Monday, February 24, 2014

Is There Demand for Gigabit Access? Yes and No

There are two different ways to characterize the present level of demand for gigabit Internet access service; both correct. Some, especially Google Fiber, argue there is high demand now, at $70 a month.

Even many competitors might agree, while also maintaining, paradoxically, that consumers might not “need” a gigabit service, in terms of applications they want to use right now.

The fundamental issue is value compared to price, not simply value, expressed as raw speed. A gigabit service sold at $500 a month would attract relatively few consumers. The same service at $70 a month seems to have reasonable demand.

The issue, as always, is consumer estimation of value, related to price. If Google Fiber sold a 500-Mbps access service for $35 a month, would that be its most-popular offer? Many would answer in the affirmative.

Others might continue to argue that most consumers do not need, or perhaps even want, a gigabit service at $500 a month. They might even prefer a 500-Mbps service for $35 a month, which is probably why Google Fiber does not offer such an option.

So part of the “demand” equation is value, as related to price. The supply issue is easier to characterize. Most incumbent cable companies and telcos would rather not invest more than required to meet current levels of demand, if they fundamentally believe they cannot sell enough gigabit access product, at low prices, to earn a return on the investment.

Without question, a gigabit for $70 a month destroys all existing value-price relationships for access services now  offered by most ISPs.

If you assume the typical monthly price for a 20 Mbps service is about $50 a month, you can understand the impact of Google Fiber’s price umbrella.

The Google Fiber $70 a month price implies that the cost of 1 Mbps of access speed “costs” about seven cents. So a 100-Mbps service would logically “cost” about $7 a month.

But the issue of demand for gigabit service is more complicated than often supposed. Are there lots of consumers who would buy a gigabit service for $70 a month. Certainly. But would most choose to buy 500 Mbps for $35 a month? Probably, at least for the moment.

So do people “need” or “want” a gigabit service? Yes and no. Yes, they do want faster speeds, but just how fast might hinge on the price. More people might prefer 500 Mbps for $35 a month, compared to a gigabit for $70 a month, or even 20 Mbps for $7 a month.

But few ISPs would really want to find out which offers people really want. Google Fiber can show there is demand for gigabit speeds priced at $70 a month. The issue even Google Fiber probably does not want to test is whether there actually is overwhelming demand for 500 Mbps at $35 a month.

No comments:

U.S. Streaming Spending Flat Last 3 Years, But Change Coming?

Most would agree the subscription video business now is unstable, with major changes looming. On the other other hand, consumers tend to o...