Broadband companies have a problem. Broadband service isn’t able to keep up with demand. The problems are mainly caused by the high speeds that these companies provide. The companies have limited scope to manage performance, which is why they turn to customers to do the work. The customers respond and overwhelm the companies with demand. The companies sell what they can to supply customers with maximum speeds. Demand puts such a strain on networks that they become useless and have to work with the customers to try and meet the demand.
It’s an oligopoly – a system where one firm controls both the supply and demand of a product. This structure leads to monopolies where one company controls the outcome. When a network fails, the company providing the service is left to pick up the tab.
But this system works because the people using the network are extremely loyal to the networks providers and only provide them with complaints when a problem occurs. When a network providers is hit with maximum demand, they have to find a way to do the work without totally crippling the network. But while they’re working with the customers to meet demand, the network providers are earning staggering profits off the back of the people who are charging them hundreds of pounds extra for a service.
Most people pay a premium for their broadband package because they value the speed and convenience of getting fast internet from a reliable provider. But in a recent study, Capital Economics found that an inordinate number of high speed internet providers makes a profit of almost £30,000 per subscriber. That’s more than £3,000 for a customer wanting just 10 megabits per second, more than triple the average broadband speed of the UK.
Internet service providers often justify their inflated profit margins on two fronts. The first is that while their customers are willing to pay high prices, it’s in the interest of the internet companies to keep the money coming in and take a profit. The companies keep the prices high for the simple reason that they have to pay the high bills these customers are charging in order to keep their own profits high.
The second reason for the high profits is that as much as the internet companies pay to keep customers on board, they are also investing millions of pounds every year in rolling out ever faster broadband networks. And this’s in addition to the huge amounts of money they are already spending on already bleeding networks. After all, the most profitable part of their business is data transmission, especially data upload.
The results of the Capital Economics research which goes under the name of ‘Political Economics: How Big Data Transforms Free Trade’ show that investment in the infrastructure necessary to keep a network fully functioning is high and keeps generating positive financial results for the internet companies. And the internet companies are dominating this market share using the network based model, which lets them make a profit.
In response to the Capital Economics research, Russell Quirk, chief executive of broadband provider Switch pointed out that it doesn’t matter if broadband companies are making profits because they get paid a premium because there is no substitute for the speed that they provide:
“Under the current market, access to faster speeds, high reliability and guaranteed quality of service outweighs the price paid by customers who don’t opt for high speed, reliable and guaranteed quality of service. Speeds measured at around 20-30Mbps are considered to be ‘broadband’ by most people in this country.
“High speed broadband is essential to the economy and consumers who get to choose that speed or higher when switching providers will still pay what a similar service would cost them in the UK. We believe in combining investment in network with a great service and, like all players in the marketplace, we’re keen to support the government in developing a level playing field that allows everyone to have access to that broadband that they require for a more equitable economy, with fair taxes on this network, better regulation, and, crucially, more competition.”
The UK Government has already indicated it’s considering regulation to ensure network services are more evenly distributed. Some people have argued that cutting off cash flow from high-profit companies would wipe out service improvements. But other people have argued that better regulation is needed to end the mad privileges of the corporate elite who benefit from such systems.