I promised to interleave new material into the original piece I wrote for Telemanagement on broadband costs (now online). But I found myself writing a whole other post, so here’s part 2 of the original, with a couple minor edits (and a couple funny pictures!). Part 3 is on its way … OECD data to boggle the mind! Rogers lowers bit caps! Unjust discrimination alleged! All new episode!
Sleuthing out costs
Let’s stick with bit caps as an example of why the large ISPs are happy to keep you in the dark. Bell offers a “Performance” tier which at 6 Mbps downlink is the closest option to what I get from my reseller, National Capital Freenet, at 5 Mbps. Not only is this Bell tier more expensive per month than NCF’s. It also comes with a stunning extra feature: a bit cap of 25 GB a month. And equally astonishing, the over-usage charge is $2 a gigabyte. Meanwhile, NCF has a cap of 200 GB, which comes with an over-usage charge that’s 75% less than Bell’s – 50 cents/GB.
We don’t know for sure what Bell pays its upstream provider for bandwidth, but there are some well-informed guesstimates out there. One analyst who follows the industry numbers very closely, and internationally, is Dave Burstein (he also publishes several newsletters at fastnetnews.com). In the context of his analysis of a 250-gig Comcast cap, Burstein writes the following:
“Two carriers report cost per gigabyte of under ten cents and it should be similar at Comcast. Comcast doesn’t release a figure, so I’m presenting a range based on 5 cents to 20 cents. Smaller and some rural carriers pay much more.”
Let’s assume the high end of Burstein’s range is suitably conservative – 20 cents per gigabyte. So, back of the envelope, Bell is charging a 1,000% markup on the raw cost of each gig in the cap on this tier – $2 for what costs 20 cents. If we were to take the low end of Burstein’s range, i.e. 5 cents per GB, then a $2 cap would represent a 4,000% markup. These estimates correspond to what we heard from one outraged ISP reseller after the CRTC decision on usage-based billing last May (Telecom Decision CRTC 2010-255):
“The rates are absolutely atrocious. How the hell are we doing above one dollar for extra usage?” said Rocky Gaudrault, president of Chatham, Ont.-based Teksavvy. “It’s in the thousands of multiples beyond what the costs are.”
Burstein’s analysis applies more widely to ISP costs. He provides cost estimates from several providers for bandwidth per megabit and these translate into a current average cost for large carriers of about $10. That in turn corresponds to a cost per subscriber for bandwidth of $1 a month. In other words, for provisioning a service like Performance, which costs the subscriber about $50 a month (with modem and without bundle), Bell’s bandwidth cost is about 2% of the retail price. And as Burstein notes:
This figure is the industry standard and has been roughly stable for 5-8 years. Bandwidth demand has been growing at 30% (AT&T figure) to 40% (Comcast out of date figure) for each user. Switches/routers/transit have been getting cheaper at 25-45% per year driven by Moore’s Law. Likely future cost: Almost certainly similar. … Result: Costs go down 25-45%, bandwidth demand goes up possibly slower. Cost per month per customer should be flat to down as far out as we can look.
Burstein uses his cut-to-the-chase analysis to make one other crucial point about the access business. ISPs charge a much higher price for higher speed tiers, suggesting they are covering higher costs for those speeds. Nope, just not true:
The cost of delivering 40 megabits is almost exactly the same as the cost of delivering 2 megabits once the equipment is in place. The only steep difference is in cost is when additional construction is needed. Regardless of speed, it’s one DSLAM port, one modem, and one wire. There’s no cost reason to charge significantly different prices. The two or three times difference in price for high and low speeds on Verizon FiOS, for example, comes from weak competition, not ordinary economics.
Agreeing on what’s “just and reasonable”
The fact that retail broadband prices would seem to be far from cost-based raises some questions about how the CRTC arrives at telecommunications decisions where a price impact on consumers is at issue – such as the CRTC decision on usage-based billing noted above (Telecom Decision CRTC 2010-255).
The implications of 2010-255 extend to both principle and practical details. It’s bad enough the Commission has handed the Bell companies – indeed all of our incumbent ISPs – a new revenue stream. It’s worse that, in its decision, the Commission explicitly approved tariffs for UBB that include over-usage charges. Did the Commission have information indicating that the gross markup on some caps might range from 1,000% to 4,000%? If it did, does it consider these markups “just and reasonable”?
As part of its due diligence, the Commission asks explicitly “Are the Bell companies’ proposed rates just and reasonable?” (following para 51). After clawing back some markups it did not consider just and reasonable, the Commission concludes (para 72) that the rates as adjusted do indeed pass muster.
Should we believe the Commission’s assessment? Well, whether you believe it or you don’t, it’s not for you to know. Because under its rules, “applicants may request that specific types of material or information submitted in an application be treated by the Commission as confidential where the public interest will best be served by doing so” (my emphasis). How do we know the public interest is being served if we have no idea what was submitted by Bell under its cost claims? We don’t.
The rationale for this closed-door approach can be found buried in footnote 7 at the very end of the decision:
… Markup levels included in the Bell companies’ economic ITMP rates and in the cable carriers’ TPIA service rates are confidential, since the costs submitted by the Bell companies in this proceeding and by the cable carriers in past proceedings in support of proposed TPIA service rates have been maintained in confidence.
It seems reasonable to suppose that the incumbent ISPs are making supranormal profits in residential broadband, thanks in part to remarkably low costs. Meanwhile, the ILECs and cable MSOs have forged a highly robust duopoly which controls some 95% of residential lines across Canada. The CRTC reports that from 2005 to 2009, the incumbents’ residential access revenues grew at a CAGR of 11.5%. All other ISPs combined saw their revenues grow at a CAGR of 2.8% (CMR, p.138). Are these the indicators of a competitive market, according to the Commission? If the CRTC sees the incumbents’ profits, costs and market share as the outcome of successful policymaking, as well as good for consumers, it’s going to have to explain its perspective to those of us who take a less optimistic view.