $19.00 per month. This is a fee where the cable companies have diverted increases in programming costs into the fee rather than raise the basic price of cable.
  • The regional sports fee can be as much as $12.50 per month – the fee varies by market depending upon the local sports networks that Cox carriers. Again, the company has pushed rate increases into this fee to hold down the advertised price of cable TV.
  • Cox also charges from $6 to $10 extra for a settop box – a fee that is not included in the advertised price.

A customer buying the $53 basic cable product could get the first bill over $90 – a startling difference to somebody who thinks they purchased a $53 product.

Cox also has what most in the industry consider hidden fees for broadband. The company charges $12 per month for a WiFi modem. The biggest surprise for broadband customers might be the Cox data caps that charge $10 per 50 GB of data for any customer exceeding the monthly data cap – with the maximum monthly data cap surcharge at $100.

It’s no wonder that customers dislike ISPs when the first transaction with them smacks of deception. New customers often sign a one or two-year contract for service and are then locked into paying the higher fees.

Cox is not unique, and all of the big cable companies and most of the big telcos also have hidden fees. The Cox fees are on the high side compared to most cable companies, but not by much.

The FCC proposes to expose the practice of hidden fees for broadband by requiring ISPs to disclose all of their charges on a broadband label. Unfortunately, the FCC label doesn’t include the cable product, which has the highest hidden fees.

It will be interesting to see if this kind of lawsuit will change ISP practices. With Cox’s 3.4 million cable customers, there are a lot of folks who could join in the binding arbitration effort to get a refund. One would think that this is going to make all big cable companies pause because they all use the same tactic of forcing customers to use binding arbitration. My prediction is this will lead big ISPs to drop the arbitration requirement rather than change the way they charge customers.

Is it Time for Honest Pricing?

Verizon is getting a lot of positive press from changing its product pricing to be more transparent. I look at the new pricing structure. and see both plusses and minuses.

The new pricing is a straightforward menu of prices as follows:

  • There are three broadband products: 100 Mbps for $40, 300 Mbps for $60 and 1 gigabit for $80. The first two products charge $15 monthly for a router – a router is included in the gigabit product price.
  • There are new, and lower-priced cable TV options. Your FiOS TV is $50 (plus $12 for a settop box). A customer chooses 5 channels and Verizon provides 120 other channels based upon that choice. More FiOS TV provides 300 channels for $70 and includes one free settop box. The Most FiOS TV is $90 and comes with 425 channels, one free settop box and some use of a DVR. Verizon is also now reselling YouTube TV for $50.
  • A basic voice line is $20 and comes with caller ID. I assume voice mail is extra. They didn’t include it in the announcement, but there must be a higher-priced product that includes unlimited long distance.
  • Customers must use autopay and paperless billing to get any of these products.

There are some definite positives from the new pricing:

  • Verizon says they have eliminated hidden fees.
  • Verizon has eliminated term contracts for these products. It’s not clear in the announcement, but customers under current contracts are likely going to have to finish those contracts before moving to the new prices.
  • This eliminates the games that Verizon and other big ISPs have played with bundling discounts. With bundle discounts, customers got some nice price breaks for buying multiple products. However, the discounts were never associated with any product, and customers found that when they tried to drop any one product that they lost the bundling discount. This new pricing is a menu and customers can pick what they want to buy, and due to monthly billing can add or subtract products later with no penalty.
  • Along those same lines, Verizon will have finally taken out all of the hassles of trying to negotiate for standalone products. Customers can pick any products from this new menu of services, including standalone broadband.

Of course, there are also negatives:

  • The settop box and router fees at $12 and $15 are outrageous considering that in both cases the box that Verizon is providing likely costs around $100. These add-ons costs are still going to be mentioned only in the small print in advertising, which still smacks of hidden fees.
  • Verizon is also including a $15 per month product they call TechSure Plus that provides for 24/7 technical support. Reading between the lines, this product means customers will have to pay Verizon $180 per year to avoid the long phone waits for customer service. The unspoken threat is that customers without this service will go to the end of the customer service queue. It’s a ballsy product statement by Verizon – pay extra if you ever want to talk to us.
  • All of this is only available where Verizon has fiber – and there is still a lot of their market that is not wired with fiber.

The new pricing is a definite challenge to the big cable companies that Verizon competes with. The $55 price for 100 Mbps broadband ($40 for the broadband and $15 for the router) sets a market bottom price and is a definite challenge to the cable companies. It’s likely that a big majority of Verizon customers will choose this product because of the low price and because most homes today are going to be happy with 100 Mbps service on fiber. This product will make the big cable companies sharpen their pencils for their base broadband product and also might make them hesitate from the annual broadband rate increases they’ve now built into their planning.

It’s going to be interesting to see how Comcast and the other big cable companies react to these new prices. They can advertise promotional pricing that can beat the Verizon rates, but those specials will likely still include hidden fees, and the rates will spring back to full price at the end of the promotional period. The big cable companies also need to be careful about offering lower prices only where there is FiOS – this will annoy the hell out of customers in other markets who will understand they are subsidizing lower rates in Verizon markets.

It’s not going to be surprising to see Verizon take away customers from the cable companies with these prices. The prices are not particularly low, but for the most part, they are honest and transparent – a refreshing change from a big ISP.

Tackling Hidden Fees

The topic of hidden fees on telecom bills was in the news recently when AT&T tripled their administrative charge on cellular bills – a change that nets then $800 million annually in new bottom line. Consumer Reports recently launched a campaign they are calling “What’s The Fee?” that is identifying and tackling hidden fees from big corporations like ISPs, airlines and banks. Their advocacy branch, Consumers Union launched a web site to identify hidden fees and started a petition drive to notify the big companies that many of their customers are unhappy with these fees. Consumers Union says they get more complaints on the issue for Comcast compared to any other corporation.

I’ve written in the past about the hidden fees that ISPs put onto their bills. I think they use these fees for a number of reasons:

  • The hidden fees disguise the true price of their products. The big cable companies widely advertise the price of cable that doesn’t include the fees without telling the public that the fees can’t be avoided. They night advertise a $69 cable package that might actually cost over $90.
  • The big cable companies have increased the rates for the hidden fees at a much faster pace than the increases in the ‘basic’ published rates for cable TV. This disguises rate increases by holding down the published rates for cable TV.
  • The hidden fees put pressure on competitors. Any competitor to the big ISPs that wants to publish true rates is at a disadvantage when customers compare their true rate to the deceptive basic rates of the cable companies that don’t include the hidden fees. My clients wrestle with this issue all of the time – should they be honest with customers and look to be more expensive or should they follow the same practice of mimicking the hidden fee structure so that their pricing is more easily compared?

What are the hidden fees? Let’s look at Comcast:

  • Broadcast TV Fees. This fee supposedly covers the cost of the retransmission fees paid to the over-the-air networks like ABC, CBS, FOX and NBC. Comcast charged $1.50 for this fee in 2015 and it’s now up to $7.75. Comcast doesn’t mention on bills that they own NBC. Comcast already charges all customers a substantial fee for basic TV that far exceed the cost of buying this programming.
  • Regional Sports Fee. This fee is now up to $6.75 per month in many markets (varies somewhat around the country). This fee supposedly compensates for the various regional sports networks. What Comcast fails to mention is that they now own the majority of regional sports networks, including a big pile they are getting due to the AT&T / Time Warner merger. This fee was $1 in 2015.
  • Settop Box and Cable Modems. While these are not hidden fees, these charges are supposedly set to recover the cost of the hardware. But in recent years Comcast has jacked up these fees significantly, to the point that I would consider a big portion of these to also be hidden fees. The charge for a cable modem is now $11. The company charges $9.95 for the first settop box and $7.75 for additional ones. Just a few years ago these fees were around $5. In both cases it’s likely that the settop box and cable modem costs Comcast $100 or less.
  • HD Fee. Comcast no longer charges separately for this, but I still see this on the bills from some of the other cable companies. This fee was established years ago when HD was a new technology, but today practically every channel is HD.

The Comcast fees have gotten so large that they could add $25 per month to the advertised price of a cable / broadband package. There is an open class-action lawsuit against Comcast that is seeking damages for customers who were charged these fees when they purchased advertised products that didn’t mention the fees.

What is most perplexing is that regulators have been quiet on the topic, even though just about everything to do with these fees is deceptive. Comcast swears that it provide full disclosure about these fees and that customers are not deceived, but one has to read some truly fine print on their web site when ordering a cable product to understand that these fees will be added to the advertised price.