Monday, July 24, 2017

Internet Access--Good, Deployed Fast and Also Cheap--Pick any 2 (UNLESS)

There’s an old adage in marketing: “good, fast, cheap: pick two.” At least for most physical products--virtual or software products are different--that adage illustrates basic trade-offs.

Quality tends to cost more. Rapid availability of new products tends to cost more.

So products can be made available at less cost if they are “not as good” or “take longer to deliver.” In the area of physical or tangible products, speed, quality and cost tend not to align (intangible products often can break these rules).

You might say the worst of all worlds is to supply an intangible product (internet access) using a capital-intensive manufacturing process (building physical access networks).

One clear example: business models in competitive markets where facilities-based competition is possible.

As a rule of thumb, a third entrant in a fixed network access market has to hope for market share of about 20 percent to survive. On the other hand, the two existing suppliers then can hope to sustain share of perhaps 40 percent each, assuming each is equally skilled and the third provider is able to stay in business.

And that is why fixed network business models, where facilities-based competition exists, is so difficult. Monopolists enjoyed an easy time of it. Cost per customer (amortizing full network cost over the customer base) and cost per passing (the cost to build the whole network) were almost the same number.

In other words, if it cost $1000 per passing to build the network past 100 locations, then at 100-percent penetration (customer take rate) cost per customer was the same: $1,000. At take rates of 95 percent, cost per customer still was only about $1053.

At 20 percent take rates, the same network has a cost per customer of about $5000. At 40 percent take rates, cost per customer still is $2500. In other words, in a facilities-based scenario, cost per customer can range up to 1.5 times more than in the one-provider market, and up to five times more in a three-provider market.

And that assumes only a maximum of three competitors. In the 5G era, it is not clear how many total competitors will operate in any single market, in large part because mobile substitution will be possible for every key consumer product.

In a facilities-based, competitive market, there could well be three or more key competitors, with varying investment costs.

The point, to refer back to the basic marketing adage (fast, cheap, good: pick two), is that unless major innovations are discovered, fixed network internet access is not ever going to be good as well as cheap and rapidly deployed.

PIck two of three, that will be your choice, as a supplier. That is why there is intense work going on with 5G fixed wireless. In some developed markets, it could be the sort of innovation that breaks the limits. Perhaps customers can be supplied good access, cheap and with fast deployment.

That would truly be something new in the fixed networks access business.

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