Sunday, October 29, 2017

Cox Data Usage Charges

Recently, Cox, a city sanctioned monopoly, has begun charging users for data usage over 1TB in my town, Santa Barbara.  While I don't actually believe that charging users for data usage is wrong, I do believe that there is an actual fair market value for data and that Cox is overcharging dramatically - in an environment where it has a government sanctioned monopoly.  This, I believe is wrong.

First, let's break down how I see pricing for data connections working into two groups: Fixed costs and Variable Costs.

Fixed Costs

The primary fixed cost for home network connections are the physical connection between the internet provider and the home and the other networking equipment required to make the connection.  This would be similar to the electrical lines that connect your home to the grid and the grid infrastructure necessary to transmit electricity from a generator to a home.  Similar to the power grid, there is not really an increase in cost here when a customer consumes more power unless the customer has specialized requirements that require some sort of upgrade - extremely uncommon.

Variable Costs

Internet service providers have to connect their users to the rest of the Internet.  Fundamentally, a residential internet service provider has one or more agreements with other internet service providers to ensure that any computer on the internet can talk to any other computer on the internet.  Cox, for instance likely has arrangements with companies such as Level3 and Cogent who can connect Cox to other service providers such as Comcast and Time Warner.  Internet companies like Google and Facebook also have agreements with the same providers (Level3 and Cogent).  Unlike residential providers, these providers must compete for business and companies who connect to them can distribute traffic across a variety of them, balancing it throughout the day to bring costs down.  These costs continue to shrink every year.

A more detailed writeup of these fixed and variable costs can be found at this very good Broadband Now article.

So, what is wrong with what Cox is doing?

Cox's pricing is here.  I find this pricing suspicious given that Google Fiber is able to provide substantially better service at a lower cost in Kansas City.  But, setting aside the fact that Cox charges more for less to all subscribers.  Let's look at what Cox charges to people who use over 1TB of data to, say, restore their computers using an Online backup service.  $10/50GB, or roughly $0.20/GB.  These costs should reflect only changes in variable costs, and not any fixed costs which are incurred in the over $70/month Cox charges customers after all fees.  Google, Microsoft, and Amazon charge between $0.087/GB and $0.12/GB - or roughly 1/2 the cost of what Cox charges, and these providers are including their fixed costs in these charges.  Using only 1GB of data in a month with Google/Amazon/Microsoft costs about a dime.  Using only 1GB of data in a month with Cox costs over $70.  Let's assume that this discrepancy is because Cox has higher fixed costs.  That means that those fixed costs are covered any any additional charges due to increased variable costs should be somewhere near market value for network transit fees.  Cox is charging at over 10x those fees (more on this later).

That's only a dime.  What does it matter?

If a home user wants to restore a 3 TB hard disk from a backup, Cox will charge that person an extra $15.  That's a lot of money just to restore a backup!  This pricing also will act as a mechanism to deter people from streaming video from Cox's competitors, Youtube, Netflix, etc.  Once you hit that cap, Cox will charge you $10 for every 16 hours of Netflix you watch in 4k.  Netflix charges $12/month for the ability to stream as much 4k video you want and that includes both the cost of paying licensing fees for the movies and paying their internet provider (cogent or level3) to ship the movie over the network.  That's just a couple of movies a week before you're paying more money to Cox than you are to Netflix!

How much should Cox charge then?

Here's what Amazon, Microsoft, and Google charge:

These providers, including Cox, are likely only paying less than $.01/GB as of 2011 in a market where prices have been falling consistently for decades.  Without transparency from Cox, it's hard to say what their bandwidth acquisition costs are, and Cox should be allowed to turn a profit.  But I believe anything more than $0.03/GB (billed in 1GB blocks, not 50GB blocks) highly suspicious.  Again, this reflect a 3x profit margin given what data I have been able to find already.  Cox is currently charging between $0.20 and $10.00/GB depending on how much of that 50GB block is used.

What should be done?

I would like for the Santa Barbara city council to publicly work with Cox to correct this abuse on its monopoly privileges in our community.  My personal feedback is that the city should take measures to allow changes in policies to our sanctioned monopolies re-open negotiations between the monopoly and the city to ensure that the tax-paying consumer is treated fairly.  I would hope other jurisdictions do so as well.

2 comments:

  1. Their strategy is aimed at those of us that no longer bundle their services (cable, internet, phone). I pay premium service for Internet Only which went up $5 to $89.99 only because I no longer bundle. It will go up another $50.00 for internet only because I have cut cable and phone service and go over the 1 TB monthly limit. That will be $139.99/month for only unlimited internet. That is crazy pricing! Right now there are not a lot of us (relatively speaking) that use streaming only for entertainment and therefore exceed 1TB but these will continue to grow. Cable television will drop just as the number of home landline phones has dropped. Eventually everyone will hit the caps and be paying $150.00 for internet only. The barrier is that the switch to become a cord-cutter is still relatively difficult for technically challenged.

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  2. I don't think that this pricing is fair considering the cable company doesn't actually provide content to cord cutters. And, since they operate in a government sanctioned monopoly, I expect regulation to force these prices down as a taxpayer.

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