A recurring feature I’ve planned for this blog is a series on Budget Hacks, of which this post is the first installment. In these posts I’ll spotlight one particular element of most people’s monthly budget and outline ways to materially hack away at each. Today we’ll be looking into internet service providers (ISPs for short) and how overpaying for this fundamental service can seriously impact your net worth over time.
Estimated reading time: 12 minutes
Internet as a public utility
So how important is internet access these days? I’m sure there are degrees of opinion on this topic, but I’d argue that access to the network of information that binds humankind together is fairly important. In 2016, fully 88.5% of Canadians have access to the internet in one form or another — this level of penetration ranks us about 20th in the world, tied with the United States and Belgium. There’s a decent argument to be made that internet access is a public good requiring the same guarantee of availability as the natural gas that keeps you alive in winter or the water system that chaperones your digested Snack Packs into the Hudson Bay.
How important is internet access to your monthly finances? Here’s a table that shows average Canadian household expenditures on basic utilities over the last 5 years of available data:
Source: Statistics Canada – Survey of household spending CANSIM Table 203-0021
The average Canadian household spent $509 in 2014 to access the internet — making it slightly less important (in dollar terms) than keeping your house warm, but slightly more important than giving your house its own phone number or having the option to take the odd shower. The average expenditure on internet access increased 31% over this time frame, only exceeded by the increase in cell phone bills (up 36%, and future cannon-fodder for this blog).
And you can understand this from the telecommunications companies’ perspective — they’re surrounded by customers cutting their TV services and deleting their home phone lines entirely. Of course they’ll be trying to juice revenue for the services seeing the highest increases in demand, namely internet access and cell phone coverage.
Does our internet service suck?
So what kind of service are we getting across the country? Here’s a chart that shows average internet download speeds across Canada as of Q2 2016:
Internet speeds across Canada (Mbps)
Source: CIRA – Canada’s Internet Performance
The provinces of Saskatchewan, Ontario, and New Brunswick all see average download speeds over 20 Megabits per second (Mbps) that rival world leaders such as South Korea, while the barren wastelands of Manitoba and Alberta (my home province) get speeds closer to Romania or Singapore.
From a budgeting perspective, how do Canadians’ monthly internet access bills compare to other countries? This gets a bit dicier to analyze — to estimate this, I’ve combined two datasets I found that outlined world average internet speeds and average monthly cost per Mbps of service in US dollars.
On the left axis is estimated monthly internet bills, with the countries in descending order of most expensive to least expensive internet. On the right axis, I’ve shown the average download speed, just so you can quickly see what level of service each of these countries is receiving for their monthly bill (the dotted line is set at Canada’s internet speed, so you can quickly compare to each country). South Korea has only a slightly less expensive monthly bill than Canada, but receives almost double the level of internet speeds, etc. From this, we can see that Canada has one of the most expensive average internet bills in the world, while only receiving what could be characterized as “above average” speeds.
Considering the sheer size of our country and the oligopolistic nature of our telecommunications industry, this actually isn’t as bad as I thought it was going to be. All in all, it’s a very Canadian state of affairs — we pay more for it, but it’s not terrible.
How to hack your internet bill
So, let’s start getting to the point. Internet service in Canada is expensive, so how do you game the system?
At this point, I’d like to establish some ground rules for this blog. Let’s refer to these as DadMath Maxims.
DadMath Maxim #1 – Outside of reasonable discretionary spending, only buy things you actually need
Is internet something you need? For some this may be no — such as criminals hiding in the mountains or infants who haven’t yet qualified for a credit card. But for 88.5% of us and rising, this is a yes, including for me. I cannot cut my internet service, otherwise I couldn’t write this blog post, check reddit 12 times a day, figure out how to cook anything, or basically run my life in a way I’ve been used to during 20+ years of internet service. So let’s assume this is a yes.
DadMath Maxim #2 – If you’re buying a fungible good or service, always choose the least expensive option
Ok what is a fungible good or service? Basically, if something can replaced with an almost-perfect copy of itself in form or function, it is a fungible good. For example, if you sell a single stock of Microsoft and buy it back, you’ve exchanged a fungible good. The stock you receive is completely replaceable for any other single Microsoft stock — you’re indifferent to one over the other. However, if you lend your friend your car, and they lose it, they cannot simply give you another car — the year, make, or model could be different, and even if they were the same, that car would have a different history, mileage, maintenance history, etc. Other than the split second you drive a new car off the lot, cars are not fungible goods.
What about internet service? Say your house receives a download speed of 15 Mbps from your current provider. Then let’s say you switch to a new provider at the same service level. How has your life changed? Is your internet now somehow different — have the bits coming and leaving your house changed in any meaningful way? Can you not watch YouTube at the same speed and quality? Can you not send emails? Can you not call someone to answer questions when your internet is down? If these answers are all “no”, then internet access is a fungible service. You should be completely agnostic as to whom you receive your internet from and select the cheapest provider.
Who is the cheapest internet provider?
This article was actually prompted by an email I received from my current internet provider earlier this month. Here’s a screenshot:
Seriously, I can’t even remember the last time a monthly service I purchase went down in price on the company’s behest. Starting in January, I’ll be receiving my TekSavvy internet for $39.95 per month, down from $44.95 per month currently. This is because of a recent CRTC decision to set provisional wholesale internet rates while permanent rates are decided. These rates allow newer, smaller competitors to access the lines of large incumbents at price-points that allow legitimate retail alternatives to those incumbents.
If the CRTC lowers the rates incumbents can charge, companies like TekSavvy can make the same profit at a lower cost to consumers. In the long-run, this should place considerable pressure on the large companies to lower their prices, and a positive feedback loop putting downward pressure on prices is created. So, good job CRTC. So who are these big and small companies, and what do they charge? Here’s a table comparing relatively similar internet plans among retail ISPs where I live, Alberta.
Internet providers in Alberta
|Service||Download (Mbps)||Upload (Mbps)||Monthly Data Cap||Monthly Price|
I’ve referenced my current internet provider, TekSavvy. I’m going to guess most of you haven’t even heard of this company. It’s fairly simple: I pay them money each month, and internet service is delivered through my cable lines. This service uses Shaw’s cables. If there was ever a problem with my internet, TekSavvy would subcontract Shaw’s technical people to come to my house.
Switching between Shaw and TekSavvy was as easy as placing a couple of phone calls and setting a date with both companies to switch (and nobody needed to come to my house). On the specified date, internet as surefooted as Shaw’s ever was started blasting through my wireless router. The only thing different from my perspective was paying $44.95 (now $39.95) per month instead of $75.00 for the exact same thing.
What have my results been? Well, I’ve posted a SpeedTest I just did this morning. I pay for 30 Mbps download speed and 5 Mbps upload speed. Through my router, I tallied 29.22 Mbps download and 4.37 Mbps upload speeds during this test. So I’m getting damn near what I’m paying for and I can guarantee you that earlier tests with Shaw were not always within this margin. Again, think about this — same bits, same service, completely replaceable. As a consumer, you should not care whose logo is on top of your internet bills, as long as it’s the cheapest option you can possible get for your necessary level of service.
Now, you might be thinking that $35 dollars a month isn’t all that much. Here’s the math that proves otherwise.
DadMath Maxim #3 – Making small decreases in monthly spending results in huge benefits over the long run
I generally believe most people look at their monthly budget and think something along the lines of: “what’s the point of saving $35 (or $70 or $10) a month? How does this make me any noticeably richer? To get rich I need to locate some new massive pile of money!”
While a massive pile of new money wouldn’t hurt, those tiny little pools of capital add up to substantially impact your net worth over time. Let’s take our current example. Assume a base case of paying $75 per month (plus inflation) for Shaw internet for the next 30 years. Then imagine an alternate universe where today you switch providers (in this case TekSavvy) and save $35 per month (plus inflation) for the next 30 years. Because the Bank of Canada maintains an inflation target of 2%, let’s assume that this is long-run inflation. Because I’m in Alberta, I’ll assume 5% GST and no provincial sales tax. Hell, I’ll even throw in Shaw’s promotional rate of $45 for the first three months in the first year.
You can see that over 30 years, assuming the cost dynamics and relationships remain relatively consistent (an insanely huge assumption), you would spend $20,421 on internet service over the next 30 years with TekSavvy and $38,242 on Shaw service. That means an ‘in-your-pocket’ savings of $17,822 over this period. So already the benefits are coming into focus. Let’s grow this pile of money some more.
DadMath Maxim #4 – Invest 100% of every dollar you save
If you took every dollar you saved between these two universes and stuck them in a brown burlap sack, you would have $17,822 in the sack 30 years from now. Instead, what if you took every dollar you saved and invested them in a balanced portfolio of financial instruments? Any further return you could make doing this is an additional cost, or opportunity cost, of remaining with higher priced internet service. Said another way, by insisting to pay more for internet service, you’re stealing whatever potential financial return you could have made investing those savings directly from your own pocket.
I will cover this topic in more detail, but for now assume that you’ll invest your saved money into some kind of smart, diversified portfolio of indexed stocks and bonds. Long-term nominal returns from the stock market are about 10% annually, with about 5% return from bonds — let’s conservatively assume you can achieve 7.5% annual returns over the long term.
So, every dollar you save will earn 7.5% annually. A dollar you save at the beginning of this year will be worth $8.75 in 30 years purely because of this compounding return. A dollar you save at the end of year 29 will be worth $1.075 in year 30. Obviously, the more time each dollar has to asexually reproduce itself, the better.
Let’s take that $17,822 of ‘in-the-pocket’ savings and let it gain a 7.5% return over this 30-year period.
Cumulative addition to your net worth by switching internet providers
We can see that by saving the current equivalent of $35 a month over this 30 year period and investing it, you will have added $57,047 to your net worth by the end of Year 30.
The present value of that huge pile of money is $6,516 — or, you would be equally tempted if someone were to offer you $6,516 in tax-free cash today or $57,047 in cash 30 years from now (considering an expected rate of return of 7.5%).
Stated another way, the only way you should be willing to pay Shaw (or any other big-brand internet provider) $75 for 30Mbps internet service is if Shaw offers to hand you a cheque of at least $6,516 today or a $57,047 cheque postdated to 30 years from now.
Otherwise, I suggest you switch.