In the preceding article, The Relative Cost of Internet Access, we looked at the differences in costs between various service tiers available from two Internet Service Providers. For those interested in a simple recap, here it is: the cost of a broadband Internet connection in Germany is (slightly) lower than the cost of comparable connection in the United States. But not only is the pricing more attractive in Germany, the speed of the connection is superior as well. Excluding special offers and discounts, customers in Germany have no trouble signing up for an uncapped connection of 32 Mbit/s down, while U.S. customers, looking to spend no more than their German counterparts, are limited to only 6 Mbit/s.

So now the question remains: why the hell is an Internet connection so darn expensive in the US, and why are so many ISPs now considering, or, worse yet, actually implementing, bandwidth caps?

In order to answer this question, let’s take a brief look at which ISPs are capping their customers and to what extent they are doing so:

• Comcast: 250GB cap on total bandwidth consumption per month.
• Time Warner Cable: Toying with the idea of total bandwidth caps at about 40 - 75GB per month.
• Cablevision: No explicitly stated cap; although some report that heavy usage is frowned upon.
• Verizon FIOS: No cap, whatsoever.

These four — Comcast, Time Warner Cable, Cablevision, and Verizon — represent practically the entire high-speed ISP industry as it exists today in the United States; so much for competition, right?

Notice anything interesting about the various caps that these four companies are imposing on their customers? Here’s a hint: look at what else they’re invested in.

Comcast and Time Warner both own a variety of actual TV networks. More specifically, Comcast owns E! Entertainment, The Style Network and G4. Similarly Time Warner also owns a plethora of channels, networks, and even a studio or two:  New Line Cinema, HBO, TBS, Warner Bros., Cartoon Network, and the list goes on.

But why should it matter what else these companies do, as long as they can provide us with a digital connection to the outside world? Well, a major part of the problem is that because these companies have been allowed to expand into so many different direction (without any proper oversight from either the government, or the executives heading the boards), they are now so big that they simple too cumbersome to be able to adapt swiftly to the latest industry tends.

If you’ve set up a business model around television stations, networks, and programming for said media, what is the one thing that your business relies on? Television viewership!

And what’s the biggest threat to television at the moment?

Why, it’s the Internet, of course.

So, at the end of the day, it all comes down to traditional television programming versus diverse, à la carte Internet content.

Now, one might make the observation at this point that there really shouldn’t be a problem here, since Comcast and Time Warner are two business that are well invested in both of these markets; that is, they both offer Internet access, and then both offer television services. Though correct, this observation misses a critical point. Companies of this caliber are, relatively speaking, old gaints, who have over the years gotten very used to a single, very lucrative business model, which, at the end of the day, boils down to nothing more than the number of people tuning in. Internet service for these companies, in comparison, is only a small branch in a much larger business model. Additionally, offering Internet access is not, by any stretch of the imagination, the same thing as owning a TV network, let alone several of them. With ownership comes the ability to dictate and create content, which is not the case if you’re only acting as a doorkeeper to a vast realm of content and knowledge.

Being used to seeing the majority of their income stem from television based content, companies like Comcast and, to a larger extent, Time Warner are scared out of their wits; the Internet is stealing away viewers and they have no clue what to do about it. There now exist services such as Hulu and Netflix, which have led thousands upon thousands of people to drastically reduce the time that they spend in front of an actual television — mind you, they’re still spending a lot of time in front of a screen; they’re just not putting their feet up and leaning back.

Due to services like Hulu and Netflix, less and less revenue is streaming into the coffers of Comcast and Time Warner. They might be providing the Internet access, but that really is all that they are doing. They see absolutely no additional income from what the consumer actually does with that access.

The simple fact is that people are watching less and less actual TV, and from the perspective of those invested in both the Internet service and television service industries, the only real short-term solution to this problem is to limit the amount of time that customers can spend using online services such as Hulu and Netflix. This is simply due to the fact that under the current model there is far less money to be made providing content over the ‘Net than through the tube.  For a lot of providers, the easiest way of reducing the time spent with a browser instead of a remote is simply to impose bandwidth caps and/or increase the price of pulling in the bits.

Of course, Comcast and Time Warner would be the last to admit that they are behind the times and that their coveted revenue models are antiquated and may be approaching extinction. The excuse typically peddled by Comcast and its ilk is that there are users — and by their own admittance, way less than 1% — who use exorbitant amounts of data on a monthly basis, and that these customers, in doing so, are spoiling the party for the rest of us. Without getting too far off topic, let me just say that I have a very hard time believing that.

If customers can only consume so many bits per month, then, logically speaking, there should come a point at which they will be forced to stop using the Internet to watch their favorite shows. And if they can’t watch their favorite shows on the ‘Net, customers will have to revert back to watching television instead, which is exactly what the cable companies want — and need.

Intuitively, one might assume that as technology advances and becomes more readily available that products and service should become ever more abundant and ever cheaper. One would presume that in the most populous state in America, where the boundaries of technology are continually being probed and pushed back, that something as basic as an Internet connection would be relatively cheap, certainly no more expensive than a connection somewhere in Europe, right?

Looking at the numbers, however, this is not necessarily the case, and reasons for this pricing discrepancy are not immediately apparent. In order to understand why the prices are what they are, one needs to understand the who the players are, as well as the state of the industry as a whole.

But, before we get too far into the analysis, let’s start out by looking at the numbers.

Internet penetration in the United States is at roughly 45 percent (according to a census taken last year), and with the number of services and devices what use the Internet increasing daily, this percentage is bound to skyrocket in the coming years. That being said, however, the United States is still way ahead in terms of Internet penetration when compared to the rest of the world, and as such, the rate of adoption in the U.S. is not quite as high as it might be in some other, more rapidly developing, parts of the world. In fact, while the percentage of Internet users in the rest of the world is at around 20 percent of a given population, Internet adoption (in the rest of the world) is growing at a rate of about 395% — compared to a growth rate in the United States of about 228%.

Despite the high penetration, however, the cost of service in the United States is rather steep, even when compared to other developed nations. To illustrate my point, let’s take a look at the cost of a high-speed Internet connection in Germany versus the available offers from Comcast, the most popular Internet Service Provider (ISP) in the United States.

With a quick hop across the pond with Google.de, it doesn’t take all that long to find an appealing high-speed Internet offer in Germany. I found a rather appealing (as you’ll soon see) deal from a company called Kabel Deutschland (Cable Germany, for those who care).

For the purposes of this comparison, I’m only interested in signing up for an Internet connection; in other words, I’m not interested in television or phone service, nor do I want any sort of bundle. So, let’s take a look, shall we…

The most basic service available from Kabel Deutschland at the time of writing is their so-called “Flat Easy 1000” plan. Although this basic plan isn’t likely to impress any Internet addicts, it nonetheless offer customers a download speed of up to 1Mbit/s, an upload speed of up to 128Kbit/s, in addition to a few more features (like 6 e-mail accounts, a free modem, et cetera). Again, this isn’t the most impressive package, but it’s probably more than enough if the computer isn’t the center of your world. Neglecting one-time installation costs and the like, the monthly cost for this service comes out to be €9.90 (about $13.15).

At this point, none of this is all too impressive; it is certainly possible to find a comparable deal in the United States. In fact, AT&T is currently offering a $10 per month plan for customers who have not had a high-speed Internet connection in the past 12 months. Ignoring special offers, however, AT&T cheapest offer is $19.95  for a connection featuring 768 Kbp/s up, and 384 Kbp/s down (with a 1-year contract); and Verizon offers 1 Mbit/s down, with 384 Kbp/s up for $17.99 (if you sign up for a 2-year contract).Verizon’s offer is arguably the closest to that of Kabel Deutschland, but it is still 36% more expensive than the German offer.

Where things start to get really interesting, however, is when one starts looking at the available offers for what has been coined “hi-speed Internet.” What becomes quickly apparent is that the cost of an Internet connection really skyrockets in the U.S. as speed increases, while in Europe the prices remain far more reasonable. Signing up for Comcast’s hi-speed connection quickly results in a monthly bill of (just) over $40 dollars. Now, that might be okay, depending of the speeds involved. Unfortunately, those speeds are not that impressive at all, especially when you start to consider the offers available in other first-world countries.

Although it is possible to attain speed of more than 6 Mbit/s, the vast majority of Comcast’s offerings revolve around a 6 Mbit/s down-speed. More to the point, Comcast is particularly fond of offering customers what they call “PowerBoost”; depending on the overall demand placed on its network, Comcast is able to offer customers access to a full 12 – or 16 Mbit/s (depending of the type of service), for short periods of time.

Going back to Kabel Deutschland, the situation is quite different. Their top offer is for a package that includes a 32 Mbit/s connection, with a 2 Mbit/s upload, 60 e-mail accounts, and a free wireless router to top it all off. But, wait, there’s more! Smack-dab in the middle of the page, in red text, it reads: “Kabel Internet mit Flatrate ohne Limit.” Now, you don’t need to know a lot of German to know what that translates to. Unlike Comcast, Charter, and almost every ISP in between, Kabel Deutschland does not place caps on the amount that their customers can use. If such a service were to be offered here in the U.S., it would be “competitvely” prices at well over $80, to be sure. However, the Germans are offering all this for a mere €22.90 per month for the first year — that’s $29.60! Thereafter, the price increases to €29.90, which translates to about $42.10.

Although it would seem that after a year of service both Comcast and Kabel Deutschland charge about the same, one ought to consider that Kabel Deutschland’s offer is far superior in speed and value. Not only does the German ISP offer a better connection, but they also guarentee that customers can download (and upload) as much as they please, without having to worry about any hitting any bandwidth caps — the same cannot be said for Comcast, with their 250 GB cap.

Now that we’ve seen the numbers, there’s still the lingering question of why this price descrepency exists, especially when one considers that Comcast, and in fact most ISPs in America, is also imposing a rather unpopular bandwidth cap on their users. The reasons for and implications of these simple facts will be discussed in the next article in this series.