When Telcos Discount Prices, What are They Protecting, What are They Merchandising?

Some products are attractive for attackers in the fixed networks business for reasons of gross revenue. For T-Mobile, the attraction of home broadband includes average revenue per account that is double that of a mobile account, as well as ability to take market share. T-Mobile has zero share of the home broadband business.

In other cases, defenders are motivated by profit margins, as much as gross revenue. For ISPs, linear video entertainment profit margins have fallen dramatically, while margins for voice and internet access have remained higher.

Without adjusting for differences in currency, internet service providers in the U.S. market might arguably have an advantage over ISPs in some other markets: the average revenue per user is as much as three times the ARPU of the same service in South Korea, or double the revenue in Europe. 

source: ETNO, Analysys Mason 

That might be an illusory advantage.

Adjusting prices using the percentage of gross national income method, U.S. prices in 2014 were among the lowest in the world. Adjusting revenue using the purchasing power parity method, global prices hover around $50 a month. 

There are other adjustments, though. In the U.S. market, 60 percent to 75 percent of internet access plans are bought in a bundle, so there is no way to directly state the internet access price. Price has to be inferred. 

The point is that such bundles always offer lower prices on the product elements purchased. So the “effective price” paid for internet access--purchased in such bundles--is discounted from the posted retail prices for internet access purchased on a stand-alone basis. 

Precisely how big a discount might exist is contingent on the assumptions one makes about each of the constituent elements of the bundle. Some customers buy a triple-play bundle including a service they actually do not want or use (voice), in order to get lower prices on video and internet access services. 

Also, each service provider will make different allocations based on profit margin protection as well as gross revenue priorities. Cable operators arguably used to merchandise voice or internet access to protect linear video revenue. These days, they might lean to protecting internet access revenue and margin and merchandise voice and video to a greater extent. 

Telcos might arguably have protected voice revenue and margin while merchandising either video or internet access. These days, it is not clear what is merchandised. Profit margins arguably still are highest for voice and internet access, so video is the likely candidate for discounts, up to a point. 

Cost of goods is the floor for discounting wiggle room, suggesting the value of streaming versus linear product offers. Even when content costs are equivalent, the other costs of fulfilling a video account are lower when the streaming service is offered, compared to a linear video service. There are avoided truck rolls and customer premises equipment savings, for example.