Last week, we learned from a leaked memo that Time Warner Cable is preparing to roll out usage-based broadband service tiers to new customers in Beaumont, TX. The company has since confirmed its plans, with monthly bandwidth caps set at 5GB, 10GB, 20GB, and 40GB. Customers who exceed their cap would be hit with an undetermined per-gigabyte charge, but Bell Canada's overage fees, which range from CAN$1.00 to CAN$7.50 per gigabyte, may give some inkling of where Time Warner's overage fees will end up. Usage caps are a short-sighted response to capacity constraints, one that's likely to hurt the company more than it will help in the long run—especially with new broadband options on the horizon.

Time Warner's plans have received a mixed reception, to say the least. Public interest groups such as Public Knowledge have praised the move, with PK president Gigi Sohn calling it a "welcome development for consumers and for the cable industry." At the other end of the spectrum are high-bandwidth users and companies who are concerned that low caps will slow down the pace of innovation on the Internet.

The idea behind usage-based billing is to charge consumers who use the most bandwidth accordingly. And telling customers that they have X GB of data to burn through each month is better than the kinds of nebulous caps some cable subscribers have bumped into. Still, I'd argue that Time Warner and any other cable company considering bandwidth caps is taking a short-sighted view of the problem.

Time Warner isn't the only US cable company to contemplate usage caps. Light Reading reports that Charter has plans to go a "usage-based solution," while Comcast director of communications Charlie Douglas told me that Comcast "continuously evaluates" a number of pricing models, including "consumption-based billing." Unsurprisingly, Verizon—whose PR people in the CES press room never hesitated to talk smack about the cable industry to me last week—has no plans to trial bandwidth caps with either its plain DSL or FiOS service. "I think this is Time Warner's response to the cable companies' problem in a shortage of bandwidth," a Verizon spokesperson recently told BusinessWeek. "We don't think that we are in a position that we need to do that."

Ever since the Federal Communications Commission started on its deregulation rampage under former Chairman Michael Powell, US Internet users have been faced with a paucity of choice when it comes to broadband. If they're lucky, those wanting broadband have two providers to choose from: one for cable and one for DSL. Some (like me, even though I live in Chicago), have only one viable option. Others are stuck with satellite broadband with its usage caps and poor latencies, or, still worse, dial-up.

Competition on the horizon

But the broadband landscape is finally primed for change, and companies like Time Warner that decide to cap bandwidth use run the risk of consigning themselves to a broadband ghetto, a place where a service's limitations makes it unattractive compared to newly available alternatives.

Those alternatives should begin arriving as soon as this spring, when Sprint officially opens its Xohm WiMAX network for business. Our experience with Xohm (admittedly in a very controlled environment) leads us to believe that it could be a legitimate contender to DSL and lower-speed cable. I saw speeds of 2.5Mbps with very acceptable latency during a demo on the Chicago River last summer, and the experience of surfing the 'Net on WiMAX was akin to using wired DSL. Although pricing and service tiers have yet to be announced, Sprint has said it will be priced competitively with wired broadband and will not have usage restrictions.

Looking a bit further ahead, there's the 700MHz spectrum that's going to be auctioned off beginning this week, and the possibility of "white space" wireless broadband service. None of that spectrum will be available until the end of analog television transmissions in February 2009, and it will be a little while after that before networks are built that can take advantage of the spectrum. There's also LTE (Long Term Evolution), a 4G wireless broadband spec current undergoing preliminary testing. Recent trials carried out by Nokia saw speeds of 173Mbps, but the technology is still at least two years from deployment.

On the wired front, cable companies are facing competition in select areas from Verizon's FiOS and AT&T's U-Verse deployments. AT&T's service is less attractive by virtue of its use of copper wiring for the connection between its network cabinets and homes, which has led the company to cap speeds at 6Mbps. FiOS, on the other hand, topped a recent Consumer Reports ISP satisfaction survey and is causing geeks to relocate to get in on its fiber-to-the-home goodness.

All of that is to say that cable and DSL won't always be the only games in town. If wireless solutions are able to deliver on their promises of high speeds with no usage limits, capped cable broadband service like Time Warner has planned is likely to be unattractive, to say the least.

Instead of developing plans designed to discourage consumers from feeding at the bandwidth trough, cable companies would be better served in the long run by making investments in new technologies like DOCSIS 3.0 and the kind of infrastructure improvements necessary to meet bandwidth demands. Those kinds of expenditures can be unpopular with shareholders unwilling to see earnings suffer in the short term so that a company can better position themselves to compete in the long term. But it's a better alternative to positioning your company as the Dollar Store of broadband providers.