The Cost of downloading all that video

by Saul Hansell, Bits/New York Times

In an article in today’s New York Times, I wrote about the controversy over the now-abandoned plan by Time Warner Cable to impose additional fees on customers who upload and download more than a set quota.

AT&T continues to test a similar plan, and many cable and phone company executives still argue that usage is growing so fast, mainly driven by video that they need to start charging heavy users to cover the additional cost of the bandwidth they consume.

Hard numbers are not that easy to come by, but I’ve found a few. I see no evidence that the pace of spending to expand network capacity has increased at all. Indeed there are a lot of areas where new technology is radically cutting the cost of Internet bandwidth.

For those that want to understand more about what drives these costs, here is some of the hard data I’ve found. (As always, Bits readers are a knowledgeable bunch, so if you are in the network business, please share your own experience in the comments.)

I’ve mainly been looking at the costs that will increase as the bandwidth used by customers goes up. So I haven’t looked at overhead, marketing, customer service and so on. All of the discussion of cost is complex because much of the infrastructure at these providers is shared between video, phone and Internet service.

Still, there seem to be two major buckets of expense to consider: the cost of local networks that connect to people’s homes and the cost of the bandwidth that link those networks to the Internet. The local costs are larger, but falling faster with new technology.

Local Network Costs

Think of a broadband Internet provider like a river of bandwidth that divides into smaller and smaller tributaries as it flows from a regional hub through neighborhood facilities until it trickles a stream of connectivity into each home. Each connection in this network, and each node where connections are split into smaller streams, has a set capacity.

Most of the network for any Internet provider is high-capacity fiber optic cable. But the last link, running from a neighborhood office or a small device hung on a phone pole—runs over cable TV or phone wires. In a cable system, there is a fixed amount of bandwidth that is shared among all the customers in a node, often about 500 homes.

That capacity, in current technology, provides about 38 megabits per second to share. That means if four homes are all downloading very long files at 10 Mbps, a fifth customer going online, will start to slow down everyone’s connections.

If that node often becomes congested, the cable company divides it into two separate groups of roughly half as many homes. This process of “splitting nodes” happens on a regular basis. (While the details are not the same, phone companies that use D.S.L. technology also have to spend money when usage in a given neighborhood increases beyond a certain capacity.)

In a presentation to investors in 2007, Comcast boasted about how its network is designed to make such node splits efficient. The cost depends on the configuration of the equipment at the node to be split. In some cases, little more than minor adjustments are needed, and the cost is $2,500. If the company needs to add a new Cable Modem Termination System, the device that connects cable wires to the Internet, it will pay $6,000 if the device is in one of its existing facilities. And if Comcast needs install a new C.M.T.S. on a pole, stringing a new fiber optic cable to it, the cost is $20,000.

According to Comcast’s presentation, the average cost of all these upgrades comes to $6.85 for each home served in the neighborhood. I checked with Tony Werner, the chief technical officer of Comcast. He said the costs quoted are still roughly accurate, but the average may be increasing somewhat as more of the company’s upgrades involve new equipment and sometimes new fiber.

The other way that cable companies are increasing capacity is by using new technology known as Docsis 3. This is a standard that allows companies to use more video channels for Internet service. The current standard uses one video channel. The first generation of Docsis 3 service combines four 38-Mbps channels into a pool of roughly 152 Mbps that can be divided among customers. Cable companies can decide whether to use that capacity to offer higher speeds to customers or to increase the number of customers who can be served at slower speeds, avoiding the need to split nodes.

The Comcast presentation said that the effect of this is that Docsis 3 will reduce the cost of the C.M.T.S. hardware, which had been about $20 per home passed, by 70 percent, for customers at current speeds. And it will allow 100-Mbps service at a lower hardware cost than the company had been paying for its then current 6-Mbps service.

There is one other hidden cost of Docsis 3 that should be noted: When a cable company converts 3 more channels from video to Internet service, it can’t make money from those channels by offering a video package or pay-per-view movies.

But most cable systems are in the process of converting to an all-digital format from the current approach that mixes analog signals (which can be watched without a set-top box on an older “cable-ready” television) with digital signals. This is mainly being driven by the need for extra capacity to handle high definition programs. A company can send 10 standard-definition channels or 2 high-definition channels in the space of one analog channel. All that means is that there is not a shortage of channels for use by Internet data, at least for a while.

Bandwidth Costs

It’s even harder to get hard numbers for the cost of connecting a local network to the Internet. As you might expect, the costs vary enormously depending on the geography involved.

I spent a fair bit of time working through the options with George King, the president of Global Capacity, a firm that helps companies negotiate and buy Internet connections, and Julie Dillenbeck, the firm’s vice president of marketing.

A medium-sized Internet provider might pay about $10,000 per month for a one gigabit per second connection to the Internet. If the system didn’t own its own network in the metropolitan area, it may need to spend another $2,000 to $15,000 per month for a connection between a local system and the central office of whatever company was providing their Internet bandwidth. Assuming that bandwidth is divided among nodes of 500 homes sharing 38 Mbps, that means the cost of bandwidth ranges from 76 cents to $1.92 per month.

Mr. King added that the cost for a very large Internet provider that owns a backbone network would likely be less.

In general, this cost is linear. That means if everyone started using a lot of Internet video, and a cable system split all their 500 home nodes in half, the cost of the Internet bandwidth would double. That cost, however, has been declining steadily, perhaps 5 percent to 10 percent a year, Ms. Dillenbeck said.

That tracks with what I’ve heard from Mr. Werner of Comcast and other cable industry experts I’ve talked to, who say that the bandwidth costs are rising somewhat but they are a relatively small portion of the overall expense of providing Internet service.

All these costs, by the way, apply whether or not anyone on the system is actually surfing or downloading anything. I asked Mr. King to help me figure out what a cable company pays per gigabyte used by its customers because Time Warner wanted to charge customers $1 for every gigabyte they used over a certain monthly allotment.

He told me that telecommunications providers will not sell bandwidth by the gigabyte to businesses, even though many customers want to buy it that way. For example, some movie studios that send large files to DVD manufacturing plants, don’t want to pay for connections they only use from time to time.

“The network providers almost always say ‘No,’” Mr. King said. “As long as the bandwidth is open for business, it will cost you the same whether there is data running or not.”

In other words, the cable and phone companies want to charge consumers per gigabyte even though they refuse to sell it to business customers on the same basis.

article originally published at Bits/New York Times.

The media's job is to interest the public in the public interest. -John Dewey