Retail Pricing Will Determine Gigabit Demand

By now, it is clear that a shift to gigabit Internet access speeds is no mere matter of a few “hero” tests here and there, but the next evolution of the Internet access business in many markets, with a pull-through that will boost speeds into the hundreds of megabits range in communities where demand or cost make gigabit investments difficult.

Google Fiber, which most would credit for driving the change in the U.S. market, has not had to grapple with demand issues in the same way that incumbent Internet service provider might have, for one reason.

Google Fiber, in pricing its symmetrical gigabit service at $70 a month, has largely eliminated the cost barrier. Consumers who had been paying, or are aware, that a faster service can cost $80 a month or more, will not face “value-price” hurdles at that level of retail pricing.

Earlier belief on the part of many ISPs that there actually was little demand for gigabit access services were right, as far as their own offers. Few consumers were anxious to pay $100 to $300 a month for a dramatically-faster service, when a service costing $40 to $80 was deemed adequate.

The point is that demand for gigabit access very much hinges on retail price. So even if a recent survey of ISPs conducted by Broadbandtrends found the “number one challenge for offering gigabit broadband services was unclear customer demand,” that is likely because the proposed gigabit services were not being offered at price points similar to Google Fiber.

In point of fact, demand for a gigabit service costing $70 should not be markedly different from demand for any high speed service costing close to $70 a month. The issue is what percentage of existing customers pay just $40 for lower-speed services, and what percentage pay higher amounts.

A 2013 survey by the New America Foundation found that in the U.S. market, the best deal for a 150 Mbps home broadband connection from cable and phone companies is $130 a month, offered by Verizon FiOS.

On average a 45-Mbps connection cost about $90 a month, a study by the New America Foundation suggested, even if some might note that pricing is complicated when extracted or interpolated from a triple-play bundle, where there actually is not a fixed price for the high speed access component.

The point is obvious, though. Demand for gigabit access hinges on the price point. If a customer is willing to spend $90 for 45 Mbps access, there is little reason to believe that same customer would not be willing to spend $70 to $90 a month for a gigabit service.

The harder decision would have to be made by a consumer paying perhaps $45 a month for 18 Mbps service.

In the consumer Internet access business, speed has grown an order of magnitude every five to seven years or so. If that continues--and so far the trend is quite linear--a gigabit by 2020 would not be uncommon, in parts of most major markets.

Still, the Broadbandtrends survey suggests ISPs have a significant amount of uncertainty about anticipated take rates for gigabit broadband, particularly among incumbent telco respondents.

One might suggest that is because the installed base of customers are paying prices that make a gigabit alternative more expensive. In other words, ISPs think--likely correctly--that many consumers might conclude a “good enough” service for $40 beats a “best in class” offer costing $70, or about 75 percent more.  

The survey also found “a surprising low percentage of respondents” are using pre-registration to determine build priority for gigabit service.

More than half of respondents are currently offering gigabit access to businesses and Institutions, while 34 percent are offering such services in the residential market

“Being perceived as a technology leader was the overwhelming driver for gigabit broadband deployments, said Teresa Mastrangelo, Broadbandtrends principal analyst.  One suspects that is primarily an issue for commercial providers.

“For some operators, particularly municipalities, gigabit broadband is proving to be the foundation that can improve and enrich education, healthcare and public services as well as the economic engine for growth, investment and job creation,” said Mastrangelo.

Respondents suggested cloud-based backup and support for Ultra HD (4KTV) were the emerging new apps that could drive gigabit adoption.

That might not ultimately be as important as the tariffs ISPs offer.

Why Both 100-Mbps and Gigabit "Top Speeds" Make Sense

Decisions about internet access speeds always are a mix of supply and demand drivers, as suppliers invest in capabilities they believe potential customers will buy, at specific price points, at levels that are sustainable long term.

That is why the second-largest U.S. internet service provider--Charter Communications--sells 100 Mbps connections as its top offer, while Comcast and other cable companies are rolling out gigabit connections.

Charter could upgrade to a gigabit, but clearly believes the market will pay for 100 Mbps. If so, then investing in more-expensive gigabit connections does not make business sense.

Comcast and others (AT&T, many independent ISPs and other cable companies) think upgrades to a gigabit are required for competitive reasons (headline speeds and marketing), even if they believe most consumers will not choose to buy such services.

The key observation is that nobody actually has found that most consumers are willing to buy gigabit connections when they also have a choice of 100-Mbps up to 300-Mbps choices that cost less.

In other words, investing in gigabit platforms almost always--so far--involves a determination that most consumers will not buy that product, and instead will opt for a lower-speed--though still fast--connection.

So why supply gigabit services? The answer is because “our competitors do so.”

Comcast primarily operates in major urban markets, where competition is more robust, and where it faces Google Fiber offering gigabit services. That is true for AT&T and CenturyLink as well. Even if only 10 percent of customers actually choose to pay for gigabit services, that still sets market expectations, and no leader wants to face the marketing claim that “it is not the leader” in speeds.

Customer demographics also can play a role. Charter historically has operated in smaller markets, where competition is less robust, though the new Time Warner Cable assets primarily are in larger urban areas.

Comcast, on the other hand, mostly operates big-city networks, where it faces competition from other ISPs presently, or soon, to offer gigabit speeds.

So gigabit headline speeds matter, in big markets, even if suppliers realize most consumers will not buy them, yet. Google Fiber, and some other gigabit providers, also have found demand for gigabit connections less robust than they had hoped. EPB reports that about eight percent of its internet access customers buy the gigabit service, for example. Google Fiber might have wound up getting 10 percent or less take rates for its gigabit service, priced at $70 a month.

Under such conditions, a range of decisions, ranging from “top speeds of 100 Mbps” to “top speeds of a gigabit” or even 2 Gbps, make business sense. Demand matters when supply is considered.

Cable One Offers Gigabit Internet Access to 95% of its Passings

Cable One’s “GigaONE” gigabit internet access service is now available to residential customers across more than 95 percent of its U.S. footprint, representing more than 200 communities.

The primary impact likely will be that more people buy access at lower speeds, ironically. The reason is that when gigabit services are offered, the price of lower-speed tiers tends to drop. And, as you would guess, consumers buy more of a product they like when the price is lower. Verizon, for example, introduced its new gigabit per second at a retail price half that of the former 760-Mbps service, for example.

Gigabit services launches tend to reduce prices of services in the 100 Mbps or hundreds of megabits per second range to drop about  $27 per month, or about 25 percent, according to an Analysis Group study.

In markets where gigabit service has been introduced, prices for internet access in the 25 Mbps and lower speeds also tend to drop, by 14 percent to 19 percent.

Likewise, when two providers sell gigabit services, prices for that service tend to decline by $57 to $62 per month, or 34 percent to 37 percent less.

Actual revenue upside might also be complicated. On one hand, gigabit sells for a higher price. But gigabit availability also tends to mean prices for lower-speed tiers fall. So net incremental revenue is tough to evaluate.

Take rates are part of the equation. Some believe adoption of gigabit services could range between five and 10 percent, in markets where lower-speed tiers also are available.

"Price anchoring" is the reason most consumers able to buy gigabit internet access will not do so. Price anchoring is the tendency for consumers to evaluate all offers in relationship to others. As the saying goes, the best way to sell a $2,000 watch is to put it right next to a $10,000 watch.

Anchoring is why "manufacturer's suggested retail pricing" exists It allows a retailer to sell a product at a price the consumer already evaluates as being "at a discount." Price anchoring is why a "regular price" and a "sale price" are shown together.

In the internet access business, price anchoring explains why gigabit access speeds are priced in triple digits, while low speeds are priced in low double digits, while the tiers most consumers buy are priced in between those extremes.

Service providers who sell a range of internet access products differentiated by speed and price might “typically” find that a minority of customers actually buy the “fastest” tier of service. That is largely because of price anchoring.

People often evaluate a "best quality offer, at highest price" one way against the "lowest quality offer, at lowest price, before concluding that the "best" value is the mid-priced quality, at the mid-tier price.

That was true in the past when the top speed was 100 Mbps as well. Most consumers did not buy the "highest quality" offer, whatever it was.

So it can be argued that gigabit internet access speeds have complex effects on internet service provider business models. Most customers will not buy the top speeds, but will upgrade to faster tiers of service. At the same time, prices generally fall, on a “cost per Mbps” basis.

Consider that Comcast internet access average revenue per account is about $40 a month. Given that Comcast gigabit offers, where it faces little competition, are as high as $160 a month, and perhaps as low as $70 where Comcast faces gigabit competitors, that $40 average suggests uptake of the fastest tiers of service remains less robust than some would imagine.

Against that ISPs must balance the capex to build the faster networks, as well as evaluate the upside from any new apps and services that might be enabled by the faster networks, top speeds or rising average speeds.

The new wrinkle is that ISPs often make gigabit service available in neighborhoods where demand is highest. Doing so might lead to 30 percent take rates in those neighborhoods, as AT&T claims.

Gigabit Access" Price Really Does Matter

Though that will grow, over time, there is an important marketing principle at work here: headline speed remains mostly a marketing tactic.

Never, it seems, do “most” consumers buy the top speed, when there are choices offering less speed, meeting consumer needs, at less price. That has been the case for most cable TV and telco providers of Internet access, for example.

AT&T executives have said that, where it is available, about 30 percent of customers buy a gigabit per second service, even when other tiers of service are available. In part, that relatively high take rate reflects the fact that AT&T builds gigabit networks first in neighborhoods where propensity to buy is highest.

Take rates for some other providers such as Comcast might not be as high, in part because Comcast builds its gigabit internet access everywhere across its service territory, and not only in some neighborhoods.

Service providers who sell a range of internet access products differentiated by speed and price might “typically” find that a minority of customers actually buy the “fastest” tier of service.

That was true in the past when the  top speed was 100 Mbps as well. Still, much hinges as how an internet service provider markets its services. ISPs who sell only one speed--gigabit--at lower prices, will tend to see higher take rates. Prices really do matter.  

Deloitte Global predicts that the number of gigabit per second (Gbps) Internet connections will grow by an order of magnitude, to 10 million globally, by the end of 2016. About 70 percent of those connections will serve consumer locations.

Still, those 10 million subscribers will represent a small proportion–about four percent–of the 250 million customers on networks capable of gigabit connections as of end-2016. By 2020, gigabit accounts might number between five and 10 percent of all fixed network connections, Deloitte believes.

Gigabit access availability and marketing has primarily lead to increased sales of 20-Mbps and 40-Mbps accounts, U.S. telco CenturyLink has said.

But there is no reason to believe availability of gigabit connections changes the tradtional demand dynamics for consumer Internet access. Where there are a range of tiers and prices, most consumers opt for lower-priced packages that still offer reasonable bandwidth.

Rarely does demand for the absolute top speed tier ever seem to exceed about 10 percent of the buyer base.

In other words, most consumers will buy a tier of service that is deemed to be “good enough,” and also provides a better price-value relationship, compared to the absolute “best” offer. In other words, given a choice between best, better and standard packages, most consumers will choose the “better” package or “standard” package.

Deloitte further predicts that about 600 million fixed network Internet access subscribers may be on networks that offer a gigabit tariff by 2020, “representing the majority of connected homes in the world.”

Deloitte predicts that between 50 and 100 million broadband connections may be of the active gigabit variety, representing take rates between five and 10 percent.

There are good reasons to expect such take rates, now and in the future. Historically, only a fraction of consumers actually have bought the “fastest” tier of service marketed at any specific point in time.“At each point in time much faster speeds have been available, but were only chosen by a minority,” says Deloitte.

It is likely the historic patterns will remain in force: multi-user accounts, and accounts where video consumption is high, will be the scenarios where the fastest speeds offer the greatest value.

Shockingly, consumer Internet access speeds have increased, since the time of dial-up access, at nearly Moore’s Law rates. Price-value relationships likewise have gotten better.

Equally shocking, and perhaps more disruptive, will be the availability of gigabit speeds on mobile devices, a development truly shocking for a market used to typically speeds ranging from hundreds of kilobits per second to a few megabits per second up to perhaps 15 Mbps, on average.

By 2020, the first commercial mobile networks capable of gigabit per device mobile connections should be in operation.

LTE advanced currently offers up to about 500 Mbps in trials, and up to 250 Mbps in commercial offerings. Fifth generation networks are expected to boost typical top speeds to a gigabit or more.

It appears that coming millimeter wave platforms will shatter all past expectations of mobile bandwidth, which historically have been at least an order of magnitude lower than fixed network speeds.

Price Anchoring Affects Gigabit Take Rates

"Price anchoring" is the reason most consumers able to buy gigabit internet access will not do so. Price anchoring is the tendency for consumers to evaluate all offers in relationship to others. As the saying goes, the best way to sell a $2,000 watch is to put it right next to a $10,000 watch.

Anchoring is why "manufacturer's suggested retail pricing" exists It allows a retailer to sell a product at a price the consumer already evaluates as being "at a discount." Price anchoring is why a "regular price" and a "sale price" are shown together. 

In the internet access business, price anchoring explains why gigabit access speeds are priced in triple digits, while low speeds are priced in low double digits, while the tiers most consumers buy are priced in between those extremes.

Service providers who sell a range of internet access products differentiated by speed and price might “typically” find that a minority of customers actually buy the “fastest” tier of service. That is largely because of price anchoring.

People often evaluate a "best quality offer, at highest price" one way against the "lowest quality offer, at lowest price, before concluding that the "best" value is the mid-priced quality, at the mid-tier price.

That was true in the past when the top speed was 100 Mbps as well. Most consumers did not buy the "highest quality" offer, whatever it was.

So prices really do matter, as does price anchoring. In that regard, forecasts for gigabit internet access take rates hinge not only on where it is available, but how ISPs use price anchoring to package those services.

Some might make "gigabit" the only offer. Other ISPs will use price anchoring to create "basic, better and best" tiers with the assumption that most will buy the "better" tiers of service.

That will powerfully affect take rates for gigabit services.

Deloitte Global predicts that the number of gigabit per second (Gbps) Internet connections will grow by an order of magnitude, to 10 million globally, by the end of 2016. About 70 percent of those connections will serve consumer locations.

Still, those 10 million subscribers will represent a small proportion–about four percent–of the 250 million customers on networks capable of gigabit connections as of end-2016. By 2020, gigabit accounts might number between five and 10 percent of all fixed network connections, Deloitte believes.

Though that will grow, over time, there is an important marketing principle at work here: headline speed remains mostly a marketing tactic.

Never, it seems, do “most” consumers buy the top speed, when there are choices offering less speed, meeting consumer needs, at less price. That has been the case for most cable TV and telco providers of Internet access, for example.

Gigabit access availability and marketing has primarily lead to increased sales of 20-Mbps and 40-Mbps accounts, U.S. telco CenturyLink has said.

But there is no reason to believe availability of gigabit connections changes the tradtional demand dynamics for consumer Internet access. Where there are a range of tiers and prices, most consumers opt for lower-priced packages that still offer reasonable bandwidth.

Rarely does demand for the absolute top speed tier ever seem to exceed about 10 percent of the buyer base.

In other words, most consumers will buy a tier of service that is deemed to be “good enough,” and also provides a better price-value relationship, compared to the absolute “best” offer. In other words, given a choice between best, better and standard packages, most consumers will choose the “better” package or “standard” package.

Deloitte further predicts that about 600 million fixed network Internet access subscribers may be on networks that offer a gigabit tariff by 2020, “representing the majority of connected homes in the world.”

Deloitte predicts that between 50 and 100 million broadband connections may be of the active gigabit variety, representing take rates between five and 10 percent.

There are good reasons to expect such take rates, now and in the future. Historically, only a fraction of consumers actually have bought the “fastest” tier of service marketed at any specific point in time.“At each point in time much faster speeds have been available, but were only chosen by a minority,” says Deloitte.

It is likely the historic patterns will remain in force: multi-user accounts, and accounts where video consumption is high, will be the scenarios where the fastest speeds offer the greatest value.

Shockingly, consumer Internet access speeds have increased, since the time of dial-up access, at nearly Moore’s Law rates. Price-value relationships likewise have gotten better.

Equally shocking, and perhaps more disruptive, will be the availability of gigabit speeds on mobile devices, a development truly shocking for a market used to typically speeds ranging from hundreds of kilobits per second to a few megabits per second up to perhaps 15 Mbps, on average.

By 2020, the first commercial mobile networks capable of gigabit per device mobile connections should be in operation.

LTE advanced currently offers up to about 500 Mbps in trials, and up to 250 Mbps in commercial offerings. Fifth generation networks are expected to boost typical top speeds to a gigabit or more.

It appears that coming millimeter wave platforms will shatter all past expectations of mobile bandwidth, which historically have been at least an order of magnitude lower than fixed network speeds.

Gigabit Connections Likely Will Remain a Fraction of Accounts, Even When Ubiquitous

Deloitte Global predicts that the number of gigabit per second (Gbps) Internet connections will grow by an order of magnitude, to 10 million globally, by the end of 2016. About 70 percent of those connections will serve consumer locations.

Still, those 10 million subscribers will represent a small proportion--about four percent--of the 250 million customers on networks capable of gigabit connections as of end-2016.

Though that will grow, over time, there is an important marketing principle at work here: headline speed remains mostly a marketing tactic.

Never, it seems, do “most” consumers buy the top speed, when there are choices offering less speed, meeting consumer needs, at less price. That has been the case for most cable TV and telco providers of Internet access, for example.

Gigabit access availability and marketing has primarily lead to increased sales of 20-Mbps and 40-Mbps accounts, CenturyLink has said.

One example of demand dynamics:  In my own neighborhood in Denver, I can buy a gigabit access service for $110 a month, 100 Mbps for $70 or 40-Mbps service for $30 a month (Granted, all those are one-year promotional prices, so an increase would be expected after 12 months).

All those prices are for stand-alone service, with no phone service.

In that sort of environment, many consumers are going to conclude that 40 Mbps is “good enough,” and provides a better price-value relationship.

Having recently upgraded one connection from about 30 Mbps to 100 Mbps, I have to say I haven’t seen web page load speed advantages at all. There might, or might not, be any improvement in network stability. Content streaming has not been improved.

Granted, that particular connection normally is a one-user connection, so there is no contention from other users. The point is that 40 Mbps per user seems to work as well as 100 Mbps per user. For that reason, I cannot see any advantage to buying a gigabit connection, which I can do.

Google Fiber might test such demand characteristics as it activates its Atlanta gigabit network. There, for the first time, Google Fiber will offer, in addition to the standard “gigabit for $70 a month,” 100 Mbps for $50 a month.

It will be interesting to see how demand sorts out, between the gigabit and 100-Mbps offers.

Deloitte further predicts that about 600 million fixed network Internet access subscribers may be on networks that offer a gigabit tariff by 2020, “representing the majority of connected homes in the world.”

Deloitte predicts that between 50 and 100 million broadband connections may be of the active gigabit variety, representing take rates between five and 10 percent.

There are good reasons to expect such take rates, now and in the future. Historically, only a fraction of consumers actually have bought the “fastest” tier of service marketed at any specific point in time.

“At each point in time much faster speeds have been available, but were only chosen by a minority,” says Deloitte.

It is likely the historic patterns will remain in force: multi-user accounts, and accounts where video consumption is high, will be the scenarios where the fastest speeds offer the greatest value.

Shockingly, consumer Internet access speeds have increased, since the time of dial-up access, at nearly Moore's Law rates. Price-value relationships likewise have gotten better.

source: IP Carrier, Rod Tucker

At the end of 2012, the average entry level price for service was over $400, according to Deloitte.  By the third quarter of 2015, the average had fallen to under $200, and the cheapest package was priced at under $50. Typical prices in the U.S. market range from $70 a month up to about $130 a month in early 2016.

Equally shocking, and perhaps more disruptive, will be the availability of gigabit speeds on mobile devices, a development truly shocking for a market used to typically speeds ranging from hundreds of kilobits per second to a few megabits per second up to perhaps 15 Mbps, on average.

By 2020, the first commercial mobile networks capable of gigabit per device mobile connections should be in operation.

LTE advanced currently offers up to about 500 Mbps in trials, and up to 250 Mbps in commercial offerings. Fifth generation networks are expected to boost typical top speeds to a gigabit or more.

It appears that coming millimeter wave platforms will shatter all past expectations of mobile bandwidth, which historically have been at least an order of magnitude lower than fixed network speeds.

In Many Cases, Key Result of Gigabit Internet Access Will be Uptake of "Less Than Gigabit" Services

Gigabit internet access connections might seem a clear case of abundance way beyond a user’s ability to consume such bandwidth.

Nevertheless, Deloitte Global predicts that the number of gigabit per second Internet connections will climb to 10 million by the end of 2016, up an order of magnitude from the 2015 level.

About 70 percent of those connections will be bought by consumers, about 30 percent by businesses.

Greater availability and reasonable prices will drive adoption. Perhaps of equal importance is the prediction that, in 2016, some 250 million consumer locations will be able to buy gigabit connections, and will not.

By 2020, some 600 million subscribers may be on networks that offer a Gigabit tariff as of 2020, representing the majority of connected homes in the world, Deloitte says. Of those 600 million potential connections, between 50 and 100 million consumers might actually buy gigabit services (between five and 10 percent of the potential buyer base).

At the end of 2012, the average entry level price for gigabit service was over $400. By the third quarter of 2015, the average had fallen to under $200, and the cheapest package was priced at under $50, Deloitte says.

The likely result of all those gigabit offers will in many cases be that consumers opt to buy faster connections, but not at the full gigabit rates. Internet service providers that sell gigabit connections and no other speeds will see the highest adoption.

Telcos and cable TV companies that typically offer a range of speeds will probably find most consumers satisfied with speeds lower than a gigabit.

source: Deloitte