How Comcast Pays for Bandwidth

comcast-truck-cmcsa-cmcsk_largeToday’s blog is more about Comcast’s data caps. I recently saw a quote from Brian Roberts, the Comcast CEO during an interview by Business Insider. When asked about the data cap trials he said the following:

We don’t want anybody to ever not want to stay connected on our network, but just as with every other thing in your life, if you drive 100,000 miles or 1,000 miles, you buy more gasoline. If you turn on the air conditioning to 60 vs. 72, you consume more electricity. The same is true for usage, so I think the same for a wireless device. The more bits you use, the more you pay.

He is basically saying that it costs Comcast more to buy Internet bandwidth for customers who use more bandwidth. Certainly his first example means that – you certainly must buy more gas to drive a vehicle more miles. Is this a good analogy? For it to be true Comcast would have to be buying raw bandwidth each time a customer uses the Internet – this would mean when you download something at your house that Comcast is somehow buying more bandwidth from the big Internet spigot.

But that’s not how it works. While Comcast is really big, they are not one of the companies that owns the Internet, so they must buy bandwidth just like any other ISP. So how do ISPs buy Internet access? They buy it with two cost components – transport and raw bandwidth. Transport is the cost of getting the bandwidth from one of the major Internet POPs to a market. At Comcast’s size they either have a direct physical presence at each major Internet POP or they have an arrangement with some carrier who does. Due to their sheer size, I have to imagine that Comcast’s cost for transport on a per-megabit basis is lower than anybody else in the industry other than maybe AT&T, who is one of the owners of the Internet structure.

Transport can be a major cost for an ISP that operates a long distance from a major POP. I have small ISP clients that spend between $10,000 and $20,000 per month on transport, which is a lot if you only have a few thousand customers. But for Comcast this cost has to be miniscule on a per customer basis. And the cost is fixed. Once you buy transport to a market it doesn’t matter how much bandwidth you shove through the pipe. So this cost doesn’t increase due to customer usage.

The other cost is to buy the actual Internet connectivity — an expense that is sometimes referred to as an Internet port. This is an electronic connection directly into the main Internet routers. My small clients pay anywhere from $1 to $5 per raw dedicated megabit per month for Internet bandwidth. Generally the more you buy the cheaper it gets. Again, one has to imagine that Comcast pays a lot less than my clients due to their huge size.

And even that cost can be significantly reduced by large ISPs like Comcast through peering. Peering is where a carrier like Comcast makes a direct connection to companies with a lot of Internet usage like Netflix or Google. From an economic standpoint, peering is essentially the sam as transport and bypasses paying for the Internet port. Any traffic that goes through the peering connection does not increase with a customer’s use of the bandwidth.

An ISP’s total cost for an Internet port is based upon the average of the busiest times of the month. For instance, a small ISP might use 500 raw megabits of aggregate usage on most evenings, but if their customers have a few nights per month where they use 700 megabits, then the ISP pays for that larger amount for the whole month.

The interesting thing about this pricing structure is that the ISP pays the same every day of the month whether the customers are using the data or not. The cost to Comcast wouldn’t change if any one customer, or even all of the customers in a city, were to use more data, as long as that usage doesn’t create a new fastest day of the month. From a cost accounting basis, this means that the cost of Internet bandwidth can also be considered as a fixed cost. There is nothing that any one customer, or even a fairly large pile of customers, can do to change the cost of the bandwidth to Comcast. It does not cost them more when you watch an extra movie.

The idea that Comcast is paying more for somebody who downloads 500 gigabits per month than somebody who uses half of that is false. If that 500 gigabit customer was to instead use zero bandwidth in a given month then Comcast’s costs wouldn’t change by a penny.

To put this into a different perspective, many of my clients have done the math and in aggregate their bandwidth costs them between $2 and $5 per customer per month depending upon how small they are. This is the average of transport costs, any peering costs and the Internet port costs. I would be surprised if a large ISP like Comcast is spending much more than $1 to $2 per customer per month for bandwidth. For them to charge $35 for going over their data cap is outrageous and that charge is 100% profit to them.

Roberts did make one true analogy when he compared his data caps to wireless carriers like Verizon and AT&T. They buy bandwidth in the same way that Comcast does, and so it also doesn’t cost them extra when a customer uses an additional gigabit on their cellphone. US wireless data is very close to the most expensive bandwidth in the world and you have to go to places like Africa to see bandwidth being sold for as high pf a price. The cable companies like Comcast have eyed the Verizon and AT&T wireless profits with envy and the data caps are nothing more than an attempt to greatly bump up what they can bill for data. They will be billing customers for going above an arbitrary cap, while in reality using more bandwidth doesn’t cost Comcast anything extra.

12 thoughts on “How Comcast Pays for Bandwidth

    • I’m hoping that the FCC is going to have the backbone to take on data caps. I interpret Title II regulation to give them the power to take on monopoly abuses in broadband. The Comcast data caps are really nothing more than a consumer scam.

  1. Over subscription ratios? Does Comcast have, say, a 100:1 over subscription ratio? I just dumped Comcast for CenturyLink fiber service. I’m getting 100 Mbps service for $80/month vs. $200 for Comcast 100 Mbps plus mandatory cable package we never used. Occasionally there is competition to the monopolist.

    • It’s my bet that Comcast will not mandate data caps in markets where they have direct competition with fiber. Just everywhere else. If that’s what happens then it’s more proof that their data caps are an abuse of monopoly power. It’s nothing more than a money grab. There are no network or cost reasons why they need data caps.

      And congratulations on getting fiber!

  2. Jeez, I hate to defend Comcast here, but this analysis really oversimplifies and misrepresents the economics of running a business. Okay, Comcast buys transport in really big chunks, and it doesn’t dynamically adjust its purchases based on how much any individual customer uses. But it DOES adjust its transport purchases based on how much its customers COLLECTIVELY use. Not minute-to-minute, but if 1,000 customers used to average 10G per month and now they average 100G per month, Comcast will have to buy more transport. Same thing on the Comcast-owned last mile. Once it gets oversubscribed, Comcast incurs a cost; either having to build new capacity or losing customers. The economic calculation that any business in this sort of situation would make is NOT to ignore the cost of usage until their infrastructure becomes overloaded and they need to lay out money, but rather to account at each stage and transaction for the cost, whether current or future, that a customer imposes on the company. Okay, that’s theory of business economics. In Comcast’s case, the theory absolutely applies, but the mitigating factors on which Comcast should be criticized are the magnitude of the “overage” charges, the inaccuracies of measurement, the terrible customer service, and whether, in a truly competitive broadband market, Comcast would apply these fees in the way that it does.

    • You are right to a degree, but there are other factors to consider. At least for all of the ISPs I work for the overall cost of buying Internet access has dropped continuously and significantly year over year. And so yes, one would think that Comcast would pay more if people in a neighborhood grow to their usage over time from 10G to 100G. But that’s not what has happened. Most ISPs are paying less today than they were paying ten years ago for raw bandwidth, and in doing so are probably buying ten times more bandwidth than they did ten years ago. Costs have been dropping faster than volumes of data have grown.

      Secondly, I acknowledge that Comcast has a cost of bandwidth. As my blog mentions, I suspect this is something under $2 per customer per month. That cost is clearly covered by the base charge of somebody buying an Internet product from them.
      You are talking about the Internet costs for a neighborhood, and that is the same thing I am talking about when I estimate the $2 cost per customer per month. But if somebody in that neighborhood of 1,000 people significantly steps up their Internet use, my contention is that doesn’t change buy a penny what Comcast is paying for that neighborhood. They way that they buy the components of broadband essentially make them very close to all fixed costs.

      The only way that the ‘fixed’ costs of bandwidth change for Comcast would be if everybody changed their behavior in a short period of time. For instance, if we had another 911 and everybody was on their computer solid for a week, then the cost to Comcast for that month would probably increase. But in the following month when everybody goes back to normal usage the cost would return to it’s original level. The usage of any one person cannot change the cost at all, but even at the more global level it takes a lot of new usage by everybody in a neighborhood to change the costs in a short period of time. This is further mitigated by the fact that with 23 million customers Comcast can average the costs of all neighborhoods together. For everyone that might go up another might be going down.

      And you are right about all of the other issues about how lousy of of an ISP that Comcast is, but it would take a dozen blogs to cover all of those other issues – and I’ll get around to that!

      • I disagree with the comparison to cell phone providers. Granted the cellphone companies are making a killing on data, however when you have extremely low caps like cell phone companies do, you do effectively limit usage and reduce capacity and bandwidth requirements, as you are discouraging high usage across your entire customer base. However when caps are high enough to not affect daily usage from 95% of your customer base then caps have zero impact on your highest daily usage as you explained so well.

      • First, my comparison to wireless was talking about the fact that in both cases there is very little incremental additional expense to the service provider to provide the extra usage. The fact that the wireless data caps are so stingy is a whole other issue and I dislike them as much as the Comcast cap. But I can take steps on my wireless phone to control the cap, like always looking for WiFi. On my landline the only way to control the cap is to curtail doing things that I want to do.

        However, I want to take exception any exception that the Comcast data cap is designed to only apply to the 5% of the largest customers. If that was true I would still hate it but would have less of an issue with it. But in today’s world of using the Internet to watch video, 300 GB in a month is not a high data cap and my guess is that this is going to easily hit 1/4 to 1/3 of customers regularly and a much higher percentage at least a few times per year. Further, since the rate of broadband usage is doubling about every three years, if Comcast doesn’t grow that cap each year it’s going to catch more and more people in the future.

        Unfortunately only the ISPs have the statistics, but I would guess that even today that if you wanted a cap that only affected the top 5% of customers that it would have to be maybe 600 GB to 800 GB per month. I would welcome anybody who has a better guess as to what a good cap ought to be. I know there are a number of ISPs that already today have a terabit cap, so the 300 GB Comcast data cap is stingy on day one. When Comcast first started caps 3 – 4 years ago the cap even then was at 250 GB, and if they just grew that cap properly today that would be around 600 GB.

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