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Cable Industry That Makes 90%+ Margin on Broadband Now Says Caps Are About ‘Fairness’

They are in the money.

Follow the money to the real root of this argument.

After conclusive evidence that cable broadband upgrades have eliminated any congestion problems, the cable industry has finally admitted usage caps are not about “congestion relief,” but are, in their view, “about fairness.”

Reports of the Internet data exaflood, tsunami, brownouts, or even blackouts are highly exaggerated and always have been. But we knew that from the first day Stop the Cap! got started.

In the summer of 2008, Frontier Communications attempted to define a top limit on their residential DSL accounts at a staggeringly small 5GB per month. Time Warner Cable initially thought 40-60GB a month was more than fair when it tried to ram its own Internet Overcharging scheme down the throats of customers in New York, North Carolina, and Texas in April 2009. Comcast said using more than 250GB a month could create congestion problems on their network and be unfair to other customers. To this day, AT&T, one of the nation’s largest telecommunications companies, claims that anything more than 150GB on their DSL service or 250GB on U-verse could bring their entire network to its knees.

The Holy Grail of Wall Street economics for broadband is to monetize its usage, creating an endless money party for what is today a utility service. Millions have been spent lobbying anyone who will listen that usage caps and consumption billing were essential to promote investment, upgrades, and to expand broadband service into rural America. Since those arguments have been made, broadband rates have increased, investment has decreased on a per customer and often real basis, and the government is now trying to chip in public taxpayer dollars to get providers to wire areas that will never pass demanding return on investment formulas.

The second prong of selling this meme is the creation of an Internet boogeyman — the “data hog,” a largely fictional creature that supposedly cares only about consuming every possible bit of bandwidth and slowing your web browsing to a crawl. Shouldn’t he pay more, you are asked, at the same time these same companies continue to raise your rates and now attempt to limit your use of a service that should cost less.

This week, Michael Powell, former FCC chairman turned head of the nation’s largest cable lobby — the National Cable & Telecommunications Association, capitulated on the “congestion” myth to an audience at the Minority Media and Telecommunications Association.

Asked by MMTC president David Honig to weigh in on data caps, Powell said that while a lot of people had tried to label the cable industry’s interest in the issue as about congestion management. “That’s wrong,” he said. “Our principal purpose is how to fairly monetize a high fixed cost.”

He said bandwidth management was part of it, though a more serious issue with wireless.

But he pointed out that the cable industry had to spend a bunch of money on its network before the first customer was signed. So, for a business that requires “enormously high” fixed costs — digging up the streets, put the wires in — and operational expense, “it is a completely rational and acceptable process to figure out how to fairly allocate those costs among your consumers who are choosing the service and will pay you to recover those costs.”

When will Washington regulators and lawmakers stop drinking the Kool-Aid handed them by high-paid lobbyists?

When will Washington regulators and lawmakers stop drinking the Kool-Aid handed them by high-paid lobbyists?

But our readers know Powell’s arguments are based on nothing more than the same empty rhetoric that declared the Internet exaflood was at hand.

Cable broadband was introduced as an ancillary service in the late 1990s utilizing cable television infrastructure that was constructed and paid off years earlier. Introducing broadband required only incremental investment and that remains true to this day. Cable operators more than cover their costs with sky high prices for service delivering some operators as high as 95% gross margin on broadband. Capital investments have broadly declined for years as have the costs to deliver the service on a per customer basis.

Suddenlink president and CEO Jerry Kent admitted the days of expensive system upgrades were over and it was now time to rake in profits.

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

Powell’s arguments ironically may apply partly to Verizon’s FiOS fiber network, which requires the retirement of copper wire infrastructure around since Alexander Graham Bell, but even Verizon covered much of its costs winning permission to raise rates years earlier to cover fiber upgrades. Much of that money was diverted to their wireless business instead. Today, Verizon FiOS manages just fine with no usage limits at all.

In fact, the only argument about fairness that should be open for debate regards the current cost of broadband service in the United States when compared against operators’ enormous profit margins. The lack of competition has allowed providers to increase prices and introduce “creative pricing” that always guarantees protection for the incredibly high average revenue per customer already earned.

Too often, Washington regulators and lawmakers drink the Kool-Aid handed them by an industry with an incentive to distort the truth. That incentive is the billions at stake in this fight.

Powell has even shelved the notion of the Cheetos-eating data hog burning up the Internet in his parent’s basement and has elected to try class warfare instead, claiming the most capacity is used “by a high end elite subsidized by the rest.” The real high-end elite are the telecom company executives cleaning up overcharging customers for a service that has become a necessity. Arguing for usage caps as a way to offer “lower prices” for those who cannot afford the ridiculously high prices the industry charges today only creates a new digital divide – the have’s and the have only so much.

Either way, providers laugh all the way to the bank.

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Currently there are 11 comments on this Article:

  1. Scott says:

    So the Cable Co’s new idea of “fairness” is penalizing and wringing massive profits out of 98% of their customers using data caps meant to cause users to exceed them when using new emerging data and video services so that they’re forced to pay excessive overages fees back to the Cable Co?

    All this because of a few users that actually use all the bandwidth and services they’ve paid $100+/mo for that are now called elitists instead of data hogs? These users have no significant impact across a massive network or even neighborhoods when averaged out with all the normal usage and excess capacity of DOSIS 3 and Fiber infrastructure.

    Seriously?

    They’ve definitely learned something from political debates by using the class warfare analogy by pitting their regular customers against those top using percentile in order to shift the debate from the high pricing and limited capped service to one of your elitist data hog neighbor is the one to blame.. don’t look at us..

    There’s definitely something else in that Kool Aid that the politicians are drinking besides sugar and water.

  2. marco says:

    the 90% margins you quote is misleading as you are probably just referring to gross margins. However, most of the costs are due to the SG&A and capital investments involved, which are also shared with the TV and phone services. Thus, if people cut the cord on tv and phone, you will only have broadband to support the entire network. in this situation, the cable operators would have to raise broadband prices on everyone to earn their cost of capital…or they will have to go to usage based pricing.

    usage based pricing WILL happen. it is only a matter of when.

    • Scott says:

      The margin’s aren’t that off, it’s not that hard to figure out when you see their SEC reports, when you listen in on their earnings calls, when you see statements by the CEO’s…

      Then when you see various Cable Co’s charging $1.00 – $5.00 per Gb on overages for metered plans which you ALREADY pay $50-100/mo for that would already cover any and all usage costs if it was unlimited.

      They only pay a couple cents per Gigabye, $1+ and metering is robbery.

      The majority of their costs are content for licensing channels on the TV side of their business, their infrastructure has been paid for a long time ago with minimal if any improvements or investments which are often passed on to customers anyway. (again see their statements to investors and filings)

      If the Government did order a break up of Cable Co’s TV business and Internet business you would see TV pricing go back UP, and Internet get more competitive if collusion from prevented between the two so they’d stop trying to protect their ailing TV business from IP based streaming companies like Netflix, HULU, Amazon, RedBox..

      • marco says:

        I was referring to the costs of the broadband only. Yeah, overall….the cost of content is very large.

        The infrastructure goes through a cycle….at some point they will upgrade the network again, which will require massive investment…perhaps for ftth.

        • Scott says:

          You mean the same cycle of upgrades we’ve gone through over the last decade plus? Cablo CO’s and ISP’s never had any issues getting beyond the analog dialup over POTs to more DSL varieties than you can count on your hand, to analog and digital cable plus DOCIS 1, 2, and 3.

          All those upgrades in the backoffice with their respective management infrastructure of software and plant equipment were paid by Unlimited Internet users while still returning good profits to the companies.

          In most cases costs were shouldered by customers to had to pay extra higher fee’s to ‘rent’ their newer high speed modems during rollouts eliminating the cost to upgrade the homes.

          No American ISP or Cable company that isn’t community owned looks beyond a 3yr, 5yr return on investment. Hiking their rates to reap 90% profit year over year doesn’t add up in your argument as they aren’t banking that profit for future re-investment into infrastructure.

          They’ve been consistently REDUCING investment in infrastructure and upgrades year over year, and even if they did look to expand out with fiber and faster equipment that’s easily done with normal profits taken every year as a rollout is scheduled across markets. Or they do what they’ve always done and take on some dept for a customer wide rollout and easily pay it off.

          But to say they need to meter and gouge customers and harm competition in order to make infrastructure upgrades that they aren’t making and don’t need the money makes no sense. The only ones benefiting from all this are Wall St., and the executive enjoying their multi-million dollar bonuses and salaries. This isn’t the cellular business with billion dollar spectrum purchases, it’s normal incremental upgrades over a pretty predictable cycle.

          If this industry wasn’t abusing it’s position and buying legislation to stop community broadband projects and acting as predators against new entrants by locking in long term customer contracts or no or little profit to run them out, I’d say let the free market decide.

          But this isn’t a free market in a duopoly, and we seriously need government regulation to step in and restore it so these corporations work for the people, not the other way around.

  3. Sherika says:

    We’re being taken over without being able to have a chance to fight back because they’re buying up everything to stop anyone from building their own internet!

    Is that fairness?

    Is this really fairness for open internet?

    This goes against the people of USA, and what we have invested our time ,and money in.

    What happen to the fact we all signed on for Net Neutrality to keep the unlimited universal access.

    Don’t the customers who have invested in these companies have a right to fight back?

    Hello is anyone awake?

    This is ridiculous to have data caps ,and nobody will be stupid enough to believe this is about fairness. This is about controlling our human right to open internet, and these companies are going to abuse every loophole to screw us over!

  4. Sherika says:

    What about the fact they’re favoring businesses with free unlimited internet access with no data caps?

    They punish all of us who are residential ,and favor all businesses.

  5. Sherika says:

    FIRE THE HEADS OF THESE CORPORATIONS NOW AND SAVE OUR UNLIMITED INTERNET!

  6. Sherika says:

    THIS IS LEGALIZED EXTORTION SOLD TO THE AMERICAN PEOPLE
    PUT DOWN YOUR TOYS AND FIGHT FOR UNLIMITED!

  7. jr says:

    “fairness” means punishing consumers while having the money to pay 8 figure CEO salaries and the funds to buy other cable companies

  8. AP says:

    DATA CAPS ARE NOT ABOUT FAIRNESS YOU STUPID SACK OF S###! IT’S ABOUT PROTECTING YOUR DEAD TV BUSINESS, PERIOD! What has cable TV giving us over the past several years? 1000+channels of TRASH! Seems like when I flick through the channels, it is nothing but cheap fake reality TV shows, biased news, sitcoms that are BORING! Not like the classic comedy shows from the ’60s and ’70s, and even washed down cartoons. When did you see Tom getting whacked by an anvil in Tom and Jerry? when did you see Elmer Fudd get shot in the face just for laughs (and there is NO BLOOD)? TV is nothing more than a watered down landfill because of certain groups that don’t like what they see or hear and we are paying in upwards of about $100-$150 a month for just TRASH TV.

    If the ISPs do go the usage billing route, I’m sure there will be BLOODY rebellion from the customers if the feds don’t step in and investigate these usage cap practices.







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