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97% Profit Margins on Internet Will Cripple Innovation

by Joshua Auriemma on February 7, 2013

We’re at a point now where technology has finally caught up to the amount of bandwidth most people have available. A few years ago, the only thing we could really do to max out our bandwidth was download huge files from the internet, but nowadays ubiquitous internet activities can easily max out our available bandwidth or put us over our data caps.

We cut the cord in my house a while ago and Netflix and Hulu have replaced our traditional TV habits. At night when my girlfriend is in one room and I’m in another, both streaming Netflix in HD, we’re using up to 5.6 gigabytes per hour. (If we were sadistic and decided to stream in 3D, that would be up to 9.4 gigabytes per hour.) A conservative estimate says that just in Netflix bandwidth, we’ll tear through about 215 gigs of bandwidth per week. The problem is that many US ISPs start to cap data at around 300 gigs per month.1 We had to upgrade to Comcast Business to avoid those caps, and we’re paying quite a bit more as a result (although thankfully less than we would if we had a standard internet/cable bundle). Even at the increased price of Business Class, the download speeds are about the same (read: not good). Living in Central Pennsylvania, we also don’t really have any other viable alternatives.

This problem has already led, in my opinion, to the destruction of a perfectly good business model. OnLive, a streaming video game company, is in serious financial trouble even though in a perfect world its business model should be selling like gangbusters. No need for a gaming console, subscription plans for multiple games without having to shell out $60 for each new game, great hardware to render graphics, and extended demos so that people can test games instantly without needing to install anything. The problem is that due to connection speeds and server response times here in the US, the average gamer can notice a few millisecond input lag, which is apparently enough to turn most gamers off the product.

I think OnLive was the first major company to really be affected by our infrastructure, but it won’t be the last. There are some technologies specializing in reducing bandwidth costs through compression, but as our hard-wired technology continues to improve, we’ll ultimately want downloadable analogs, and that’s going to be a problem going forward. Recently, credible sources have reported that ISPs like Comcast and Warner Cable are operating at a 97% profit margin on currently-existing internet services. Even though the US is currently ranked in the high 20s to low 30s in terms of broadband measures, there’s simply no incentive in the world for the ISPs to improve what they’re already offering until someone comes along and offers something better, on a large enough scale, for cheaper. (Or until the government decides to regulate the insanity.) If things don’t change in the near future, I suspect we’ll start to see the first round of applications and services that become popular in foreign countries, but are simply unusable in the US, within the next few years.

I should note that there’s some hope at the end of the tunnel. I’ve seen some anecdotal evidence recently that Google Fiber may be shaking up the state of affairs. Unfortunately, people better versed in the issues than me have commented that it’s unlikely that Google will be able to expand across the entire US, but who knows? I’ll stay optimistic because it seems like our only shot in the near future.

  1. This was the Comcast hard cap for a while, though I’ve read that they’re likely turning it into a soft cap, where people like me will only have to pay an obscene amount of money to continue service rather than get shut off entirely. []

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