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The Broadband Myth PDF Print
Written by Jonathan Haase   
Thursday, 06 February 2003
Following in the footsteps of last week's rant, I though that this week, I would delve a bit further into the issues behind providing broadband internet services to the masses. Those who know me personally know that I work as a technician/programmer for a relatively small ISP in the midwest. That being said I want to state here an now that none of the financial, or other data in this rant is based even loosely on any information that I have obtained directly as a result of my working there. All of the information contained in this rant comes from sources publicly available on the internet. Though my job does probably make it easier for me to find this data, as it helps to know what you are looking for, and were to search for it.

So why did I title this rant "The Broadband Myth"? Well overall the lofty goals that we've all heard about having broadband available to the masses is pretty much just that, a myth. The reasons are numerous, but it all really boils down to two simple things in the end. 1. Everyone wants broadband internet services. 2. Most people aren't willing to pay more than $40-$50 a month for broadband services. I guess first I should explain a little about what I mean when I say broadband internet services. For the most part what I'm talking about there is an internet connection with the capabilities of serving at least 200Kbps of bandwidth to the internet. This pretty much eliminates dial-up modem access which will almost certainly never go higher than it's current 56Kbps (actually 52Kbps with current regulations), without major upgrades in the overall telephone industry nation-wide to eliminate much of the copper that's still in the ground. In with the dial-up group this also eliminates dial-in ISDN, which is more or less a digital equivalent of using two modems and eking out a bit more bandwidth for a maximum throughput of 128Kbps. Eliminating those options pretty much leaves us with four alternatives; Cable, DSL, Wireless, or some form of "Dedicated" connection.

Of those four alternatives a residential customer really has access to only three. The costs associated with a dedicated connection are generally to high for the average residential user. For example the average nationwide price for a short haul clear channel T1 (average distance from ISP with backbone services 3 miles or less) is around $500 a month. This is just the "local loop" charge, and doesn't actually include any internet connectivity. By "local loop" I am basically referring to what you have to pay the phone company for the line between you and your ISP. The price goes up the farther you are from your end point destination, as the telco has to put more T1 repeaters to allow the signal to go farther, and they will pass this cost on to the end user. One T1 is capable of carrying 1.5Mbps, so add to this $500 per month whatever your local ISP is going to charge you for 1.5Mbps of bandwidth to the internet. If you are in a large city where there is a lot of competition you might be able to get a bit better deal on this. For example there is one nationwide ISP that provide T1 connectivity in many large cities around the US for about $600 per month including the local loop charge. Still this is beyond what most residential users are willing to pay.

Of the remaining three options I'd be willing to bet that you have heard a lot more about DSL, and cable internet than wireless broadband. There are a couple of different reasons for this. Currently the big players in the broadband market are Cable TV companies, and telephone companies. If you take a minute to think about it, this really makes sense. In both cases they already have wiring and equipment in place, it mainly just a matter of upgrading or modifying equipment to allow it to carry data for internet traffic. Given this, the cost of implementation is much lower for an existing cable or telephone company.

Other competitors trying to enter the broadband market for a given area are immediately at a disadvantage. They basically have three choices, they can lease space on an existing telephone or cable companies lines, they can attempt to get "right of way" from the city to run their own lines, or they can implement some form of wireless broadband service. In the case of the first option, cable companies are generally unwilling to even consider leasing space on their lines/equipment to other ISP's, and why should they, it's not required by law, and in doing so they would be helping their own competition.

Telephone companies on the other hand are required by various regulatory bodies to share space on their lines, and equipment, and in fact they are theoretically required to charge all users the same amount, regardless if it is the ISP that they happen to own, or another ISP. However it's fairly easy for them to get around this requirement by offering so called "volume discounts". In other words, if you are a local ISP in Smalltown, USA and you are only likely to ever buy 500 DSL lines from BigTelco company, BigTelco is going to charge you something like $40-$60 per line. However if you are BigTelco ISP and you are providing DSL services in all of the markets that BigTelco services nationwide and you are going to be buying tens of thousands of DSL lines nationwide, then BigTelco is only going to charge you $15-$20 per line even if you only happen to be buying 200 of these same lines in Smalltown, USA.

The end result of this is that while BigTelco ISP can sell it's DSL service for $40-$50 per month, and make an average of $20-$30 per customer above the line charge, if the local ISP in the same market remains competitive charging the same $40-$50 per month they end up paying most if not all of that back to BigTelco, just to pay for the lines. All of this on a DSL line that probably averages about 300Kbps bandwidth to the internet. Then added to this mix take the Cable company, which also happens to be nation wide, and generally running at a profit just on the cable tv side of things without even considering internet access. BigCableCo decides to get into the broadband business and since they don't have to pay anybody for access to lines, they start selling a connection that might average 300Kbps for $40-$50. In this case BigCableCo ISP doesn't have the regulations in place that BigTelCo has, so they don't even have to pretend to pay BigCableCo for the line usage.

Enter the wireless ISP market. Here is a place where the local ISP might stand a chance. With wireless, the ISP doesn't have to pay anyone for line access, because there are no lines between the ISP and their customer. There might be some recurring monthly charges to lease tower space, if they use other companies towers for their equipment, but it's on average a lower per customer cost that what they would pay for DSL. The problem with wireless? The up front equipment cost on the customer side of things. Whereas the average cable or DSL modem will cost around $100-$200, for a good reliable wireless solution the customer side equipment can run between $500 - $1500 dollars. Additionally pretty much all of the cost effective wireless solutions that are currently on the market are either strictly line of site, requiring an external antennae on the customer's roof, something with many customers frown at, or severely limited on the distance a customer can be from the tower for non-line of site installations, requiring more towers and a higher cost for the ISP. However in the end a small local ISP still stands a better chance of making money from a wireless solution than the other broadband alternatives available to them.

So far all we have covered is the equipment and line costs associated with providing broadband connectivity for the masses. We haven't even touched on the cost associated with connecting to the backbone of the internet. Most of the reasonably priced broadband solutions provide around an average of 300Kbps connectivity, so we will use that as a baseline. Now take into consideration that you live in a big city where there is a lot of competition, more than one local backbone provider to choose from. You might be able to get one T1 to the internet from a cheap, lower tier backbone provider for around $600-$800 per month. One T1 will support 1.5Mbps of bandwidth or basically 1500Kbps. So dividing this by the 300Kbps you provide per connection for DSL or Wireless you can see that you can get basically 5 customers all using 300Kbps into one T1. Say that you are charging the upper limit of $60 per connection, that comes up to $300 per month income verses $600-$800 a month that you are paying for the connection. Mind you, I'm no accountant, but I don't see how you can make money that way.

So what's an ISP to do. Well that's why no ISP in their rightful mind would ever guarantee all their customers 300Kbps of bandwidth. Pretty much all ISP use over-subscription to offset costs. The assumption is that not all of your broadband customers will be using all of their 300Kbps at the same time. So what you do is figure the minimum number of customers that you have to shove on one T1 in order to at least pay for the T1. In this case at $60 dollars a month you would basically pay for the T1 with 10-15 customers.

This however assumes that you have no other expenses at all except for that T1, no employees to pay, no servers to maintain, no electric bills, etc. It also assumes that you are using wireless, and have somehow managed to get your customers to agree to pay the entire equipment cost of $600-$1500 up front so that you are subsidizing this cost. So in the long run if you want to actually make some money in this venture you have two choices, increase the level of your over-subscription, which at some point in time will increase the likelihood of enough customers using it at the same time that they begin to fall below that average of 300Kbps, or start charging more per month to your customers than what the competition is charging, in which case you'll start losing customers to the competition. The level at which you can oversubscribe is a fine line to walk and ensure that you are oversubscribing enough to pay your expenses, but not so much that your customers service degrades, but it's about the only way that you can make any money at all in broadband. Also don't forget that all of these numbers assume you are in or near a big city, in which case you will have to deal with more competition. If you are in a rural area or Smalltown, USA, the cost of the backbone connection goes up in proportion to how far you are away from a large city where a backbone provider might have a POP(Point of Presence). Most of the increase it cost goes to phone companies for transporting the connection to your location.

Overall in my opinion, broadband for the masses will continue to be a
myth until one of two things happens. The cost of backbone connections goes down drastically, and lessons the need to oversubscribe so drastically, or the end users become more willing to pay a higher premium for broadband connectivity. In the mean time you will see more cable internet providers going the way of @Home, and steadily rising DSL prices, as well as the occasionally wireless provider who actually manages to make a dollar or two.
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