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Wireline Costs and Caps: A Few Facts
Sunday, 06 March 2011 20:27
one_dollarBandwidth costs in the U.S. are between 2% and 5% of what we pay for broadband, a very minor part of the cost. So when the Washington Post suggested "It's expensive to run a broadband network," as a legitimate reason to block Netflix and other video I thought to revisit the actual numbers. 
    Broadband is an extraordinarily profitable service. Top Wall Street analysts John Hodulik of UBS and Craig Moffett of Bernstein both report broadband margins of 90% based on official company filings. My own figure is more like a 75% margin because I allocate additional costs, but either implies running a broadband network is actually inexpensive in relation to the price charged. 
     Bandwidth isn't free. I startled my neutrality friends by writing in 2008 that Comcast's 250 gigabyte cap was fair. Three years later, Moore's Law has brought Comcast's costs down by half, so it's time for them to honor their promise to raise the cap. But even 250 gig is 10-15 hours a day of digital cable quality TV, 10 times more than even active Netflix customers.  Cable networks can inexpensively handle any likely load Netflix users will present. 
     Large European carriers have similar costs to the Americans. Smaller ones, without their own fiber backbone, are sometimes squeezed. Most of Europe has significantly more competition than the U.S. duopoly, including 4-5 carriers in most of France and Britain. The prices therefore lower, often by 30-50%, so margins are not as extreme. Broadband is a highly profitable service at almost all large telcos and cablecos.
    High backhaul and bandwidth costs in some parts of the world are important issues. Africa is just getting fiber connectivity and prices still have a long way to fall. Fewer than 10% of U.S. broadband provided by smaller and rural carriers but some of those face monopoly-like backhaul pricing. Several times at the U.S. broadband workshops carriers reported paying 10 and even 20 times more for bandwidth in some rural areas. The plan recommended solving those problems but so far the FCC hasn't taken action.
Here are some numbers:
2 cents to 5 cents per gigabyte. The actual bandwidth cost to a large carrier like Time Warner or AT&T, depending on how you do the accounting.
$1/month/customer. The industry standard figure for the cost of bandwidth. Fortunately, Moore's Law has been bringing down the cost per bit of bandwidth at 25-40% per year, allowing the industry to thrive as video drives usage. When fiber is in place, the main cost for additional bandwidth is upgrading routers, switches, wave division multiplexers and the like. They've become much cheaper at a predictable rate. Result: the cost per customer of bandwidth has been about $1/month since 2004 or so. Since broadband prices are $20-$50, that's 2-5% of the price charged.
15 gigabytes/month. The average (mean) user in the U.S., per Cisco's respected VNI survey and numerous comments from the major companies.
Going Down: Bandwidth usage growth per customer. The rate has been about 30% per year, with the rate slightly falling the last few years. The growth in average usage is actually going down slightly, per Cisco VNI and the MINTS data of Professor Andrew Odlyzko.
Going Down: Capital investment required. In 2009, AT&T cut U-Verse by 1/3rd. In 2010, Verizon cut FiOS by 2/3rds. John Stankey of AT&T has said they will cut U-Verse much further after this year. Fran Shammo of Verizon says "Wireline will continue to come down year over year." Cablecos have been dropping capex as a % of sales and often in absolute dollars. According to a recent survey by Heavy Reading, 70% of the cable networks have been upgraded to DOCSIS 3.0 already. There's no significant capital spending beyond that at least until mid-decade. The Columbia University CITI report to the broadband plan aggregated analysts forecast and predicted a drop in overall capital spending on broadband, particularly in wireline. The primary capital spending for wired broadband is behind us, with few significant network buildouts in the next five years or longer.
Going Up: Profit Margins. Prices for broadband have generally been going up in the U.S. since 2007 while costs drop. Comcast, Time Warner, Verizon and most others have raised their broadband prices and ARPU. They also have (modestly) raised the prices of triple play including broadband, according to Dave Barden of Bank of America. Capex is dropping pretty dramatically while other operating costs are also falling. Customer support costs have gone down as few new customers (who need more support) are added. Modems and other gear continue dropping in price. Costs down, prices up = higher profits. Both Stankey and Shammo pointed to improved margins.
     Wireless obviously has more bandwidth limits but in the LTE generation the gap is narrowing. Bandwidth costs are unlikely to be a major issue up to a cap of 25 to 75 gigabytes/month, far above the 2-5 gigabytes currently the standard offer. I wish I could be more precise than 25 to 75 gigabytes, but until we have some real world experience with loaded LTE networks it's very hard to predict traffic patterns.
     I will add more details on sources as well as the technology features that explain the numbers above when I can. If you're using this material for policymaking, touch base freely if you need details. As always, I freely share files and sources with other reporters. 

Last Updated on Wednesday, 16 March 2011 21:43