Big telcos and cable operators demand the right to impose data caps that punish their most enthusiastic customers for using too much Internet (with exceptions to the caps made for services that have paid bribes for “preferred carriage” of course), and they say that it’s simple economics: if you use up more of a service, you should pay more for it.
Nate Anderson does an admirable job of rebutting this economic argument by focusing on a foundational economic principle: fixed versus marginal costs. ISPs’ major cost centers are all fixed; most of your ISP’s annual expenses will be the same no matter how much bandwidth its customers use, based amortizing the cost of wires they’ve buried and equipment they’ve purchased. Those costs are independent of usage. The bandwidth itself is “free” in that major ISPs have free peering arrangements with one another (that means that the ISP your favorite video service is on doesn’t charge your ISP to send it the bits you want to see, and your ISP doesn’t charge it anything either).
The decision to charge the most ardent Internet users more isn’t about ISPs recouping the costs those users incur; rather, it reflects the ISPs’ belief that the people who use the Internet the most value it enough to pay a premium to use it.
TWC’s revenues from Internet access have soared in the last few years, surging from $2.7 billion in 2006 to $4.5 billion in 2009. Customer numbers have grown, too, from 7.6 million in 2007 to 8.9 million in 2009.
But this growth doesn’t translate into higher bandwidth costs for the company; in fact, bandwidth costs have dropped. TWC spent $164 million on data contracts in 2007, but only $132 million in 2009.
What about investing in its infrastructure? That’s down too as a percentage of revenue. TWC does spend billions each year building and improving its network ($3.2 billion in 2009), but the raw number alone is meaningless; what matters is relative investment, and it has declined even as subscribers increased and revenues surged. “Total CapEx [capital expenses] as a percentage of revenues for the year [2009] was 18.1 percent versus 20.5 percent in 2008,” said the company a few months ago.
In fact, CapEx has declined for the industry as a whole. As the National Broadband Plan noted, the big ISPs invested $48 billion in their networks in 2008 and $40 billion in 2009. (About half of this money can be chalked up to broadband; the rest of the improvements were done to aid cable or phone service.)
To recap: subscribers up, revenues up, bandwidth costs down, infrastructure costs down. This might seem like a textbook case of “viability”; what were execs like Britt and Hobbs talking about last year when data caps were held up as a necessary safeguard against doom?
Should broadband data hogs pay more? ISP economics say “no”
[Nate Anderson/Ars Technica]
(Image: Time Warner Cable Truck, Mike Mozart, CC-BY)