World’s Fastest Broadband & $43 million executive compensation

I was invited to attend an Industry Canada roadshow last week in Calgary. It was part of a national tour gathering input to formulate a new “Digital Economy Strategy for Canada.” One of the concerns raised was the dismal state of broadband service in Canada. We now rank about 33rd in download speeds behind Estonia and Luxembourg, just ahead of Ghana and Mongolia. Canada ranks around 52nd in upload speed, behind Kenya.*

* source: Ookla Net Index/ 6.23.2010

Our Industry Canada hosts indicated the issue had been raised in previous cities on the tour, they were well aware of it and moved the discussion on to other issues.

Now on to the $43 million part;

Earlier this week I happened across an article in the Calgary Herald entitled “Calgary’s top 55 earners”. As I perused the list with a certain awestruck envy at the annual compensation numbers I happened to notice that 4 of the top 10 earners were from the same company. Wow! What are the odds? And who could this corporate leviathan be that would have 4 of the top 10 earners? Global energy company? National transportation company? No. A regional cable utility; Shaw Communications. Here’s the Herald numbers:

2. Peter Bissonnette, Shaw Communications President $11,746,223
3. Jim Shaw, Shaw Communications Chief executive $11,557,119
5. Bradley S. Shaw, Shaw Communications Sr. vice-president, operations $10,846,491
10. JR Shaw, Shaw Communications Executive chair $9,113,676

I’ve done the math for us, that’s $43, 263, 509. Now on to the world’s fastest broadband part.

A New York Times Bits blog post by Saul Hansell titled “World’s Fastest Broadband” says it all:

World’s Fastest Broadband at $20 Per Home


If you get excited about the prospect of really, really fast broadband Internet service, here’s a statistic that will make heart race. Or your blood boil. Or both.

Pretty much the fastest consumer broadband in the world is the 160-megabit-per-second service offered by J:Com, the largest cable company in Japan. Here’s how much the company had to invest to upgrade its network to provide that speed: $20 per home passed.

The cable modem needed for that speed costs about $60, compared with about $30 for the current generation.

By contrast, Verizon is spending an average of $817 per home passed to wire neighborhoods for its FiOS fiber optic network and another $716 for equipment and labor in each home that subscribes, according to Sanford C. Bernstein & Company.

Those numbers from Japan came from Michael T. Fries, the chief executive of Liberty Global, the American company that operates J:Com.

His larger point: “To me, this just isn’t an expensive capital investment,” he said.

The experience in Japan suggests that the major cable systems in the United States might be able to increase the speed of their broadband service by five to 10 times right away. They might not need to charge much more for it than they do now and they’d still make as much money.

The cable industry here uses the same technology as J:Com. And several vendors said that while the prices Mr. Fries quoted were on the low side, most systems can be upgraded for no more than about $100 per home, including a new modem. Moreover, the monthly cost of bandwidth to connect a home to the Internet is minimal, executives say.

So what’s wrong with this picture in the United States? The cable companies, like Comcast and Cablevision, that are moving quickly to install the fast broadband technology, called Docsis 3, are charging as much as $140 a month for 50 Mbps service. Meanwhile other companies, like Time Warner Cable, are moving much more slowly to upgrade.

Competition, or the lack of it, goes a long way to explaining why the fees are higher in the United States. There is less competition in the United States than in many other countries. Broadband already has the highest profit margins of any product cable companies offer. Like any profit-maximizing business would do, they set prices in relation to other providers and market demand rather than based on costs.

Pricing at Liberty varies widely by market. In Japan, its 160 Mbps service costs 6,000 yen ($60) per month. That’s only $5 a month more than the price of its basic 30 Mbps service. In the Netherlands, meanwhile, it charges 80 euros ($107) for 120 Mbps service and 60 euros ($81) for 60 Mbps. Mr. Fries said that he expected these prices would fall over time.

“Our margins go up,” he said. “But we are delivering more value.”

Cable executives have given several reasons for why many cable systems in the United States are going very slowly in upgrading to Docsis 3. There’s little competition in areas not served by Verizon’s FiOS system, which soon will offer 50 Mbps service. And some argue there isn’t that much demand for super-high speed.

Mr. Fries added another: Fear. Other cable operators, he said, are concerned that not only will prices fall, but that the super-fast service will encourage customers to watch video on the Web and drop their cable service.

The industry is worried that by offering 100 Mbps, they are opening Pandora’s box, he said. Everyone will be able to get video on the Internet, and then competition will bring the price for the broadband down from $80 to $60 to $40.

Aren’t you worried that the prices will fall too? I asked.

“Maybe,” he said very slowly. “We’ll see how it happens. We want to keep it up there for now. It is a premium service.”

As Saul notes;

Competition, or the lack of it, goes a long way to explaining why the fees are higher in the United States.

Or as a report entitled “Right to Communication” by G. Longford/M. Moll and L. R. Shade (2008) phrased it for Canada;

“Canadians continue to face a market oligopoly comprised of a very limited number of powerful incumbents. As a result they live in the worst of both worlds, enjoying neither the benefits of real competition nor the benefits of an industry regulated to serve the public interest”

So, according to the NY Times article and just to connect the dots between the world’s fastest broadband and $43 million in annual executive compensation; for less than 25% of one years compensation of four executives, ($20 a house x 490,000 homes = $9,800,000) every home in a market the size of Calgary could have the world’s fastest broadband – instead of ranking 52nd.

Industry Canada was recently quoted as saying broadband is now considered as
“essential infrastructure for participating in today’s economy”

UPDATE: The deadline for ideas and submissions on Canada’s digital economy strategy has been extended until midnight, Tuesday, July 13

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