Thursday, February 6, 2014

Remember Economics of Dial-Up ISP Business? Get Ready. You Might See it Again

For those of you who actually remember the economics of the dial-up Internet access business, you will recall that a profitable smallish business became unsustainable with the advent of broadband access. Profit margin was the key issue.

When Internet access was an app that rode on top of a standard unlimited use local voice connection, small ISPs could make a business case for service because they were not leasing access connections.

With broadband, independent ISPs suddenly found themselves required to lease wholesale capacity from facilities-based providers in order to provide service, which wiped out profit margins.

One wonders whether, eventually, that is a problem similar to what independent ISPs will face in the future, on the assumption that the market-standard Internet access offer is 1 Gbps, in urban and suburban markets.

Cable companies and telcos will have to spend more, but can adjust.

Whether that will also be true for wireless ISPs is not so clear. To be sure, there traditionally is a gap between price-performance of urban Internet access and rural Internet access. That will allow rural and independent providers a shot at survival, if they can offer 100 Mbps or more, even if 1 Gbps proves prohibitive.

But nothing is certain, and the precedent of the dial-up to broadband transition might provide a warning. As broadband initially meant a transition from kilobits per second to megabits per second, or an order of magnitude increase, so might a jump of two orders of magnitude likewise pose a calamitous challenge for wireless providers, who might not have access to enough bandwidth to compete.

At least for the moment, what many service providers (cable and telco) will have to do, when faced with the reality of a 1-Gbps competitor, is drop prices. Sooner or later, though, even that is going to be a tough proposition, since the immediate steps have tended to be creation of offers something like “100 Mbps for $70,” when Google Fiber offers 1 Gbps for $70.

At an implied price of seven cents per Mbps (1,000 Mbps at $70), a 100 Mbps service “should” cost $7 a month. That is why Google Fiber prices 5 Mbps at the level of “free.” Using the same metric, 5 Mbps would cost 35 cents a month.

Mobile service providers might eventually face the same challenge. If enough people have very high speed connections, and there is even more Wi-Fi available than there is at present, it will make sense for people to buy relatively small mobile data access packages, and default to Wi-Fi most of the time.

One might argue that is what people already do.

To be sure, mobile access likely always will come at a price premium to fixed service. But the premium will shift as the price per megabit per second for a fixed connection climbs towards the gigabit for $70 a month level.

Even if mobile data continues to cost about an order of magnitude more than the equivalent amount of bandwidth delivered by a fixed connection, absolute cost has to adjust. If 50 Mbps on a fixed network costs about $3.50 a month, for the sake of argument, then 50 Mbps on a mobile network might be expected to cost $35 a month.

Bandwidth economics are going to be interesting going forward. Where we normally operate within “scarcity” constraints, we might in the future actually be facing relative abundance. And that is going to have financial implications for ISPs.

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