Should broadband data hogs pay more? ISP economics say "no"

It is good to be an Internet service provider. In fact, it's better than being a cable operator, since there are no multibillion-dollar payments to content creators.

Time Warner Cable's revenues from Internet access have soared in the last few years, surging from $2.7 billion in 2006 to $4.5 billion in 2009. Customer numbers have grown, too, from 7.6 million in 2007 to 8.9 million in 2009. But this growth doesn't translate into higher bandwidth costs for the company; in fact, bandwidth costs have dropped. TWC spent $164 million on data contracts in 2007, but only $132 million in 2009. What about investing in its infrastructure? That's down too as a percentage of revenue. TWC does spend billions each year building and improving its network ($3.2 billion in 2009), but the raw number alone is meaningless; what matters is relative investment, and it has declined even as subscribers increased and revenues surged. "Total CapEx [capital expenses] as a percentage of revenues for the year [2009] was 18.1 percent versus 20.5 percent in 2008," said the company a few months ago. In fact, CapEx has declined for the industry as a whole. As the National Broadband Plan noted, the big ISPs invested $48 billion in their networks in 2008 and $40 billion in 2009. (About half of this money can be chalked up to broadband; the rest of the improvements were done to aid cable or phone service.)

To recap: subscribers up, revenues up, bandwidth costs down, infrastructure costs down. This might seem like a textbook case of "viability"; what were Time Warner execs talking about last year when data caps were held up as a necessary safeguard against doom? TWC's single biggest expense for Internet access is not network investment or bandwidth. It's labor. As Internet use increases, TWC techs, engineers, and executives need to make adjustments. Paying all of these people costs money, and those costs increase as the network is more heavily used.