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Cable Companies’ Big Internet Swindle: They Charge You $40 For Broadband That Costs Them $8 To Provide

Adam Lynn November 24, 2009 Broadband Speed, Comcast/Xfinity, Internet Overcharging, Public Policy & Gov't 15 Comments

Adam Lynn

Adam Lynn

Most people agree: They pay their cable company too much money. Not only is this view widely held, it’s also backed up by hard numbers.

In September, Free Press submitted a filing with the Federal Communications Commission in response to its inquiry into whether broadband is being deployed in a “reasonable and timely fashion.” While preparing this filing, we dredged up some stunning numbers on the cable industry’s Internet windfall.

Anyone reading this blog post could probably offer dozens of reasons why the Internet rocks, so we don’t always feel as though we’re paying too much for access to such an amazing resource. That said, by the time you finish reading this, I’m willing to bet you will.

Why do I seem so sure? It’s all in the numbers. Let’s first look at cable operators’ obscene profit margins for broadband service. Some financial analysts and institutions have noted that the profit margin for cable Internet subscribers is on the order of 80 percent. In other words, your cable company charges you $40 for something that costs them $8 to supply.

Hard numbers

The research team at Free Press, of which I’m a part, set out to see if we could prove cable’s big swindle by providing some hard numbers. We looked at the latest detailed financial information from Comcast and calculated estimates on the range of costs incurred by the company (for instance, advertising, customer service, upgrades, etc). This estimate does not include the initial expense for laying cable because those one-time costs have been fully recouped.

In our research, we found that for the second quarter of 2009, Comcast had a profit margin for its cable Internet service of about 70 percent (See pp. 41-43 of our filing if you’d like a closer look). Outrageous, right? Getting a little PO’d?

The only service I know for which consumers are subjected to even more obscene overcharging is text messaging. For those of you paying attention to the debate over Internet service providers’ push to further overcharge consumers based on how much bandwidth they use, have a look at pp. 44-45 of our filing (though you may want to have handy a couple stress balls or voodoo dolls before you do). You’ll see just how marginal the increase in providers’ costs is for greater bandwidth use.

One other relevant fact here is that your local cable Internet service uses just a few “channels.” So while about a quarter of cable operators’ revenue comes from selling Internet access, they only allocate around 3 percent of their networks’ total capacity to provide that access..

No equipment upgrades, no faster Internet

With major advances in technology in recent years, U.S. cable operators now have the ability to increase our Internet speeds, but they’ve long been dragging their heels on using their immense profits to invest in their networks. You may have heard about cable companies beginning to offer downstream speeds of “up to” 50 or 100 Mbps using DOCSIS 3.0 technology. Of course, these faster speeds would only begin to catch us up to our overseas counterparts.

Most likely, though, your cable operator still hasn’t begun offering the service, but here is a peek of what you can expect if that changes. In our filing, we run the numbers on DOCSIS 3.0 to illustrate just how cheap these upgrades are in relation to your monthly service fee. In other words, we show just how inexpensive it is for cable operators to offer large swaths of the country much faster speeds.

In general, two pieces of equipment need upgrading in order to get faster Internet: the equipment in your nearby cable building, and the cable modem in your home. Your cable company charges you a monthly modem rental fee separate from your monthly cost for broadband (Comcast just increased its fee). You can also buy your own modem.

The second piece of equipment that needs upgrading for faster Internet is the cable company’s equipment (known as the CMTS). In most cases, this is simply a software upgrade (like an update of your operating system), and the cost savings associated with the upgrade appear to completely offset its cost. Making these upgrades will allow companies to offer much higher speeds, something they should already be doing, given how much we’ve all been paying them for years.

In our research, we discovered all sorts of cable operators and equipment manufacturers discussing just how cheap these upgrades are (see our filing, pp. 40-41). Japan’s largest cable operator revealed that these upgrades cost about $20 per household, while U.S. cable operator Charter puts that number at $8 to $10.

Of course, this all sounds like great news, right? Almost all of us can finally have those speeds that are offered to consumers overseas without an increase in price, given those huge profit margins and the low cost of upgrades. However, as you may have come to expect from U.S. broadband providers, wishful thinking and reality rarely align.

Sticker shock

Despite the low cost of upgrades, most operators are planning to make them in just a few places or, as they call it, “surgically.” The only company that is doing a more extensive job is Comcast. And despite being right in the midst of these upgrades, the company just reported a considerable drop in capital expenditures (read, investment) (see slide 8, here). What’s more, if you are “lucky” enough to have access to these new faster speeds, be prepared for some sticker shock. These cable companies are requiring monthly fees in excess of $100! This is in stark contrast to places that have far higher levels of competition, where companies are offering advertised download speeds of 100 Mbps for $60 per month. Now you’ve got to be riled up, no? Well, things are only going to get worse unless the FCC takes action.

In many of the less lucrative areas where phone companies are reluctant (if not outright opposed) to investing in their networks, cable providers are quickly becoming the only viable option for consumers wanting higher speeds. As it has in many previous quarters, Comcast alone added more subscribers than all the big phone companies combined in the third quarter of 2009. This means that there are more people than ever being swindled for mediocre Internet service. Unless the FCC’s national broadband plan includes strong recommendations to increase competition, this trend will only grow in the future.

If we got your blood boiling while reading this, go click on 09-137 and tell the FCC to stop the cable industry’s Internet swindle.

Adam Lynn serves as Policy Coordinator for Free Press in Washington, DC where he conducts research on issues related to media ownership, public media and the future of the Internet.

Currently there are 15 comments on this Article:

  1. Tim says:

    I have been saying this for the longest. These guys don’t want to upgrade their networks. It cuts into their profit margin. Also, if they implement caps, they can put off upgrades even longer and ride the cash cow as long as possible. They know there is little to no competition. And the competition that does exist in some areas, the prices aren’t that dramatically different. It is almost like they had a secret meeting with their competitor to set certain prices and to not go below certain prices on their services so both could benefit. Don’t think it happens? Look at LG, Sharp, and Chungwha http://www.nytimes.com/2008/11/13/business/worldbusiness/13iht-panel.4.17804853.html for a recent example that had been going on for years.

    If we had true competition, the prices would be going down not up like they are with these DOCSIS 3 upgrades.

  2. Mike says:

    The cable companies just can’t help themselves and it will eventually lead them back into being regulated by the government, they simply can’t keep going on this path with a service that’s slowly become as crucial as every other service we recieve. But with 80% margins, why would they ever want to do right right thing to invest across the board in their networks and actually bring prices down or increase speed and service levels to offer actual value?

  3. Ian L says:

    I heard that DOCSIS 3 upgrades were more along the lines of $80 per customer, including the modem. That’s cheap on the CMTS side considering the cost for a bulk-packed DOCSIS 3 modem is probably on the order of $50. But it’s not quite as low as people would make out. You also may need to “clean up” cable plant so there are enough channels to deploy DOCSIS 3. I know in Golden, CO Comcast did a fair amount of cable work when they upgraded the area to DOCSIS 2.0, then DOCSIS 3 shortly thereafter. I know this because the service went down in the early morning hours one time when Comcast upgraded to DOCSIS 2, and another time when they upgraded to DOCSIS 3. My modem signals are also different than they used to be, with no changes on my end. Plant upgrades cost money.

    Also, are you sure that you’re reading profit margin numbers correctly. To me an 80% profit margin would mean that Internet access costs $25ish for a cable company to provide and they charge $40. Maybe I’m wrong though.

    Lastly, other places have low prices and high speeds due to competition and/or government subsidy. Cable companies have no subsides and, in many places, little to no competition on speed. A town near me has Time Warner Cable and Windstrream DSL. Windstream’s speeds max out at 12 Mbps down, 768 kbps up. Time Warner Cable’s 15/2 tier is $5 more, at $50. TWC is the fastest in the area, and a better value than Windstream on the high end, at least for residential service. Windstream beats TWC on business ervice pricing, but that’s typical with DSL vss. cable; TWC can offer 2 Mbps uploads where WS is stuck at 1 Mbps.

    Nearby in San Antonio and Austin, TWC competes against AT&T U-Verse and Grande Communications. There they compete on speed and price; Grande’s $50 tier maxes out at 12/1 plus PowerBoost. TWC wins here on speed at the same price, though Grande is a little faster on their $40 tier (8 Mbps vs. 7 Mbps) though there’s no PowerBoost on Grande and there is on TWC. AT&T U-Verse has faster download speeds than either cable company, provided you’re close enough to the VRAD, however pricing is not competitive with TWC; 18/1.5 costs $65, 12/1.5 costs $55.

    A few miles away, a local phone cooperative has fiber. $70 for 20/3 with a one-year contract. This is $20 more than TWC’s 15/2 service so TWC is fine with not competing here. If they did GVTC (the cooperative in question) could probably ratchet up speeds until TWC cried Uncle; they use AT&T for bandwidth and I’m sure have their own fiber running right into one of AT&T’s network hubs. As it stands though GVTC offers better speeds than TWC and charges slightly more for them, or is cheaper for comparable speeds by a few dollars, as long as TWC doesn’t have a pricing promotion afoot. So equilibrium is maintained.

    The solution: more competition and/or the prospect of increasing customer revenue if better technologies were adopted. Since the above providers don’t see very many people paying for their higher tiers, they assume that there’s a price ceiling at that tier or close to it and don’t decide to upgrade. It takes a competitor with a solid network and decent pricing to shake them out of this.

  4. Dave Hancock says:

    Despite the profits from the Internet, cable’s main business is providing TV programs. Why on earth would they want to improve the Internet bandwidth to enable customers to move their viewing to the Internet? (They don’t, unless they can get a cut of that pie).

  5. Uncle Ken says:

    Dave: Ill up you one question. Why would a provider allow any streaming
    of anything and make you watch it on regular cable TV in the first place.
    Why would I want to watch TV on my computer in the first place. Two
    sides to every coin. I always knew streaming video would make the net
    implode at some point. To much data.

  6. Dave Hancock says:

    Ken,

    Answer to your “up”: Because the “unofficial” Net Neutrality rules that the FCC has been operating would prevent that (just ask Comcast). But the telecon/cable lobyists are trying to change that and prohibit any effective Net Neutrality rules.

    Regarding “Why would I want to watch TV on my computer in the first place.” The latest crop of TVs now have Internet connectivity – so you can watch TV from the Internet (plus there are now lots of STBs & Blu-ray players with the same connectivity). Seeing this growth of technology is EXACTLY what scares the cable side of the business.

  7. Austintx says:

    Its refreshing to see, at last, an article about capping and overcharging which doesn’t start with the phrase “As we move forward toward a fair form of consumption-based charging…”, etc.

    There IS NO fair form of consumption-based charging for bandwidth! Unlike processed water, gas, and electricity, bandwidth is not generated by backbone providers or ISPs, nor is it something consumed in the process of transmitting it. With the fiber and copper infrastructure paid for long ago, there is no expense other than maintaining the existing equipment – which hardly varies, whether the networks are idle, or fully saturated. The small difference is mostly due to the likelihood of more service incidents when there are more individual customers on a given network. So many people simply do not understand this, because they’re trained by traditional utilities to think of their bills in terms of what they really have consumed.

    The only fair form of bandwidth billing should be by provisioned_speed x billing_period. And if the ISP is not capable or willing to reliably provide the provisioned speed, customers can downgrade to a cheaper tier and thus avoid unjustly enriching their provider.

    These networks should have been upgraded long ago to reflect the needs of the customers, and the times, but instead the telcos choose to keep their profits and publicize a false “shortage” to provide them with a pretense for raising prices. It’s absolutely outrageous that they try to play the victim here. This is an EMBARGO.

    There is NO SUCH THING as a “bandwidth hog”. Customers with “unlimited bandwidth” service are provisioned with an “up to” maximum speed throughout the course of the 1-month billing period. Noone has ever actually obtained the full bandwidth possible to them. Additionally, the ISPs place too many customers on each segment to carry that much bandwidth to each of them, but that’s not the fault of the customers.

    Note that I’m not arguing that ISPs don’t get *billed* by their upstream providers for bandwidth. Usually, the bill is static, and provides for pretty much “unlimited consumption” as long as upload/download ratios remain even, and the downstream ISP doesn’t frequently use much more than their provider has reserved for them. However, these bandwidth rates are the result of a cartel, and not an open market.

    Small ISPs aren’t talking about the same kind of bandwidth expenses as top-tier backhaul providers (and major ISPs who are their own fiber/backhaul moguls). Small ISPs are collaborators with the cap-and-overbill camp because they have no choice. Top-tier backhaul providers do not suffer any sort of expense for each gigabyte they convey, although they do keep track for billing purposes. Like the small ISPs, they make money via “billable events”. Their profits are not tied to the quality NOR quantity of service they provide. Their profits are simply tied to the arbitrary terms of their contracts. If the big ISPs and telcos are raising their rates, then the little ISPs have an opportunity to “regretfully” send out emails announcing a raise in rates. “Business realities” and all that jazz.

    It’s impossible for telcos to establish why they deserve to be paid according to what their network is used for. An analogy of “consumption-based billing” for bandwidth is where a telco charges phone rates according to how many words are spoken or received by the parties on the line. They don’t care how long the call is, just how many words. And, just to be “fair”, they have a higher rate for customers who speak rapid languages such as Spanish. To do this, they have agents who monitor the lines to determine what sort of conversations are taking place. Did you conduct a profitable transaction over the phone? Fork over a percentage to the telco; we can’t have you cheating them, right?

  8. Billy Dee says:

    The link to the FCC filing is broken.

  9. jr says:

    Todd Spangler thinks we should pay 150 dollars a month for broadband that costs them 8 dollars to provide

  10. Ian L says:

    One quick note on backbone billing, as I read through the FreePress filing: backbone bandwidth is either billed at a flat rate for a set-size pipe (usually Nx100Mbps, Nx1Gbps or Nx10Gbps) or billed at 95th percentile. 95th billing roughly reflects the reality that infrastructure must be built to handle peak demand; 95th tends to be more expensive per megabit than a flat-rate but less expensive overall because a “flat pipe” is incredibly hard to fill at all times.

    That said, Comcast isn’t paying anyone for most of its traffic nowadays. It’s all peered of. What goes over Level3 is probably billed at 95th, so it’s in Comcast’s interest to keep working out peering deals to minimize this traffic, but that’s about it. I”ll bet Comcast’s entire bandwidth bill for transit (vs. peering costs, which I’m sure are pretty high) pale in comparison to what Google pays for its bandwidth…and Google has a backbone and peering of its own!

  11. Ian L says:

    Looking at Comcast’s sheet as interpreted by Free Press, I don’t see where you’re getting the $8 -> $40 number. I could see a $20 -> $60 number though. That said, FP’s 12.5% multiplier for some of Comcast’s expenses seems like guesswork to me; to be conservative let’s put them back at 25%. So we’re looking at more like 35% of revenues devoted to costs on HSI, not counting initial installation. Which is still a profit margin of nearly 200% (1 / 0.35) but not quite the dastardly picture that you’d think by the headline of this article. Even with FP’s numbers we’re seeing “only” a 230% markup.

    You also have to remember that that markup has to cover overall plant installation costs. You can talk about amortization all day, but if you want to be fair you should break out initial installation costs as a component of HSI service, since I know plenty of HSI-only Comcast subscribers that would shift the “plan cost bias” toward HSI, if you follow. So (being liberal, yes, but for the purposes of argument) if we set an installation cost for cable at $1000 (a reasonable number, considering when the plant was installed) and do a 25% on that, we get $250. Spread this over ten years and you get another few bucks per month, or another five percent added to the cost vs. revenue equation.

    Creative accounting? Maybe, but these calculations bring to light why everyone isn’t going out and building networks left and right: it’s a long-term deal. If rabid investors (the only type there are these days) wanted to do calculations based on three years instead of ten, on the above network costs you’d be looking at 250 / 36 = $7 per month in amortized infrastructure costs for internet, with the 25% x $1000 number. That’s 17% of a $42 average HSI bill right there; add in your other 35% and you get over half of revenues as costs. So the profit margin is now below 100% and investors in a new network also have to hem and haw about competition from cable and DBS. So the next-gen network never gets built. Sad, but that’s apparently how things work.

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