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.