Comcast customers in select cities could see significant markups on their Internet service as the cable company looks to increase revenue through data caps.
The cable giant has recently made headlines after customer support documents that shed light on the data cap implications leaked online earlier this month. Similar to what consumers experience with wireless smartphone providers, a data cap allows for a certain amount of data — be it streaming shows on Netflix or video chatting with relatives — before charging the customer an extra fee.
According to the documents, a number of markets, including Little Rock, Arkansas, Chattanooga, Tennessee and Galax Virginia, are going to have to deal with the data caps. If a user goes over the 300 GB limit, they could see a $10 fee, which also comes with an additional 50 GB. You could also pay an extra $35 per month, a customer can opt for unlimited internet.
A 2,000% Markup?
The $10 amount is interesting because it likely represents a massive markup for the Internet service. According to Reddit user lilrabbitfoofoo, the markup could be as high as 2,000%.
That’s just one person on Reddit and his or her math is slightly off (that’s a 1,900% increase), but there could be some truth to their point.
Unfortunately, cable companies aren’t in the transparency business, and calculating their true cost per gigabyte doesn’t seem to be possible. There are some estimates, however, that lend plenty of credibility to this claim.
A few years back, Marshall Brain, a blogger for HowStuffWorks.com, broke down a massive undersea telecommunications infrastructure project to boost Africa’s internet access. The cable system spanned 8,700 miles from London to South Africa’s Western Cape.
The cable itself cost $650 million and provided 5,120 GB per second and provided 15 access points along the coast. Brain rounded that $650 million amount up to $1 billion — a conservative estimate that includes maintenance of the system and any other issues that may have arose during the project.
The system can essentially handle 5 TB per second. At a cost of $300 million per year and because the system can transmit 15.7 billion gigabytes per year, the cost per gigabyte comes out to 1.9 cents.
And that’s just one example of one project from four years ago. Today’s economy of scale and improvements in technology have likely made providing internet service even more efficient and cost effective. As John Biggs at TechCrunch put it all the way back in 2011, “ISPs claim our data usage is going up and they must react. In reality, their costs are falling and this is a dodge, an effort to get us to pay more for services that were overpriced from day one.”
So, if it cost Comcast a penny per gigabyte, it would only cost them 50-cents for that extra 50 GB if a user goes over the data cap limit — the cost of a can of soda out of the machine. At $10, that is a 1,900% markup.
Of course, Comcast would argue that’s a very narrow view of their actual cost. They have incredible infrastructure to maintain and employees to pay, but even if it cost them 10-cents per gigabyte, that means your extra 50 GB costs them $5. The $10 they’re asking from you would be a 100% mark up.
High markups by Internet companies aren’t uncommon. Earlier this year, it was discovered that Time Warner Cable has a 97% profit margin for its high-speed internet service. According to a Huffington Post report, Comcast, Verizon, and AT&T likely have a similar setup.
And that’s why it’s so easy to call your ISP up and negotiate a lower rate. They’re making an absolute killing!
Why Data Caps?
If Comcast is making a killing off its internet service, then why does it feel like it needs to implement a data cap?
According to the leaked documents, Comcast says the move is about fairness, arguing its median customer uses about 40 GB per month.
Industry leaders — and a big portion of the tech media world — aren’t buying it, though. They say Comcast feels threatened by a growing media consuming segment: cord cutters.
“Comcast, like all cable operators, are seeing cord cutting by various parts of their customer base,” said Andy Abrasion, CEO of Comunicano Inc. “These cord cutters are eliminating their cable subscriptions and choosing to get their content via over-the-top services like Hulu, Netflix, HBO Now and others. This is creating a net subscriber loss each month and is impacting the asset value of ‘average revenue per user’ and life time values.”
Abrasion expects other cable providers to implement similar data caps but said other companies are going to be more strategic about it in order to to make more money and avoid the public relations nightmare Comcast is currently facing.
Nick Espinosa, CIO of BSSi2 LLC, said the data caps goes back to a dispute between Comcast and Netflix where Comcast didn’t adequately supply a connection that could handle the required amount of bandwidth for Netflix customers. As a result, video quality was low for Comcast customers and Netflix was forced to supply better infrastructure.
“Comcast is still seeing a rise in bandwidth use as they add new customers and markets to their portfolio and their need to upgrade their infrastructure is a never-ending cycle of expansion and installation of equipment, and not to mention running the physical cabling to locations that don’t currently have their service,” he said. “This increase helps to offset their cost.”
Customers and the Catch-22
Data caps are certainly going to ignite some unhappy customers who might already feel they’re paying too much for internet service.
The problem is that customers associate data caps with their smartphones, but always felt they had unlimited internet at home. As the cable bundle unravels and streaming becomes more prevalent than cable television, internet service providers like Comcast are going to find ways to continue making money.
“For Comcast, this has to be an irritating position to be in,” writes Jamal Carnette, of the Motley Fool. “Unlike most competition, where businesses compete directly against each other, Comcast actually plays a hand in Netflix’s success, which directly conflicts with the video business that Comcast’s cash cow. Even worse than losing subscribers is knowing you’re personally playing a hand in the other company’s success.”
So, how can this avoided? In a free market, the answer is competition.
But in a highly regulated industry that requires an incredible amount of infrastructure, starting an ISP can feel next to impossible. That’s why most communities can only by internet services from one company. Even having a second choice is rare.
Even after making it through a sea of red tape, independent ISPs find themselves in a catch-22.
“It’s like, ‘hey, I need more bandwidth, but I can’t get the bandwidth because I need more money, but I can’t get the more money because I don’t have the bandwidth,'” Joshua Montgomery, owner and operator of Kansas-based Wicked Broadband told Arstechnica last year. “It’s an ongoing problem that you’re solving every day.”
What Can You Do?
With minimal competition (read: monopolies) in most markets, it might feel like there’s not much you can do to avoid data caps from Comcast, or whichever internet provider decides to do something similar.
There are a few steps you can take.
First and foremost, if you don’t use 300 GB of data per month — and most do not (only 8 percent do, according to Comcast) — then don’t sweat it. This doesn’t really impact you.
If you do use more than 300 GB, your other option is to pay the extra $35 for unlimited service (Comcast might even let you go unlimited if you add a TV service. Check to see if there’s a basic package you could add for the same or less amount as the unlimited price.)
You could also search to see if there are other internet providers in your area, particularly one that doesn’t have data cap.
And lastly, write to the FCC. Write to your congressman and your senator. Let them know how you feel about the caps, because your only other option is to cut down on your bandwidth.
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