20 Comments

Summary:

The cable industry has tweaked its justification for capping broadband, but a report from the Open Technology Institute is having none of it.

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There are lies, damned lies, and the arguments the cable industry makes about broadband caps. As more ISPs cap their broadband service, more questions are raised about the practice, which has put cable providers on the defensive.

In the last month, cable companies have switched from justifying their caps as a means to handle congestion — or bandwidth hogs — and are now saying it’s about recovering the billions invested in their network. In January the NCTA president (and former FCC Chairman Michael Powell) said when asked about caps as a means of controlling congestion: “That’s wrong. Our principal purpose is how to fairly monetize a high fixed cost.”

After the FCC has decided to take a half-hearted interest in caps and users and industry participants questioned the accuracy of how such caps are measured and the implemented, the cable industry is changing its justification for their policies. The problem is that its latest justification is just as false as its previous one.

The fixed costs to deliver broadband are refuted by the high profit margins broadband delivers to cable firms, the fact that upgrades to higher speeds costs relatively little and that most of the infrastructure cable providers built is already paid for.

The Open Technology Institute, a policy group that, yes, takes money from Google, has released a report attempting to quell this line of argument form the cable industry. Data points cited in the report include the ever popular fact that cablecos get 95-97 percent profit margins on their broadband services, that the billions invested in their networks in the early 2000s were to compete with new pay TV products from the telcos and the satellite broadcasters, and that adding broadband to existing cable infrastructure costs very little.

To back up that last claim check back to Cablevision’s comments to Wall Street that upgrading to DOCSIS 3.0 which provided faster upload and download speeds, were $70 per home (Cablevision doesn’t have a cap.) Other analysts pegged that number at about $100.

From the report:

Yes, cable companies and others have invested billions in building networks, but they have received more than healthy returns on those investments for several decades. According to analyst estimates listed on the NCTA website, cable companies invested over $185 billion in capital expenditures between 1996 and 2011. But these networks generated close to $1 trillion in revenue in the same time period. Moreover, both Comcast and Time Warner Cable are now spending less on capital expenses relative to revenue than in past years.

I’m not actually against the 95 percent profit margins or even caps if the market for broadband were competitive. Unfortunately, when more than thee-quarters of American homes have the choice between only two providers it’s clear that competition for the basic broadband service is limited. And when you look at how competitive the services are based on speeds there are big differences. For example, AT&T U-Verse tops out at 24 Mbps on the download side while cable tops out at 50 Mbps or even 100 Mbps.

But as someone who has documented legitimate questions about caps; their size, their spread, their rationale and their effect on innovation, I’m hoping that more and more consumers, lawmakers and regulators wake up to the fact that these caps aren’t necessary and that they pose a tax on innovation.

The NCTA has issued a statement in response to the report. I’ve included it below:

“It is regrettable that New America’s latest salvo merely repeats misleading statistics and shop-worn arguments. Their entire analysis is based on a flawed understanding of the broadband business, and the historic and ongoing investments necessary to build and operate world class networks. As the FCC and numerous economists, scholars and commenters have pointed out, tiered pricing models promote fairness by more equitably apportioning burdens between high volume and low volume users. New America’s old advocacy has gotten stale.”

This story was updated at 3 pm with a statement form the NCTA.

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  1. If cable companies claim that usage caps are for the purpose of contention management, then why do they not offer Service Level Agreements (SLA’s) for consumers?

    The reality is usage caps are about supply and demand. Specifically OTT video content from competitors and having to deliver it under the auspices of net neutrality. It is not necessarily the capital or operational cost but the lost opportunity cost. Bandwidth hungry streaming video services like Netflix directly compete with the main revenue channel of cable companies. More to the point taking cable TV subscription and cable TV ad revenues while enjoying a free ride into the homes of consumers on the backs of cable companies. Cable is playing defense with usage caps when they should be playing offense and packaging/monetizing consumer behaviors for popular OTT services.

    While the majority are enjoying those 95+ margins, cable co’s also have to deal with major network upgrades every 18~20 months to deal with bandwidth elasticity so the ROI needs to be considered over the life-cycle of the network technology.

    1. Not sure what you mean by ‘Free Ride’ ? Netflix pays for the bandwidth and so do consumers.

    2. What’s actually happening is ISPs are maxing profit off broadband to make up for their other failing services, i.e. television and telephone.

      Smart people understand that data is data and you can get almost any service off of a high speed internet connection. So in reality cable companies are charging people three times for the same thing (triple play package).

  2. You hit the nail on the head. Most of the issues we see today in major industries boils down to an utter lack of anything approaching adequate competition to make something close to a free market.

  3. In the old days, when I was just a wee young Jedi, long distance telephone rates were designed in such a way to shape usage behavior and maximize the use of network resources (and profits). Long distance calls between 7am and 9pm Mon-Sat were considered prime time and had the highest rates. Calls between 10pm and midnight were charged a lower rate, and calls from midnight to 7am were the cheapest. Families would make their personal long distance calls late in the evening and on Sundays, freeing up bandwidth during working hours for the lucrative prime time business users.

    No reason why the broadband companies (fixed and wireless) couldn’t implement similar policies for broadband data IF USAGE WERE THE ISSUE, which it isn’t. Why charge the same to transport a bit at peak time as at off-peak time? Why not put discounts in place that would smooth out network usage spikes? Because the operators don’t want users to manage their usage. The overage charges are like credit card interest – highly profitable.

  4. The claim that cablecos and telcos earn 95 percent profit margins is simply false. Looking at their financial statements, the average profit margin of America’s publicly traded broadband firms is 1.99%. The 95% figure is the marginal profit margin, meaning the money they make from each new user.

    As Craig Moffett explains it: “…the gross margin on broadband service is about 95%; in fact it is directly reported by the companies. That’s typical of any telecommunications service. After all, we’re talking about transporting electrons here, so of course the marginal cost is low. The total cost, however, is not. The cost of building infrastructure is staggering.”

    These firms borrow money to build, upgrade, and improve networks, and they pay these investments off over many, many years from user fees. So they’re correct that tiered pricing is a way to apportion infrastructure fees across all users.

    If you look at the prices US broadband firms charge across the whole range of speeds compared to the rest of the world, as ITIF did in our “Whole Picture” report http://www.itif.org/publications/whole-picture-where-americas-broadband-networks-really-stand and as the Berkman Center did in their “Next Generation Connectivity” report http://cyber.law.harvard.edu/pubrelease/broadband/ , you’ll see that US prices are lower than average on the low end of services (less than $20/month in some cases) and higher than the norm for high end services (e.g., $200/month for 105 Mbps Comcast without a bundle.)

    So the pricing strategy that most US firms have adopted encourages poor people to get online and then makes the heavy users pay more. In the context of tax policy, this scheme is called “progressive,” but to Internet speed freaks it’s a bummer.

    One alternative would be to subsidize high tiers out of the treasury as they do in Japan and Korea, but that’s simply another way to make the rich pay for access by the poor. It’s less transparent, but produces the same result.

    1. > These firms borrow money to build, upgrade, and improve networks, and they pay these investments off over many, many years from user fees. So they’re correct that tiered pricing is a way to apportion infrastructure fees across all users.

      Here’s a nice article from 2006

      http://www.niemanwatchdog.org/index.cfm?fuseaction=ask_this.view&askthisid=186

      >Through tax breaks and increased service fees, Verizon and the old Bells reaped an estimated $200 billion since the early 1990s to improve subscriber lines in the United States. And what have American consumers received? The most common DSL Service over the old copper networks tops out at 768 Kbps in most areas—a hundred times slower than routine connections in other countries. (There are faster, more expensive versions of DSL, but most have a top speed of 1-3 mbps in one direction, and it varies based on how far a person lives from a network hub.)

      Looks like we already paid for most of it, didn’t we?

      1. Average US broadband speeds are faster than all but 7 countries, most of which are very small. During the most recent quarter for which we have data, more people signed up for fiber-based broadband services (FiOS and U-verse) than cable company services based partially on fiber (HFC). America is installing more fiber than all of Europe, and more than any country in the world except China right now. America also has more LTE users than any other nation, and about half of all LTE users in the world.

        The tax breaks and subsidies for broadband suppliers are much higher the seven nations with marginally faster services that the U. S., there there aren’t any subsidies to speak of outside of rural areas.

        DSL tops out at 100 Mbps. The “fiber” systems in East Asia typically employ DSL over copper for the last thousand feet, so it’s not the bad guy.

        America has a lot of junk facts floating around about broadband, and is probably the world leader in whiny analysts.

    2. Bennett’s data comes from an industry-bought “research report” sponsored by the same K Street firm that also employs him.

      The networks Bennett says need the extra money to cover costs were largely paid off years and years ago — especially the cablecos. Broadband was an ancillary product introduced on infrastructure with capacity to spare. The ongoing march to digital on cable systems has made even more bandwidth available for cheap.

      Telephone companies won rate increases and deregulation in part because they promised to use the money to construct fiber broadband. Instead, they spent the money on high profit wireless networks instead. Now Verizon has ended its FiOS expansion and AT&T’s U-verse platform is already proving unable to keep up with cable. AT&T got what it paid for.

      Broadband has been, is, and will remain a license to print money. Somehow, the industry bought “research” ignores the actual financial reports these companies produce which largely show the same thing quarter after quarter: the costs to deliver broadband continue to drop (along with CapEx/investment) even as companies continue to raise prices because they can.

      Companies borrow money for incremental upgrades because there are tax and accounting advantages and interest rates are dirt cheap. It isn’t because they don’t have the money.

      Usage caps and consumption billing are just one more way to monetize broadband usage, not to cover the costs of providing the service, but delivering the endless demand for higher revenue Wall Street demands.

      Phillip Dampier
      Stop the Cap!
      http://stopthecap.com

      1. If you had a set of facts half as strong as your insults, you’d win the Nobel Prize in economics, Phil, but it’s the other way around.

        Contrary the naive opinion of people who don’t know how networks are put together, infrastructure costs are never fully paid off. This is a system in which squirrels eat wires, nodes have to be split to accommodate traffic, and electronics have a useful life of five years or less.

        To upgrade their networks for DOCSIS 3, the cable companies had to install a new $100,000 CMTS for each 250 – 300 homes, new fiber capacity behind the CMTS, increased volume-based transit bills, updated routers, new modems for each D3 household, and in some cases new home gateways. You don’t increase network capacity by four times for $75 a home, and the traffic-related costs are ongoing.

        The NAF estimates only count the modems, apparently on the belief that all that other stuff is free. Even if you assume that CMTS’s are going to replaced anyhow and the new ones cost no more than the old ones did, you’re stuck with the admission that the network needs constant expenditures. We’re not talking tin cans and string, you see: there’s more to a broadband network than wire, and even on the wire front, the US is installing fiber today at a rate that’s 15% faster than all of Europe.

        In addition to those costs, you have customer acquisition at $1000 a pop, as well as service and support because customers are always going to have viruses and other problems. The costs on the peering and transit end never stop mounting up, and there’s the labor cost of running a NOC and dealing with the never-ending stream of problems caused by botnets and freaks pulling DOS attacks. Simply running any kind of Internet service is expensive because there is so much hands-on manual labor involved. The protocols are poorly designed and 35 years old, after all.

        Any semi-honest and thoughtful analysis takes these things into account when trying to understand how the 95% gross margin gets pared down to 2% at the bottom line of the companies’ SEC filings.

        The NAF complaint about cable company profitability is nothing but a hasty and shabby response to the ITIF report. It’s meant to appeal to bloggers who are too lazy to read 76 pages of hard data from OECD, ITU, World Bank, and Akamai.

        Deal with it, you’re busted.

  5. Reblogged this on Today In Tech and commented:
    Not surprised…at all.

  6. Bandwidth caps by cable companies are about protecting their content and on-demand subscription services from over-IP competition.

  7. Great article! I’m looking forward to reading future analysis of what these supposed “high fixed costs” are, and what conceptual gymnastics the industry goes through to group them together.

    Some of my favorite topics are how backbone-owning ISPs pay net 0 for their bandwidth, because their peering results in credits that negate the bills. The arbitrary price these cartels attach to that bandwidth is set high enough to keep non-backbone owning ISPs from making more than a few percent profit. This is how the industry pulls both the “high cost of bandwidth” and the “low profit margin” out of their posterior.

    Another topic would be about the effect on their profit by artificially restricting supply. An adventurous reporter might chart out the actual level of infrastructure debt the industry had over time, and chart atop that the projected profits from new rate hikes and fees to see if the lines say it’s justified. Remember, the infrastructure was paid off by the taxpayers a decade ago, and cost to maintain the infrastructure is dropping steadily.

    Don’t forget recent admissions by the industry that they’d cooked the books to make high-speed internet seem cheaper that it was, and that they would begin reclassifying costs from the “cable tv” category to cook the books differently.

  8. Stacey, you could argue that the margins for pretty much any service are too high if you only include the end service costs and not all of the physical infrastructure required to deliver it.

    It might be true that the market needs more competition, but the fact that “adding broadband to existing cable infrastructure costs very little” in no way addresses that argument.

    Next from the Open Technology Institute: Air carriers have extremely high margins on air travel, since adding new flights to existing airplanes and airports costs very little.

  9. What actually are the caps?

    We don’t have cable TV, but we rely heavily on Netflix/Amazon/individual network’s streaming. This is a family of 4 watching TV probably 6 days a week. Last month I think my router reported I used 150 GB of data.

  10. Richard Bennett Thursday, February 21, 2013

    The NAF report should be titled: “Why can’t we do math?”

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