How streaming entertainment makes rural broadband unsustainable

• By Stephanie Kanowitz
• Sep 30, 2021

If the five companies using the most broadband bandwidth contribute more to the costs of providing it, they could help address the digital divide, a new report states.

Roslyn Layton, a vice president at Strand Consult, researched four rural broadband providers and found that 75% of downstream network traffic comes from five companies: Amazon Prime, Disney+/Hulu, Microsoft Xbox, Netflix and YouTube, according to her report, “Middle Mile Economics: How streaming video entertainment undermines the business model for broadband.” The traffic from those companies drives about 90% of the net new network costs for the four rural providers.

The remaining 25% of traffic is what she terms “socially valuable” because it comes from sources such as government entities, public safety, education, health care and news sources. They account for about 10% of the network costs.

“We’re missing almost about $100 billion annually in the market, and that’s because the largest internet companies are not participating in the infrastructure cost,” Layton said. They not contribute to middle or last mile network costs and rebuff efforts to find methods of cost recovery. That, according to the report, makes the current model of flat and uniform pricing likely to become unsustainable for rural broadband.

Now is the time to reexamine the broadband setup, Layton said, particularly as it pertains to the middle mile, which is most impacted. That is the part that enables the transport and transmission of data from the central office, cable headend or wireless switching station to an internet point of presence, the local access point that lets users connect to the internet through their provider.

The broadband providers Layton studied charge an average of $50 for a standard broadband subscriptions – a relatively flat rate in alignment with the uniform pricing that is common in the United States for broadband. This means that there is one price for an advertised speed for an entire region. On top of that fee, subscribers pay $25 to the streamers to access the video entertainment, and for every $1 they receive, rural broadband providers must invest 48 cents in equipment to deliver the content, according to the report – costs the provider has no way to recoup.

“You have to put more servers, you’ve got to use more energy, you have to put more equipment, more maintenance,” Layton said. “Broadband providers are in a difficult place because they want to provide a good experience for the customer, but they can’t raise the price of broadband, they can’t get reimbursed from Netflix or Google, and the [Federal Communications Commission] is not going to give them any reimbursement.”

In the paper Layton presents several policy solutions. “The easiest things to do would be for the streamers to recognize that they have to contribute,” Layton said. Fees would be based on agreed thresholds and could reflect periods of peak usage — a tactic she likened to the postage Netflix used to pay to the U.S. Postal Service for mailing DVDs.

Another way to go about this is to incorporate the streaming companies into FCC’s Universal Service Fund by levying a tax on them. Created by the Communications Act of 1934 and expanded by the Telecommunications Act of 1996 to include the internet, the fund seeks to ensure that everyone has access to communications, which is paid for by contributions from telecommunications providers – a percentage of their end-user revenues. Or, Layton said, FCC could calculate an amount that internet companies must pay per terabyte of data they send into the middle mile.

Another solution is to charge end users. The problem with that, she said, is that two-third of Americans who subscribe to the internet are watching movies, but one-third isn’t, so those who aren’t streaming entertainment end up paying more for services than they should. “It’s a little bit unfair,” Layton said.

A final option is taxes. The report cites a December 2020 proposal from the Benton Institute for Broadband and Society that suggests using federal and state funding to build government-owned networks that are leased to private providers under the term “Open Access Middle Mile.”

Layton pointed to legislation that California Gov. Gavin Newsom signed in July, dedicating $6 billion to broadband that included $3.25 billion to “build, operate and maintain an open access, state-owned middle mile network.” Under that proposal, the government will cover the costs, and internet service providers can use it, which solves the problem, Layton said, but adds to the burden of the already cash-strapped state.

She also cited the $1 trillion federal infrastructure bill that includes $65 billion to improve broadband access – another use of public funds she said should be unnecessary if the biggest internet users paid their share.

But whatever solution comes to be, the current pricing model will become unsustainable, the report states.

“We have to get more money into the system or we’ll just never close the digital divide,” Layton said.