Say it with me now. Data caps are about profits, not recovering fixed costs

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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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