Marginal Cost and ISP Data Caps

Some critics of internet service provider usage-based (buckets of usage) object to the practice as unfair, since the marginal cost of supplying the next unit of consumption is considered quite low. But the marginal cost of the next unit of capacity consumption is not the gating factor dictating ISP cost structure. 

Product/Service	Consumer Margin	Business Margin
Mobile Voice	30-40%	35-45%
Mobile Data	45-55%	50-60%
Fixed Broadband	40-50%	45-55%
TV/Video	25-35%	30-40%
VoIP	35-45%	40-50%
Cloud Services	30-40%	35-45%
IoT Connectivity	40-50%	45-55%
Managed Services	N/A	30-40%
Content Apps	60-70%	N/A
Enterprise 5G	N/A	50-60%

Of course, connectivity service is a highly capital intensive business as well, also featuring the necessity of high dividend payouts, capex, interest and amortization expenses, as well as the customary operating costs all businesses incur, so gross profit margin is only part of the story. 

Sunk costs, high capital investment and borrowing costs are the key drivers of cost, not incremental costs of supplying the next unit of consumption. 

Consider a sample business model for a firm whose revenue has been simplified from billions of dollars to just $100 million, but using the same ratios of cost in the model.

The point is that high gross profit margins also come with significant costs. The result is that high gross profit margins are matched by expenses high enough to reduce net profits to five percent to 15 percent, which might be broadly representative of many other types of businesses. 

Metric	Description	% of Revenue	Model Impact
Revenue	Total income from services and products	100%	$100 million
Gross Margin	Revenue minus cost of goods sold (COGS)	60-70%	$60-70 million
Operating Expenses	SG&A, marketing, administrative, salaries	20-25%	$20-25 million
EBITDA	Earnings before interest, taxes, depreciation, and amortization	35-50%	$35-50 million
Depreciation & Amortization	Wear and tear on assets, often high in telcos	10-15%	$10-15 million
Operating Income (EBIT)	EBITDA minus depreciation & amortization	20-35%	$20-35 million
Interest Expense	Payments on debt, which can be high	5-10%	$5-10 million
Pretax Income	EBIT minus interest expense	10-25%	$10-25 million
Tax Expense	Varies by jurisdiction	2-5%	$2-5 million
Net Income	Profit after all expenses and taxes	8-20%	$8-20 million
Dividends	Shareholder payments, often a priority for telcos	3-5%	$3-5 million
Net Margin after Dividends	Net margin after dividends	5-15%	$5-15 million

Connectivity services might generally range in the middle of industries for net profit margin, keeping in mind that participants at different stages of the value chain in each industry can have distinctly-different profit margin profiles. 

Industry	Typical Net Profit Margin
Pharmaceuticals	15-25%
Software & IT Services	15-30%
Banking & Financial Services	10-20%
Telecom Services	5-15%
Consumer Packaged Goods (CPG)	5-10%
Utilities	5-10%
Manufacturing	5-12%
Automobile Manufacturing	5-10%
Retail	2-6%
Airline Transportation	1-5%
Hospitality	2-6%
Construction	2-8%