Like any other business, internet service providers get some common recommended approaches for sustaining their profit margins under competitive market conditions. And one might argue there are good reasons why most--if not all--of these suggestions seem to have relatively little impact on industry fortunes.
If one assumes connectivity demand is both ubiquitous but also relatively inelastic, there is only so much customers are likely to spend on connectivity. As a percentage of household income or firm income, for example, connectivity spending is relatively low and does not change much.
Among the range of recommendations are revenue-enhancing and cost-reducing measures. On the revenue side of the business model often include measures such as investing in network upgrades to increase capacity and improve performance.
Other frequently-recommended stops also include:
Bundling new products
Create or raise prices for higher-usage customers
Create or raise prices for higher-performance product tiers
Maintain or create usage caps
On the cost side of the business model, ISPs often are urged to reduce operating costs or find methods to reduce capital investment.
The issue is often that some of these steps help, but also require some additional costs, or can reduce take rates, increase churn or reduce market share, all of which are generally negatives.
It might be very hard to cite any particular tactic whose revenue upside is clearly and consistently greater than the costs required to implement the policies. At least hypothetically, about the best an ISP can generally do is institute policies that increase revenue slightly more than new costs are imposed.
Arguably, the cost of network upgrades--copper access to fiber for telcos; DOCSIS upgrades and FTTH for cable operators; 5G upgrades for mobile operators--impose high costs. In many cases, creating and then bundling new products also imposes new costs, even when new revenue also is generated.
As a thought exercise, consider the benefits of margin protection that various tactics might represent, balanced by the cost of instituting those measures.
Consider the cost of upgrading an access network to fiber-to-home, for example, or creating new products to bundle, reducing operating costs. All might help, but also require investments or additional costs.
In the table, the degree of help for protecting margins also is accompanied by increases in total capex and opex costs, for example.
At least in principle, if prices can be raised without causing customer churn, the upside clearly outweighs the cost (instituting price increases that most customers will accept). But nearly all the other tactics, while potentially yielding higher revenues, might also cause customer irritation and raise the risk of lost market share.
In a way, the relatively-modest return from such tactics illustrates an aspect of the “low-growth” nature of the connectivity business in general; something the industry shares with other capital-intensive industries with utility characteristics.
Demand is ubiquitous but also relatively inelastic. Under such conditions, there are limits to buyer spending propensity, no matter what is done to increase value, features or adjust prices.
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