How Much Revenue Could U.S. ISPs Lose as Competition Builds?

Some argue the U.S. Internet service provider business could lose about $2 billion a month in subscriber revenues were the market to use a regulatory framework such as exists in the United Kingdom and most of Europe, where most ISPs operate using wholesale access provided by an underlying carrier.

Even if one argues that a major shift of regulatory framework does not happen, it still is possible to argue that U.S. high speed access competition will grow, in the near future, if for no other reason than that new providers, including Google and a growing number of other firms, see the gigabit access market as interesting and sustainable.

Verizon Wireless, historically the U.S. mobile service provider most hesitant to compete on price, has launched new offers offering more for the same price.

At the same time, for a growing number of consumers, mobile Internet access is becoming a viable substitute for fixed network access. That trend is likely to accelerate as 5G networks, supporting speeds up to a gigabit per second, are launched in a decade or so.

Also at least for a couple of more years, U.S. government policy is likely to continue in a direction of “more regulation, not less.”

Whether such competition could shave $24 billion in existing annual ISP revenues is the issue. For starters, it is increasingly difficult to identify the size of the high speed access revenue stream, since most U.S. consumers buy a triple play package where the actual revenue contributors are accounting issues (attributed revenues).

“It seems, at the moment, likely that some version of increased competition will drive prices down in the next five years,” Point Topic argues.  

In fact, the Federal Communications Commission already has tried that approach, in the wake of the passage of the Telecommunications Act of 1996, and abandoned the approach in favor of facilities-based competition, a move many would credit for rapid investment in next generation access facilities.

The perhaps-unpleasant reality is that “competition” and “investment” are contradictory goals, where it comes to the use of wholesale facilities. The reason is simple enough to comprehend.

Where one actual network services provider is required to sell wholesale access with significant discounts (half retail price, for example), there is almost no incentive for a retail service provide to invest in its own assets.

If the underlying carrier must provide highly-discounted access to the network, the value of the upgrade cannot be captured.

To use an analogy, how much innovation would Apple be willing to pursue were it forced to sell as an original equipment manufacturer to all other device retailers, allowing them access to all the core features, including iTunes and the app store, at a 50-percent discount?

On the other hand, there is little incentive for the network services provider to invest further, if it is required to make the new facilities available to wholesale buyers on the same terms as presently required.

The Federal Communications Commission has not yet voted on rules that would classify Internet service providers as common carriers, but the legal challenges already are being prepared. As always, the challenges will rely on specific points of law outside the domain of a typical consumer’s frame of reference.

The point is that business headwinds in the U.S. high speed access market are building.