Broadband: Why are prices going up when prices are going down?

Submitted by acohill on Wed, 02/09/2011 - 10:52

Stop the Cap! has a great analysis of the slow but steady shift to usage-based charges for bandwidth. The wireless providers have been moving from unlimited data subscriptions to metered subscriptions for about a year. On cellular data networks, this makes a certain amount of sense, as the capacity of these wireless networks is extremely limited, despite the wild claims of "world's fastest wireless network" and the marketing hype of 3G, 3.5G, 4G, LTE, and soon to come, 5G, 6G, Infinity and BeyondG, and so on. But on wired networks, despite the increase in use by businesses and residents, prices for Internet connectivity in the wholesale market are dropping sharply, and more and more fiber is being built on inter-city routes that are making the drop in cost possible. So why are the retail providers shifting to metered bandwidth?

There are at least three reasons:

• Because they can. The duopoly of the cable and telephone companies allows them to maintain cartel-like pricing in most markets because buyers of services have no other options.
• Their old copper-based networks are overloaded, they won't admit it, and metered pricing is one way to force customers to use less bandwidth.
• The cable companies are terrified of the shift away from TV towards video via the Internet. Despite the low margins in the cable TV business, cable subscriptions provide enormous cash flow for these companies and represent the core business. As more customers drop their cable subscription in favor of just keeping their Internet service, at some point this behavior introduces a death spiral for the cable companies, as switching to 100% video/TV from the Internet (see the Hulu announcements as one example) by customers simultaneously reduces revenue while putting more pressure on already overloaded and ancient, asymmetric copper networks.

The solution, as always, is to introduce competition via a single, high performance fiber network that is owned by the community and shared among all private sector service providers. That approach simultaneously eliminates limits on bandwidth while solving the service provider capital expenditure (capex) problems. Everyone wins in that scenario, but some companies would rather destroy the economic vitality of the communities they serve than change their outmoded business model.

Think this is all crazy talk? Read this comment from the article about Hulu changes. This is happening every day.

We cut the cord to conventional TV a year ago and have never looked back. All of our content now comes from Hulu, Netflix, and YouTube. I do subscribe to Hulu+ and Netflix, effectively turning what used to be a $120 per month charge into a $20 per month charge. We view most content on our TV via an AppleTV, and the remainder is viewed using iPads. This setup is working well for us.

$120 a month to $20 a month...that's the death spiral I mentioned....