Middle Mile Economics: How streaming video entertainment undermines the business model for broadband

The pandemic has heightened the importance of braodband with policymakers and increased the urgency of closing the digital divide, particularly in the US as FCC data shows that 22% of rural Americans, about 13 million people, lack high speed wireline internet of 25/3 Mbps or higher. The Biden Administration recently called for $100 billion in broadband subsidies. Lack of sufficient broadband in rural areas is also an issue for Europe and other regions.

While many online applications have experienced a surge in traffic under the COVID-19 pandemic, the infrastructure requirements to support streaming video entertainment cost significantly more than applications for work, school, and healthcare. These latter applications are socially important, but their total traffic volume is very small compared to streaming video entertainment provided by Netflix, YouTube (Alphabet/Google), Amazon Prime, Disney+/Hulu, and Microsoft Xbox. This report describes the challenge of four rural broadband providers operating fiber to the home networks to recover the middle mile network costs of video streaming entertainment. It quantifies the amount the current and future shortfall. The rural broadband providers are located in four distinct rural regions of the United States, have an average of 20,000 customers each, and have network footprint averaging 4800 square kilometers, areas between the size of Montenegro and Cyprus. The high fixed costs of a broadband access network means that providers must carefully manage prices to be able to generate sufficient revenue from a given area subject to a set of advertised prices. The report also discusses why flat and uniform pricing (for a given level of service) presents special challenges to all broadband providers and specifically why this is a problem in high-cost and underserved areas.

The report provides microeconomic analysis based upon data provided by the rural broadband providers from 2017-2020. This details prevailing prices for broadband and streaming video entertainment services, the cost of middle and last mile networks, and the level and type of traffic in rural broadband networks, categorized by type of service and video streaming entertainment provider. The analysis estimates the cost implications of the growth in consumption of video streaming entertainment for the rural providers by considering data transport statistics for the providers and allocating part of their reported cost to video streaming services. This is compared to the estimated revenue that streaming service providers realize from broadband subscribers.

The report describes the operators’ current broadband price of approximately $50 per month per subscriber which covers the last mile cost of the network and operating costs, but not the capital cost of the middle mile, a separate cost which scales in equipment requirements as traffic increases. Separately subscribers pay about $25 per month subscriber to video streaming services to Netflix, YouTube, Amazon Prime, Disney+, and Microsoft. These five video entertainment streaming providers comprise 75% of total network traffic on the four rural broadband networks and require an additional cost of $11.65 per month in capital costs, which is presently absorbed by the broadband providers. Overall, the analysis shows that 77–94 percent of total network costs is related to video streaming entertainment. This amounted to $100-180 of unrecovered costs per subscriber annually. Given the popularity and growth of video streaming entertainment, the middle mile cost is expected to double in 3-4 years, while the number of subscribers is expected to stay constant. The unrecovered cost will grow to $25.04 per subscriber or $81,953,409 in total for the four providers.

The video streaming entertainment providers do not contribute to middle or last mile network costs and rebuff efforts to find methods of cost recovery. Netflix and YouTube offer caching services to the rural broadband providers, but these are exclusionary to the proprietary services of the platforms and entail additional costs for rural broadband providers to participate. The research shows that the current model of flat and uniform (over service area) pricing (even with subsidy) is likely to become unsustainable for rural broadband provision.

Although rural providers require the federal subsidy to provide the service, this research suggests that the subsidy in the present form (flat and uniform) might be increasing the number of high-volume users and thereby contributing in part to the problem. Our report will contribute to the ongoing policy discussion of rural broadband and closing the digital divide. Notably improving the funding for rural broadband offers a market opportunity for vendors, as there several thousand rural broadband providers in the US and outside US.

To find out more and review the table of contents, contact Strand Consult.