Wednesday, January 6, 2016

Marketing and Operating Costs Might Provide the Difference for Small ISPS Deploying Gigabit Internet Access Networks

At a macro level, the consumer telecom business relies on scale. That is why any examination of market share (fixed or mobile) in virtually any country shows a very-small number of names with 80 percent to 90 percent market share.

But there are ways small local providers sometimes can create a sustainable business model.

Odds have proven to be best when operating in smaller markets (not dense urban, not rural).

Prospects arguably are especially picking markets where the dominant providers (cable TV and telco) are bigger “national” names who know their financial results do not hinge on what happens in the smaller markets.

In other cases, the dominant competitors are smaller providers without deep pockets, but also higher overhead and operating costs. You might argue that a small Internet service provider building its own fiber-to-customer facilities will not enjoy any cost advantages over a large tier-one provider, in terms of material costs.

It is conceivable there are some labor cost savings, but permitting, “make ready” and other costs should not be materially different from what other service providers have to pay. The possible exception is the rare instance where another entity is laying new conduit and the ISP can place cabling inside that conduit without paying the cost of digging.

The point is that the business model sensitivity likely hinges on marketing and operating costs.

Consider subscriber acquisition costs, a figure that typically includes attributed marketing costs, including discounts and other promotions, per subscriber, for linear TV and mobile service.

Dish Network and AT&T’s DirecTV (prior to acquisition by AT&T) subscriber acquisition costs were about $868, on average. Comcast incurred SAC costs of $1980 per new account, while CenturyLink had $2352 per new account.

It has been estimated that some independent third party suppliers, such as Ting, spend only about $125 to acquire a new video customer.

The same sort of disparity exists for mobile service provider subscriber acquisition costs. Verizon invests about $484 to get a new mobile account. AT&T invests about $583 to get a new mobile account, while T-Mobile US invests only about $169.

Sprint, on the other hand, has to spend a whopping $1440 to get a new account, while Ting spends perhaps $80.

There is, in other words, an order of magnitude difference between Ting SAC and costs for tier-one competitors.

And that, one might argue, accounts for the ability some small ISPs could have in the new gigabit Internet access market, in some markets, even when new facilities have to be deployed.

No comments:

Some Problems Some Themselves

Real life has a way of making some expected problems a non issue. Most readers now are too young to remember it, but half a century ago it w...