The High Cost of US Cellular Broadband

The Finland-based company Rewheel has been tracking cellular prices since 2014. Their latest report looks specifically at the cost of cellular broadband and shows that US prices are among the highest in the developed world. Rewheel specifically focuses on countries in the European Union and countries that are members of OECD (the Organization for Economic Cooperation and Development), which brings in countries in North America and South America and countries like South Korea, Australia and New Zealand.

The US, Canada and a few other countries are the outliers with the highest broadband prices. The study shows that the average price charged for of a gigabit of downloaded cellular data in the US is just over $6. Nearly half of the countries studied have gigabit prices for less than $1. To put our cellular broadband prices into perspective, US cellular broadband rates are 16 times higher than the average rate in the European Union. What is striking is that the cost per gigabit in the US dropped 11% since 2017 due to carriers increasing the size of data allowances.

The study also correlated broadband prices to the number of cellular competition in a country. In general counties with multiple cellular competitors have lower broadband rates – for instance, countries with three cellular competitors have higher rates than countries with 4 or more competitors. Again, the US with four primary cellular spectrum owners is an outlier compared to other countries with that many cellular companies.

The study doesn’t look at specific reasons for the rates in various countries, or the ramifications for higher or lower prices. However, a lot of the reasons for high prices in the US are well understood:

  • In the US one of the larger costs or providing cellular service is the cost of transport to get data to and from cell sites. The prices charged to cellular providers here is far higher than fiber transport costs in many other companies. The price for fiber transport in the US grew out of the extremely high prices of transport that were billed for decades by AT&T and the other big monopoly telcos, and those prices are still high today.
  • Cellular networks are already overloaded. The cellular companies really don’t want customers to use a lot more mobile data on the cellular networks and hope that most usage gets handed off to WiFi networks. Lower cellular data prices would increase cellular network usage, and the cellular carriers in this country have not invested in the underlying cellular networks to handle greater traffic volumes.
  • The nature of competition here is different than in many other countries. The big carriers in the US have adopted an oligopoly pricing mindset where they compete on things other than price. This is not true just for cellular broadband, but also for landline broadband, cable TV service and most of our telecom markets.

There are a lot of ramifications for having higher cellular broadband prices:

  • Number one is the overall cost of cellular service in the US. The Rewheel study shows there are 14 countries in 2018 where customers can buy a smartphone plan for $34 per month (30 euros) that includes truly unlimited broadband plus at least 1,000 minutes of phone calling. It’s hard for a customer in the US to find a similar plan for under $70. Since practically everybody in the US has a cellphone, the cost of cellular phone bills is a burden on many US families.
  • Several studies over the last year have shown that US cellular customers have grown accustomed to self-limiting their cellular usage. Even customers who buy the so-called unlimited data plans that are capped at 20 GB in monthly download don’t use even half of that data on average. Cellular data caps have taught us to not use cell phone data – a concept that would be foreign in Europe.
  • Because of the high price of landline and cellular broadband, many homes have elected to use their cellphones for broadband since they can’t afford both connections. Such homes are paying far more per GB of data than the rest of us and are further penalized for going over monthly cellular data caps.
  • There are many homes in the rural US where cellular data is the only broadband option (other than satellite which most have tried and rejected). I hear stories all of the time in my travels in rural America where households with schoolkids are spending $500 or more per month on cellular data. The big cellular companies are gladly taking their money and haved no incentive to find an affordable option in rural America,

Are We at the End of Broadband Growth?

A recent report by the Leichtman Research Group looks at overall historic broadband penetration rates. In looking at the results I immediately asked the question if we have topped out with US broadband penetration rates.

The study shows that 82% of homes now have a home broadband connection. Another 2% of homes get an Internet connection from other source like dial-up or satellite, meaning that the overall number of households with some kind of home broadband connection is 84%.

But compare that to 2012. In that year 76% of homes had a home broadband connection while 7% got broadband in some other matter – a total market penetration in 2012 of 83%. This means that the composite growth of homes that have added broadband from 2012 until now is only 1% (84% compared to 83%)

During that time the big ISPs have all continued to show broadband growth. But these numbers show that the growth of broadband came from customers dropping dial-up or other slower forms of broadband.  But the big question that is raised is if the 84% overall Internet connectivity is close to a full penetration rate. If so this raises significant questions about the future of the ISP industry.

The report does suggest that there is possibly more room for industry growth – but only if we can find a way to solve the digital divide. The report shows that 91% of homes with household income above $50,000 have landline broadband compared to only 72% for homes making less than $50,000. That would suggest that the overall demand for broadband is probably closer to the 91% experienced by higher-income homes.

Numerous surveys have shown that low income homes without broadband have always cited high prices as the reason they don’t have broadband. It possible that the broadband penetration for lower-income homes might drop as the telcos begin the promised phase-out of DSL, which generally has been the low-cost broadband alternative in most markets. But these numbers also suggest that an ISP that can profitably offer a low-cost broadband alternative might have a sizable potential market.

Finally, the study looks at cellular broadband. It shows that the percentage of households that sometimes use cellular data to connect to the Internet has grown from 44% in 2012 to 75% today. 68% of households today use both cellular and landline Internet connections.

Other studies have shown that there is a small, but growing segment of the population that only uses cellular data. This tends to be younger people who value mobility over broadband speeds, or low-income households that can’t afford a landline alternative. To some extent the growth in the use of cellular broadband is probably at least partially responsible for holding down the overall growth of landline broadband connections. In economics terms there is some segment of customers that view cellular data as a reasonable substitute for landline broadband, and who are happy with only the cellular connection.

None of these numbers are a surprise to the big ISPs which track these statistics closely in each market. But the numbers are cause for alarm. Once the broadband market reaches full market penetration then there will be no overall growth in the industry in terms of adding net new broadband customers, at least beyond the rate of overall household growth.

The cable companies are still enjoying a boom related to their ability to convert customers from DSL. But the telcos have begun to fight back by building fiber-to-the-home. They are also planning to start deploying more fixed wireless connections using 5G. In at least some markets broadband is going to get a lot more competitive.

The overall broadband market is going to change and become more like any mature market when overall growth stops. This is pure economics. The market changes drastically if an ISP can only grow by taking customers away from other ISPs. We already know what that looks like by observing the marketing wars between the cellular carriers.

A New FCC Definition of Broadband?

Section 706 of the Telecommunications Act of 1996 requires that the FCC annually review broadband availability in the country. Further, that section of law then requires the FCC to take immediate action if they find that broadband is not being deployed fast enough. This is the law that in the past prompted the FCC to set a definition of broadband – first set at 4/1 Mbps a decade ago then updated to 25/3 Mbps in 2015. The FCC felt it couldn’t measure broadband deployment without a benchmark.

In this year’s annual proceeding the FCC has suggested a change in the definition of broadband. They are suggesting there should be a minimum benchmark of 10/1 Mbps used to define cellular broadband. That doesn’t sound like a bad idea since almost everybody uses cellular broadband at times and it would be good to know that the cellular companies have a speed target to shoot for.

But I am alarmed at how the FCC wants to use the new proposed cellular broadband standard. They are suggesting that cellular service that meets the 10/1 Mbps standard can be considered as a substitute for a landline broadband connection that meets the 25/3 Mbps test. This would represent a huge policy shift at the FCC because use of the cellular standard would allow them to claim that most Americans can get broadband. And that would eliminate them having to take any action to make broadband better in the country.

We can’t be particularly surprised by this shift in policy because now-Chairman Ajit Pai vociferously objected when the FCC increased the definition of broadband in January 2015 to 25/3 Mbps. He argued at the time that the speed definition of broadband should not be increased and that both satellite and cellular broadband ought to be considered as substitutes for landline broadband.

But as almost anybody with a broadband connection can tell you, speed is not the only parameter that matters with a broadband connection. Speed matters for folks in a busy broadband home like mine when different family members are trying to make simultaneous broadband connections. But even homes with lower broadband needs care about more than speed. The limiting factor with cellular data is the stingy amount of total downloads allowed in a month. The new ‘unlimited’ cellular plans are capped at 20 to 25 gigabytes per month. And satellite data not only has stingy data caps but also suffers from latency issues that means that a satellite customer can’t take part in any real-time activity on the web such as VoIP, distance learning or live streaming video.

There are several possible motives for this policy shift. First, this could just be an attempt by the FCC to take off the pressure of having to promote faster broadband everywhere. If their annual Section 706 examination concludes that most people in the country have broadband then they don’t have to push expensive federal programs to expand broadband coverage. But there is also the potential motive that this has been prompted by the cellular companies that want even more federal money to expand their rural cellular networks. AT&T has already been given billions in the CAF II proceeding to largely improve rural cellular towers.

Regardless of the motivation this would be a terrible policy shift. It would directly harm two huge groups of people – rural America and the many urban pockets without good broadband. This ruling would immediately mean that all urban areas would be considered to have broadband today along with a lot of rural America.

I don’t think this FCC has any concept of what it’s like living in rural America. There are already millions of households that already use cellular or satellite broadband. I’ve heard countless stories from households with schoolkids who spend upwards of $500 per month for cellular broadband – and even at that price these homes closely monitor and curtail broadband usage.

There are also huge swaths of rural America that barely have cellular voice service let alone 10/1 Mbps cellular broadband. I was recently in north-central Washington state and drove for over an hour with zero AT&T cell coverage. But even where there is cellular voice service the quality of broadband diminishes with distance from a cell tower. People living close by a tower might get okay cellular data speeds, but those even just a few miles away get greatly diminished broadband.

I know that Chairman Pai has two kids at home in Arlington Virginia. There he surely has fast broadband available from Comcast, and if he’s lucky he also has a second fast alternative from Verizon FiOS. Before the Chairman decides that cellular broadband ought to be a substitute for a landline connection I would challenge him to cut off his home broadband connection and use only cellular service for a few months. That would give him a taste of what it’s like living in rural America.

Using Cellular for Home Broadband

slow-downFor some time both Verizon and AT&T have been telling the FCC and state Commissions that they want to replace rural telephone lines with cellular connections, which means bringing cellular data plans to rural areas. We’ve now finally seen Verizon’s plans for what rural cellular data plans will look like:

The headline on this Verizon web site is “use the power of the Verizon 4G LTE Network to give you a lightning-fast Internet connection in your home,” followed later on in the offer with the header “Ditch your Low-Speed Internet.”

Those phrases sound great until you then see the offered speeds: “Fast Internet access with average speeds of 5 – 12 Mbps download and 2 – 5 Mbps upload.” I guess for somebody who’s been on dial-up this might be lightning fast, but it’s awfully hard to call this broadband.

But then comes the real kicker when they list the price and the monthly data caps:

  • 10 GB monthly data cap $60
  • 20 GB monthly data cap $90
  • 30 GB monthly data cap $120
  • $10 per additional gigabit of usage.

Before I totally scoff at this, it’s important to realize that there are already many households trying to get by using today’s cellular plans for home data. Compared to those plans this new offer is a little better. But these new plans are not broadband and it displays the greed of the cellular companies that they can even put such a plan into the public with a straight face. What these plans say to anybody living in a rural Verizon or AT&T area is – you’re screwed.

It’s easy to put these plans into perspective. Just last week I was traveling in Minnesota and there was a day that I used my cellular data plan to power by laptop broadband. In just one day, doing only normal business things, I used over a gigabit of data. I didn’t watch video or do anything that was a blatant data hog. And so the $120 plan would not even power my one business laptop for a month and I’d be paying that much per month and facing $10 for every gigabit I went over 30 GB.

Cellular data in this country is among the most expensive data used anywhere in the world. When you look at charts that are occasionally compiled of worldwide data prices per megabit the only places more expensive are Antarctica, some parts of Africa, and remote islands. And Verizon wants to take that ultra-expensive cellular data and extend it into rural homes.

This pricing by Verizon should end once-and-for-all the arguments that I hear all of the time that the future of rural broadband is wireless. Verizon has it within their means to offer an affordable alternative broadband product from rural cell towers – and this is not it.

I can fully understand why cellular companies don’t want to sell broadband connections in urban areas that are used to streaming Netflix – busy cell sites are really not made for that and such a connection ties up a valuable channel for a long time. But in rural areas where there are fewer people using cell towers the wireless carriers potentially could offer an affordable product with a much larger data cap. They fact that they are choosing to not do so says more about their greed than anything else.

I hope the FCC is paying attention to this. A copy of this web site need to be attached to any filing that the cellular carriers make at the FCC asking to tear down rural copper and replace it with cellular data. If the FCC supports such an idea, even in the slightest – this is what they are agreeing to.