Telecoms Toss the Gauntlet Over Broadband

Last Updated Sep 30, 2009 9:00 AM EDT

So Verizon CTO Dick Lynch finally dropped what has been obviously developing over some time, that the company is looking at moving to a consumption model for wired broadband. And so we've just seen the official launch of a new sport: telecom versus tech.

The signs have been around for a while. Last fall, Comcast was implementing a bandwidth cap on residential users. And for at least that long, the industry has been venting the direct vents from its spleen over the difficulties of dealing with an ever escalating expectation on the part of customers that unlimited bandwidth might mean exactly that. So they stream and download and chat and otherwise make use of the medium. And as Qwest CTO Pieter Poll said to me earlier this year:
Our broadband customers on a per-customer basis are consuming 40 percent more data year over year. Our traffic on our network is larger because we have more customers coming on. What you're seeing is that consumers, now that they have broadband, are depending more and more on broadband. Web pages go to rich web pages and rich web pages go to video. Video is not an isolated event. It's the first thing coming along that is streaming other than voice, but there will be things that are higher rate streaming than video. The first thing you'll see is other forms of high definition at higher speeds. There will be virtual reality in gaming. This trend will continue.The consumer's expectation is that they're not going to spend 40 percent more per year for the experience. They expect to pay the same or perhaps less. You don't have to be a rocket scientist to see what my problem is. How do I bring down my costs to move 40 percent more data?
And that's where the battle royale is forming. Tech and media companies are pushing the front of what is available and possible online, but the carriers have been concerned about how to keep pace.

It's not as though the carriers are poor. The table shows revenue and EBITDA as of their last fiscal years:

Literally any of them could fiscally afford to put a billion or more into their infrastructures. Every year. From now until whenever. The thing is, even if the companies increase capacity 40 percent every year, that's nowhere near adding 40 percent to total costs. Qwest, for example, had a total cost of sales of roughly $4.6 billion, and that includes facility and equipment, directly attributable employee, and network operation costs. Verizon's cost of services and sales was on the order of $39 billion and also includes far more than hardware for capacity. In short, although it would be expensive, there's a good chance that the companies could increase capacity that much.

Only, that sort of decision isn't going to happen because shareholders would probably freak out, lowering stock price and leaving management less well off in terms of the options they hold. They want to cap expenses and continue to grow earnings because that's what companies do. Or, to put it differently, since the FCC has noted that it's in the net neutrality camp, the gloves come off.

And here's when the battle ensues. By limited or metering capacity, the carries will greatly dampen user willingness to expand use of services on the Internet. But that's directly contrary to the interests of the companies that want to provide the services. However, this is a fight that even all the non-carrier tech companies on one side may still find an unbalanced brawl. The FCC is unlikely to tell the companies how they have to charge for bandwidth, and the carriers have all the chips, until the service and hardware side decides to build out its own national infrastructure.

Image via stock.xchng user modish, site standard license.
  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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