First, let's break down how I see pricing for data connections working into two groups: Fixed costs and Variable Costs.
Fixed CostsThe 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 CostsInternet 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:
- Amazon AWS $0.09/GB (Fixed Costs Included),
- Microsoft Azure $0.087/GB (Fixed Costs Included)
- Google Cloud $0.12/GB (Fixed Costs Included)
- Actual Interconnect and Transit Costs <$0.01 / GB
- Cox $0.20 - $10.00/GB (Fixed Costs an additional $70/month)
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.