Rural Broadband and the Unrecovered Cost of Streaming Video Entertainment

ITS Gothenburg June 2021

30 Pages Posted: 8 Apr 2021 Last revised: 11 Jun 2021

See all articles by Roslyn Layton

Roslyn Layton

Aalborg University, Department of Electronic Systems, Center for Communication, Media and Information Technologies

Petrus H. Potgieter

University of South Africa; Institute for Technology and Network Economics

Date Written: June 11, 2021

Abstract

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 paper describes the challenge of four rural broadband providers operating fiber to the home networks to recover the middle mile network costs of streaming video 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, slightly larger than Rhode Island.

The preliminary results show that current broadband prices are approximately $50 per month per subscriber. This amount 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. The analysis shows that 77–94 percent of total network costs is related to streaming video entertainment. This amounted to $100-180 of unrecovered costs per subscriber annually, whether the subscribing household is a streaming a lot of content or not. If we compute the average monthly shortfall for the estimated two-thirds of households that receive significant streaming content, the shortfall is $17.48 per subscriber. 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. The caching services provided by Netflix and YouTube are exclusionary to the proprietary services of these 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.

The paper describes the components of the rural broadband networks, policy background for their evolution, an overview of providers, and the financial calculations of cost recovery. In addition to public information, the data studied includes a series of reports from the rural broadband providers. This data has limitations including the use of different enterprise traffic measurement tools. This suggests that a follow-up study with a larger sample of rural broadband providers and common measurement tools would further refine the analysis. The paper contributes to the broadband policy literature and suggests further research, ideally by the Federal Communications Commission (FCC) which likely has access to the relevant information. The issue will likely be of increasing importance given the FCC's Rural Digital Opportunity Fund Phase I auction (Auction 904) in which 180 bidders won $9.2 billion over 10 years. These funds have no provisions for the middle mile, only the last mile.

Keywords: rural broadband, FCC, digital divide, Google, Netflix, YouTube, Disney+, Amazon Prime, Microsoft

JEL Classification: L96, L86, M21, Z18

Suggested Citation

Layton, Roslyn and Potgieter, Petrus H., Rural Broadband and the Unrecovered Cost of Streaming Video Entertainment (June 11, 2021). ITS Gothenburg June 2021, Available at SSRN: https://ssrn.com/abstract=3820644

Roslyn Layton (Contact Author)

Aalborg University, Department of Electronic Systems, Center for Communication, Media and Information Technologies ( email )

A.C. Meyers Vænge 15
Frederikskaj Bldg., 3rd Floor
Copenhagen, 2450
Denmark
+45 9940 3641 (Phone)

HOME PAGE: http://https://vbn.aau.dk/en/persons/roslyn-mae-layton

Petrus H. Potgieter

University of South Africa ( email )

P.O. Box 392
UNISA
Pretoria, Gauteng 0003
South Africa
+27 12 433 4622 (Phone)

Institute for Technology and Network Economics ( email )

Posbus 2015
Groenkloof, 0027
South Africa

HOME PAGE: http://www.itne.eu

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