Monday, October 29, 2012

Why U.S. High Speed Access Costs So Much

With the possible exception of Google Fiber's 1-Gbps symmetrical broadband service pricing in Kansas City, Mo. and Kansas City, Kan., few consumer customers likely would agree that retail prices for 100-Mbps or faster services are "affordable." 

Some business users, and to date it is likely that most buyer of 100-Mbps services are businesses, might say the price-performance of a 100-Mbps high speed access service is reasonable, though, especially compared with retail pricing of much-slower T1 services, for example. 

Still, many observers would point to prices for 100-Mbps services in other countries as examples that U.S. services are overpriced. 

Prices for residential gigabit service range from a low of $26 per month for Hong
Kong Broadband’s service to a high of $560 per month at network operator Turkcell,
according to a study by Joe Savage, Telecom ThinkTank principal, and Michael Render RVA Market Research principal.

It is hard to ignore South Korean pricing of $27 a month for a gigabit per second service, even given the high density that characterizes most South Korean networks (higher density means lower per-dwelling cost).

But there are logical reasons for such price differences, namely that prices roughly correlate to the capital investment required to pass a subscriber in the serving area, the authors say. 

For example, it costs $200 per home passed in Hong Kong, compared to $1,000 to $4,000 per home passed in Europe and North America, the study notes. 

Population density might be the single most important factor determining the cost of any fiber to home network build. A related issue is average “loop length,” a metric that is roughly related to population density.

U.S. service providers have to supply service over much longer average loops than service providers in Europe, or in many “city states” that feature high-density housing. Basically, retail cost everywhere is related rather directly to network investment cost.

That has direct implications for retail pricing. In other words, based strictly on the costs of the infrastructure, consumer broadband "should" cost an order of magnitude more than in Hong Kong.

Google Fiber in Kansas City is among the first examples of a U.S. service provider trying to deliver an arguably disruptive level of bandwidth that is an order of magnitude or even two orders of magnitude faster than what most consumers can buy today (1 Gbps, not just a hundred megabits per second), at vastly lower prices, for such a service.

The issue is whether a cable company or telco, with different cost structures, can afford to replicate that level of retail pricing. Some would argue they cannot. Google might have a few advantages related to outside plant costs, but nothing significant enough to affect its costs of construction.

The potential long term advantage will be in the operating and marketing cost arena, plus the overall lower overhead. Google does not carry the huge pension obligations a telco does, for example.

The point is that there are clear reasons why retail pricing for high-speed Internet access is so different in different markets. Costs of construction, not to mention all other costs, can vary by an order of magnitude.

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