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"97% profit margin" is said by people who don't understand how money works. If I spend $8 billion building an OS and sell it for $80 on an 80 cent CD, those sa

"97% profit margin" is said by people who don't understand how money works. If I spend $8 billion building an OS and sell it for $80 on an 80 cent CD, those same people would say I had a 99% profit margin.

edc117 12y ago
I'll agree with you that the above is a (possibly gross) simplification, but these companies aren't struggling, and maybe they should be.
- rayiner 12y ago
  See my comment above: the number isn't just a gross simplification, it's journalistic malpractice. And the issue isn't whether the companies are struggling. Nobody feels bad for Comcast's CEO's kids. The issue is the incentives to build telecom infrastructure relative to other opportunities in the economy for the billions of dollars needed. There's no free lunch. If the writing is on the wall for wireline profitability, companies like Comcast will take their capital and buy companies like NBC instead of investing in their network. If you make it illegal for them to do so, their shareholders will force them to do stock buybacks with their capital, then take that money and invest in whoever does buy NBC.
  - danielweber 12y ago
    If you make it illegal for them to do so, their shareholders will force them to do stock buybacks with their capital, then take that money and invest in whoever does buy NBC. We can just make that illegal, right?
    - harryh 12y ago
      Make what illegal? Stock buybacks? No. That would be insane.
  - dragonwriter 12y ago
    > If the writing is on the wall for wireline profitability, companies like Comcast will take their capital and buy companies like NBC instead of investing in their network. Cable companies, like Comcast, did that with broadcast companies, like NBC, without net neutrality, so, not seeing the nexus to the immediate issue here.
    - tptacek 12y ago
      It's not binary, right? That Comcast did that once is evidence that their playbook includes that tactic. The less lucrative it is to build out their network, the more they'll run the "buy content providers" play.
      - dragonwriter 12y ago
        OTOH, neutrality limits the degree to which content providers are beholden to access providers, so it makes that play more expensive (and increases the relative value of content providers to other potential purchasers.) So, arguably, it makes that play less likely, not more.
- danielweber 12y ago
  The cost to send a marginal bit on your ISP is essentially zero. This doesn't mean it's cheap to keep an ISP going. The primary cost is that they have to keep building. My neighbors are going to want more and fatter Netflix streams all at the same time that my family wants them. That requiring increasing the maximum capacity at peak demand time.
  - hga 12y ago
    "The primary cost is that they have to keep building [capacity]." Demonstrably false. AT&T and Verizon stopped with the Great Recession. US Worst/Century never seriously played that game in the first place. Don't follow the cablecos much since I'm (just) outside of a city and only have non-U-verse 150 GB/month AT&T as an option, but don't a lot of them also cap in a variety of ways, including just peering congestion, especially since Netflix directly competes with them? Unfortunately, I'm old enough to remember watching "We're the phone company, we don't have to care", and that hasn't changed much. Cablecos, I suppose we'll see.
    - rayiner 12y ago
      Verizon's wireline capex was $5.7 billion in 2014.
      - hga 12y ago
        Ah, yeah, I did leave out that they have some FiOS build out commitments in various cities like NYC, but from what I've read they are not putting money into anything else or anywhere else, see e.g. http://arstechnica.com/business/2015/01/verizon-nears-the-end-of-fios-builds/ http://arstechnica.com/business/2015/01/verizon-nears-the-en... "I have been pretty consistent with this in the fact that we will spend more CapEx in the Wireless side and we will continue to curtail CapEx on the Wireline side. Some of that is because we are getting to the end of our committed build around FiOS, penetration is getting higher," Verizon CFO Fran Shammo said yesterday in the Q4 2014 call with investors. Although maybe they're replacing DSLAMs as they become unmaintainable; AT&T is just moving hardware around (even pulling an old DSLAM out of a training facility), adding newer generation DSL here and there, and in many places where we supposize all the DSLAM slots are filled just refusing to supply new service. I don't think this invalidates my argument about capacity, though. If you're not in a Verizon FiOS area, or worse, in one of the many states and territories they've sold, you're not getting more capacity out of your DSL line from them, right? They might, though, be putting in more backhaul to satisfy, and I've heard no reports of AT&T DSL suffering from saturated backhaul.
logfromblammo 12y ago
Sunk costs are sunk. That $8 billion is non-recoverable through sales of the copies, says the economist. But if you can expect to sell 102 million copies at that 99% profit margin, those profits will justify the R&D expenses. If you can hire an actuary, they can come up with a way to factor the initial R&D cost into your per-unit calculations with a few reasonable assumptions, such that your quarterly reports look great. But if you want the board to understand enough to calculate the right bonus for you, it's best to keep the math simple, and sweep the necessary and nonrecoverable expenses into a different category.

edc117 12y ago

I'll agree with you that the above is a (possibly gross) simplification, but these companies aren't struggling, and maybe they should be.

rayiner 12y ago
See my comment above: the number isn't just a gross simplification, it's journalistic malpractice. And the issue isn't whether the companies are struggling. Nobody feels bad for Comcast's CEO's kids. The issue is the incentives to build telecom infrastructure relative to other opportunities in the economy for the billions of dollars needed. There's no free lunch. If the writing is on the wall for wireline profitability, companies like Comcast will take their capital and buy companies like NBC instead of investing in their network. If you make it illegal for them to do so, their shareholders will force them to do stock buybacks with their capital, then take that money and invest in whoever does buy NBC.
- danielweber 12y ago
  If you make it illegal for them to do so, their shareholders will force them to do stock buybacks with their capital, then take that money and invest in whoever does buy NBC. We can just make that illegal, right?
  - harryh 12y ago
    Make what illegal? Stock buybacks? No. That would be insane.
- dragonwriter 12y ago
  > If the writing is on the wall for wireline profitability, companies like Comcast will take their capital and buy companies like NBC instead of investing in their network. Cable companies, like Comcast, did that with broadcast companies, like NBC, without net neutrality, so, not seeing the nexus to the immediate issue here.
  - tptacek 12y ago
    It's not binary, right? That Comcast did that once is evidence that their playbook includes that tactic. The less lucrative it is to build out their network, the more they'll run the "buy content providers" play.
    - dragonwriter 12y ago
      OTOH, neutrality limits the degree to which content providers are beholden to access providers, so it makes that play more expensive (and increases the relative value of content providers to other potential purchasers.) So, arguably, it makes that play less likely, not more.
danielweber 12y ago
The cost to send a marginal bit on your ISP is essentially zero. This doesn't mean it's cheap to keep an ISP going. The primary cost is that they have to keep building. My neighbors are going to want more and fatter Netflix streams all at the same time that my family wants them. That requiring increasing the maximum capacity at peak demand time.
- hga 12y ago
  "The primary cost is that they have to keep building [capacity]." Demonstrably false. AT&T and Verizon stopped with the Great Recession. US Worst/Century never seriously played that game in the first place. Don't follow the cablecos much since I'm (just) outside of a city and only have non-U-verse 150 GB/month AT&T as an option, but don't a lot of them also cap in a variety of ways, including just peering congestion, especially since Netflix directly competes with them? Unfortunately, I'm old enough to remember watching "We're the phone company, we don't have to care", and that hasn't changed much. Cablecos, I suppose we'll see.
  - rayiner 12y ago
    Verizon's wireline capex was $5.7 billion in 2014.
    - hga 12y ago
      Ah, yeah, I did leave out that they have some FiOS build out commitments in various cities like NYC, but from what I've read they are not putting money into anything else or anywhere else, see e.g. http://arstechnica.com/business/2015/01/verizon-nears-the-end-of-fios-builds/ http://arstechnica.com/business/2015/01/verizon-nears-the-en... "I have been pretty consistent with this in the fact that we will spend more CapEx in the Wireless side and we will continue to curtail CapEx on the Wireline side. Some of that is because we are getting to the end of our committed build around FiOS, penetration is getting higher," Verizon CFO Fran Shammo said yesterday in the Q4 2014 call with investors. Although maybe they're replacing DSLAMs as they become unmaintainable; AT&T is just moving hardware around (even pulling an old DSLAM out of a training facility), adding newer generation DSL here and there, and in many places where we supposize all the DSLAM slots are filled just refusing to supply new service. I don't think this invalidates my argument about capacity, though. If you're not in a Verizon FiOS area, or worse, in one of the many states and territories they've sold, you're not getting more capacity out of your DSL line from them, right? They might, though, be putting in more backhaul to satisfy, and I've heard no reports of AT&T DSL suffering from saturated backhaul.

logfromblammo 12y ago

Sunk costs are sunk. That $8 billion is non-recoverable through sales of the copies, says the economist. But if you can expect to sell 102 million copies at that 99% profit margin, those profits will justify the R&D expenses. If you can hire an actuary, they can come up with a way to factor the initial R&D cost into your per-unit calculations with a few reasonable assumptions, such that your quarterly reports look great. But if you want the board to understand enough to calculate the right bonus for you, it's best to keep the math simple, and sweep the necessary and nonrecoverable expenses into a different category.