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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, Data Caps, Public Policy & Gov't 14 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.

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Tim
Tim
14 years ago

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?… Read more »

Mike
Mike
14 years ago

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?

Ian L
14 years ago

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… Read more »

Dave Hancock
Dave Hancock
14 years ago

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).

Uncle Ken
Uncle Ken
14 years ago

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.

Dave Hancock
Dave Hancock
14 years ago

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… Read more »

Uncle Ken
Uncle Ken
14 years ago
Reply to  Dave Hancock

Dave thank much for you answers. Cleared up much for me.

Austintx
14 years ago

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… Read more »

Billy Dee
Billy Dee
14 years ago

The link to the FCC filing is broken.

Phillip Dampier
Admin
14 years ago
Reply to  Billy Dee

Which link Billy? If you can quote the highlighted text, I will take a look.

jr
jr
14 years ago

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

Ian L
14 years ago

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… Read more »

Ian L
14 years ago

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… Read more »

Ron Dafoe
Ron Dafoe
14 years ago
Reply to  Ian L

The funny thing is, how many businesses get to say that under 100% margin is not good enough?

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