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How Much Does Data Really Cost an ISP?

For consumers in the US, “unlimited” broadband data can be surprisingly expensive.

Since the introduction of data caps, Internet subscribers have been frustrated by overage fees ranging anywhere from $0.20–$12 per gigabyte. The seemingly arbitrary fees are particularly frustrating since it’s unclear how much it actually costs an ISP to deliver that gigabyte.

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One thing’s for certain — it costs a lot less than the $0.20/GB fee charged by major ISPs like Comcast and AT&T. But how much does it actually cost the ISP to deliver 1GB to a customer?

Calculations based on Internet transit costs, as detailed below, suggest an ISP cost per gigabyte well below $0.01. Using the $10/50GB overage fee quickly becoming standard for broadband caps as a reference, that translates to a minimum 2000% markup on overage fees.

In some setups, it could be several times that.

Given that the cost of a generic Internet connection in US metro areas costs consumers almost twice as much as the same plan in other first-world cities like London or Paris[1] , consumers are right to be suspicious about the pricing.

invisible networks

Data: the invisible resource. Image Source: MomentsForZen/Flickr

On the other hand, there’s no denying that the cost of implementing and maintaining Internet infrastructure is nothing to scoff at, with the cost of laying fiber as high as $80,000 per mile.[2]

In this post we’ll unpack the question of how much data costs the ISP and present you with information that places the price in context.

Visualizing a gigabyte

Just to be clear, when we talk about the cost of one gigabyte we’re talking about amount of data, not the speed of delivery. (Example: cost of transferring 1GB file vs. speed of 1MB/second.) Regardless of how fast data is delivered, data caps are set in terms of amount of data transferred.

Everything digital is measured in bytes, from speed to storage capacity.

Everything digital is measured in bytes, from speed to storage capacity. Image Source: Newcastle University

The amount of data stored in a gigabyte can be visualized as roughly equivalent to a single feature-length standard-definition film. On a standard DSL broadband connection, downloading one gigabyte of data would take around 15–25 minutes. (At $0.20–$10.00/GB overage rates, you can see how this would add up fast if you don’t watch your cap — particularly with data-guzzling technologies like 4K video streaming entering the market.)

Factors that determine cost

Discounting factors like infrastructure cost and maintenance, the pure expense of delivering data comes down to one resource: electricity.

Consumers rarely think about the physical networks driving the "cloud." Pictured is one of many Google data centers — this one in Dalles, OR.

Consumers rarely think about the physical networks driving the “cloud.” Pictured is one of many Google data centers — this one in Dalles, OR. Image Source: The Data Center Journal

The Internet as a whole requires far more electricity than you probably imagine. Google’s cloud alone used 260 million watts in 2011, more than Salt Lake City in the same period [3]. A smartphone streaming an hour of video on a daily basis uses as much electricity as a new refrigerator [4].

That said, the distance between ISP and consumer is relatively short in the context of a worldwide network. (That’s why it’s called the “last mile,” and ISPs like Comcast are referred to as “last mile providers.”) While most reports place the estimated cost of moving data over existing infrastructure at less than a penny per gigabyte, the patchworked nature of Internet infrastructure makes exact measurements surprisingly tricky.

ISPs like Comcast deliver Internet over the "last mile" between the worldwide Internet network and consumers. If the Internet were a subway map, you can picture the last mile as the walk between your stop and your apartment.

ISPs like Comcast deliver Internet over the “last mile” between the worldwide Internet network and consumers. If the Internet were a subway map, you can picture the last mile as the walk between your stop and your apartment. Image Source: Bernard Goldbach/Flickr

For starters, there are three separate stages data travels through when a customer consumes data:

  • The “last mile” between customer’s residence and ISP office
  • The Internal Network between the ISP and public Internet “backbone”
  • The public Internet “backbone” network

Unfortunately, the pricing data needed to pin down the per-gigabyte cost of data transit to ISPs in the “last mile” isn’t available directly. ISPs are required to file their expenses like any other company, but they’re notoriously private with their records. Even the public records that are available are usually redacted to conceal exact figures.

Falling transit prices point to marginal per-gigabyte costs

Even if ISPs weren’t secretive about their operational costs, the varying distances and delivery types (cable, DSL, fiber, etc.) combined with traffic-sharing arrangements like peering make determining exact cost virtually impossible.

We can, however, make educated estimates based on the cost of public Internet transit prices. Again, transit prices are protected by NDAs, meaning that public data is based on individual statements from Internet Operations Forums. Even if the prices aren’t accurate to the penny, it’s clear that prices have dropped a dramatic 15–50% year over year [5].

TransitPriceDrops

Evidence from Internet Operations Forums shows transit prices quickly approaching zero. Image Source: DrPeering.net

Cost projections based on the 2015 $0.63/gbps transit price estimate land well below a penny per gigabyte even before considering peering arrangements — which bring the cost down even further by letting ISPs collaborate to offset one another’s traffic. [6]

So, even if we can’t get an exact price, it’s clear that costs have been falling into fractions of a penny per gigabyte for years.

Evidence from the horse’s mouth: ISP shareholder statements

Exact numbers on ISP data transit costs may be hard to pin down, but the most compelling piece of evidence against the need for data caps comes from ISPs themselves. Specifically, smaller Internet companies like Sonic and WOW! who continue to compete on price and customer service — even without the extra revenue of data caps or economies of scale that larger ISPs like Comcast and AT&T.

For example, Sonic CEO Dane Jasper stated to CIO that “[t]he cost of increasing [broadband] capacity has declined much faster than the increase in data traffic.”

A David and Goliath story: small Internet providers continue to compete on quality of service, even without data caps on broadband plans.

A David and Goliath story: small Internet providers continue to compete on quality of service, even without data caps on broadband plans. Image Source: Wikimedia Commons

While Sonic’s position as an underdog might shed some suspicion on the statement, Jasper provided concrete cost and revenue comparisons to back up his accusation. While infrastructure costs were as high as 20 percent of revenue when the company started up, the number has since dropped to less than two percent, says Dane.[7]

Even ISPs who support data caps have gone on record admitting that caps have little to do with data transit costs or infrastructure management. Here’s SuddenLink CEO Jerry Kent in a 2015 conference call to investors:

I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity. Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.[8]

If data caps were truly a response to the cost of data, infrastructure, and “congestion,” it stands to reason that all ISPs would follow suit and charge consumers by the gigabyte for exceeding their caps. So long as smaller ISPs refuse to follow suit, it will be difficult for major players like Comcast to justify data-consumption-based overage fees.

Big picture: costs going down

Reports filed over the past decade of Internet history have one common theme: a rapid decline in cost[9].

From the consumers’ perspective, the cost of data transfer matters much less than the simple fact that the price has been steadily moving down since the 90s[5]. Worldwide, data transit costs went down 22% in 2015 and an average 14% compounded annually in the three years prior [11]. Meanwhile, the cost of US Internet connections has only risen [12], which leads to the question: where is the money going?

Theoretically, it’s going towards infrastructure upgrades that would boost speed and efficiency, bringing prices down for consumers in the long run. In practice, the struggle between the FCC and major ISPs to facilitate the deployment of next-generation technologies like fiber-optics has been slow-moving in spite of incentives like tax breaks and subsidies [13].

Cost in context

Regardless of how cheap it is for an ISP to transfer a gigabyte of data, the fact that it’s so cheap actually diminishes its importance in the debate over connection costs, data caps and overage fees.

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With the cost of data so low as to be negligible, the real factor for ISPs is more substantial operating costs like infrastructure upgrades, technician payroll, network engineers, call centers, and every other moving part in the “last mile” Internet business.

FCC chairman Tom Wheeler, responsible for negotiating ISP regulations.

FCC chairman Tom Wheeler, responsible for negotiating ISP regulations. Image Source: Wikipedia

ISPs have an obligation to their shareholders to charge reasonable rates that turn a profit. However, the evidence is stacked against the ISP’s claim that data caps and per-gigabyte overage fees are necessary to maintain infrastructure. When costs are so low, capping consumers rather than upgrading infrastructure to account for increased traffic looks highly suspicious — especially in an uncompetitive market.

Ultimately, the only way to ensure that the ISPs maintain reasonable profit margins is to foster a competitive marketplace that lets the “invisible hand” bring the consumer price closer to the ISP cost.

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