Research Notes

Broadband Cost Recovery: A Study of Business Models for 50 Broadband Providers In 24 US States – New Report from Strand Consult

The cost to manage video streaming in broadband networks is growing 2-3 times faster than revenue, frustrating investment and affordability goals. Strand Consult’s new report Broadband Cost Recovery: A Study of Business Models for 50 Broadband Providers In 24 US States sheds light on the cost recovery challenges in broadband networks across the USA. The report finds that 44 of 50 broadband providers say that streaming video accounted for at least half of all their network traffic, with 23 providers reporting that streaming video accounted for at least 70 percent.

Broadband connectivity was critical to cushion the economic impact of Covid-19 lockdowns, allowing people to work, learn, and obtain healthcare from home. Broadband allows these services to be delivered more widely and cost-effectively. Increasingly, essential services are delivered via broadband: banking, e-government, shopping, news, public safety alerts and so on. Without connectivity, people cannot participate in the economy, and the number of under-connected Americans is still too high. The Federal Communications Commission reports 8.3 million underserved locations in the USA. And even for those who can access broadband, many struggle to pay for it.

Whereas broadband networks must provide essential services which can’t be obtained elsewhere, the cost driver of broadband networks is something else entirely: video streaming. Strand Consult’s first report in this series ”Middle Mile Economics: How streaming video entertainment undermines the business model for broadbanddocumented that just 5 video streaming providers – Netflix, YouTube, Amazon Prime, Hulu/Disney+ and Microsoft Xbox – accounted for as much as 75% of total downstream traffic on the networks studied. Every $1 earned by these streamers created $0.48 in unrecovered cost in the middle mile of the broadband networks studied. Moreover, this growing video traffic targeted to only a subset of users at any time, expands to fill available network bandwidth and impinges on the delivery of essential digital services to other broadband subscribers.

Strand Consult’s new report finds that three quarters of broadband providers experience that video streaming negatively impacts their ability to serve their customers without additional investment. Middle mile upgrades and investment initially budgeted every 4-5 years must now happen every 2-3 years, an 83 percent cost increase in just two years. Revenue can’t keep pace with the rate of traffic growth, even with the addition of new customers.  Given the need to ensure affordability, just 11 percent of the broadband providers reported that their customers are willing to pay more for broadband because of the investment requirements to facilitate streaming video. Separate independent reports project internet traffic to grow at 25 percent in coming years, with the firms Alphabet, Meta, Amazon, Apple, Microsoft, Netflix, Disney+ and TikTok accounting for most traffic.

The role of tech platforms to ensure broadband affordability and cost recovery

Ensuring broadband access and affordability are bipartisan policy priorities, and group of bipartisan Senators focus on reforming the Universal Service Fund (USF). Since 1996, telecom providers have contributed billions of dollars to USF, which distributes some $10 billion annually to broadband deployment in high-cost rural areas, schools and libraries, rural health care facilities, telehealth services, and broadband subsidies for low-income Americans. However, that unsustainable model relies on an increasing contribution rate on declining telecom services, the cost of which is borne by consumers through surcharges on their subscriptions.

The group also studies lessons learned from the Affordable Connectivity Program (ACP), likely the most successful US broadband adoption program to date. More than 18 million eligible subscribers have been brought and kept online since 2021 with a monthly subsidy of $30. However, ACP, which was made available with a one-time grant, is about to run out and has no dedicated funding.

The benefits of ACP flow to more than just those who it helps subscribe to broadband. As Strand Consult’s new report shows, the single largest financial beneficiary of the ACP is the set of online advertising platforms, which earn more than $60 per month per ACP user in advertising revenue. The report estimates that ACP users to Alphabet, Meta, Amazon, and TikTok drive $15 billion annually in new advertising revenue for the platforms. However, these companies do not participate financially in federal or state broadband adoption programs. Whereas telecom providers have been paying billions of dollars for years to support USF, the richest tech platforms contribute zero.

In light of USF reform, the report provides the economic, historical, pragmatic, and ethical case to incorporate select “edge providers”–the largest tech companies Alphabet, Meta, Amazon, Microsoft, Apple, Netflix, and TikTok–into the USF and broadband cost recovery efforts. It describes the dynamics from regulated and market-based perspectives. It presents three models and associated financial projections to fund cost recovery and affordability: advertising revenue; indexing contributions to new users and revenue realized from the Affordable Connectivity Program (ACP); and cloud computing. America’s online advertising and cloud computing industries already exceed the broadband industry in revenue. Assessing online advertising and cloud computing at a fraction of a percent could generate as much as USD $5 billion-20 billion annually, more revenue than a double-digit percentage fee on telecommunications could.

The 50-page report includes the following:

  • Executive Summary
  • Overview of challenge and opportunity of broadband economics
  • Strand Consult’s investigation and survey of 50 broadband providers
  • Cost Recovery Business Models and their tradeoffs
  • The status of Universal Service (USF) and bipartisan reform
  • The case for inclusion of select edge providers into USF: federalism, ethics, equity, efficacy, and legitimacy.
  • Ensuring broadband affordability for consumers and avoiding the pass-through effect
  • Financial projections of contribution models with assessments on select edge providers

Post-Covid bipartisan broadband policy recognizes that connectivity is not just nice to have; modern nations cannot function without ubiquitous and affordable connectivity for remote work, education, and healthcare. However video streaming, the key cost driver and leading source of traffic, creates challenge and difficulty for broadband providers to recovery costs, ensure quality of service for all users, and keep network access affordable. Policymakers observe the gap in broadband investment and affordability and want sustainable solutions.  Strand Consult’s report Broadband Cost Recovery: A Study of Business Models for 50 Broadband Providers In 24 US States will help policymakers understand the problem and explore different solutions. The USA is hardly alone in this challenge.

Proceedings and policymaking addressing the role of tech companies in broadband shortfalls are  underway at the United Nations, European Union, South Korea, Japan, India, the Caribbean, and Brazil. In 2020, Strand Consult established its Global Research Project for Broadband Cost Recovery to support the process with policy research, evidence-based analyses, and transparency efforts.

Contact Strand Consult to order the report.