Wednesday, October 29, 2014

Retail Pricing Will Determine Gigabit Demand

By now, it is clear that a shift to gigabit Internet access speeds is no mere matter of a few “hero” tests here and there, but the next evolution of the Internet access business in many markets, with a pull-through that will boost speeds into the hundreds of megabits range in communities where demand or cost make gigabit investments difficult.

Google Fiber, which most would credit for driving the change in the U.S. market, has not had to grapple with demand issues in the same way that incumbent Internet service provider might have, for one reason.

Google Fiber, in pricing its symmetrical gigabit service at $70 a month, has largely eliminated the cost barrier. Consumers who had been paying, or are aware, that a faster service can cost $80 a month or more, will not face “value-price” hurdles at that level of retail pricing.

Earlier belief on the part of many ISPs that there actually was little demand for gigabit access services were right, as far as their own offers. Few consumers were anxious to pay $100 to $300 a month for a dramatically-faster service, when a service costing $40 to $80 was deemed adequate.

The point is that demand for gigabit access very much hinges on retail price. So even if a recent survey of ISPs conducted by Broadbandtrends found the “number one challenge for offering gigabit broadband services was unclear customer demand,” that is likely because the proposed gigabit services were not being offered at price points similar to Google Fiber.

In point of fact, demand for a gigabit service costing $70 should not be markedly different from demand for any high speed service costing close to $70 a month. The issue is what percentage of existing customers pay just $40 for lower-speed services, and what percentage pay higher amounts.

A 2013 survey by the New America Foundation found that in the U.S. market, the best deal for a 150 Mbps home broadband connection from cable and phone companies is $130 a month, offered by Verizon FiOS.

On average a 45-Mbps connection cost about $90 a month, a study by the New America Foundation suggested, even if some might note that pricing is complicated when extracted or interpolated from a triple-play bundle, where there actually is not a fixed price for the high speed access component.

The point is obvious, though. Demand for gigabit access hinges on the price point. If a customer is willing to spend $90 for 45 Mbps access, there is little reason to believe that same customer would not be willing to spend $70 to $90 a month for a gigabit service.

The harder decision would have to be made by a consumer paying perhaps $45 a month for 18 Mbps service.

In the consumer Internet access business, speed has grown an order of magnitude every five to seven years or so. If that continues--and so far the trend is quite linear--a gigabit by 2020 would not be uncommon, in parts of most major markets.

Still, the Broadbandtrends survey suggests ISPs have a significant amount of uncertainty about anticipated take rates for gigabit broadband, particularly among incumbent telco respondents.

One might suggest that is because the installed base of customers are paying prices that make a gigabit alternative more expensive. In other words, ISPs think--likely correctly--that many consumers might conclude a “good enough” service for $40 beats a “best in class” offer costing $70, or about 75 percent more.  

The survey also found “a surprising low percentage of respondents” are using pre-registration to determine build priority for gigabit service.

More than half of respondents are currently offering gigabit access to businesses and Institutions, while 34 percent are offering such services in the residential market

“Being perceived as a technology leader was the overwhelming driver for gigabit broadband deployments, said Teresa Mastrangelo, Broadbandtrends principal analyst.  One suspects that is primarily an issue for commercial providers.

“For some operators, particularly municipalities, gigabit broadband is proving to be the foundation that can improve and enrich education, healthcare and public services as well as the economic engine for growth, investment and job creation,” said Mastrangelo.

Respondents suggested cloud-based backup and support for Ultra HD (4KTV) were the emerging new apps that could drive gigabit adoption.

That might not ultimately be as important as the tariffs ISPs offer.

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