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.

How Many Consumers Actually buy Gigabit Internet Access?

AT&T says it now markets its fiber-to-home network AT&T Fiber to over 5.5 million locations across 57 metros. AT&T also says that “over two million subscribers choose internet service from AT&T,” in those areas. That implies take rates of about 36 percent.

That does not mean all those consumers buy gigabit service, though. Assume AT&T sells 50 Mbps, 100 Mbps and 1000 Mbps service in those areas. Past experience suggests most consumers actually will buy one of the lower-speed tiers, with buying likely clustered around the 100-Mbps offer.

AT&T executives have in the past 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.

If overall take rates are about 36 percent, then perhaps 11 percent of AT&T Fiber customers buy gigabit levels of service.

source: nscreenmedia

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, because Comcast gigabit service sells for about $160 a month and because most consumers are going to pick speeds in the hundreds of megabits per second ranges, not the fastest or slowest tiers of service.

Comcast internet access average revenue per account tends to range slightly above $40 per month, further suggesting that not too many subscribers buy gigabit tiers of service, or that most consumers do not pay the posted rates.

Longer term, the issue likely revolves around competition between cable TV fixed network connections and mobile/wireless. Already, mobile represents 43 percent of U.S. internet access accounts, while cable represents 39 percent, with telco fixed network access at about 17 percent.

source: NCTA

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.

Have U.S. Telcos "Permanently Lost" the Internet Access Battle?

U.S. telcos now have permanently lost the battle for internet access market share to U.S. cable operators, analysts at Jefferies now say. “In our view, it is far too late for the ILECs to ramp spend to compete.”

The key exceptions, though, are AT&T and Verizon, which will be able to offer 5G access, both mobile and fixed, at speeds that will rival what cable operators can offer.

Still, unless something breaks the current trend, telcos collectively could become something of an afterthought in the access business, with market share as low as 28 percent by 2020, according to New Street Research.

That forecast, though, likely assumes 5G will not be an important factor for AT&T and Verizon, an assumption some of us do not share.

AT&T and Verizon represent 66 percent of all U.S. telco fixed network internet access accounts, while most of the fixed network telco accounts losses in the second quarter of 2017 came from the three former rural telcos CenturyLink, Windstream and Frontier Communications.

Depending on how the accounts are categorized (as accounts in the mobile business or the fixed networks business), AT&T and Verizon might be able to reverse the slow erosion they have been encountering in fixed network internet access connections.

It remains unclear whether other large incumbents will be able to use unlicensed spectrum and their own fixed networks to support backhaul to small cells, allowing them to provide fixed wireless.

Likewise, it also is unclear whether some firms might be able to lease assets from AT&T or Verizon to provide fixed wireless based on 5G platforms.

source: New Street Research

Telco	Internet Access Accounts, 2Q 2017	Net Change 2Q 2017
AT&T	15,686,000	(9,000)
Verizon	6,988,000	(23,000)
CenturyLink	5,868,000	(77,000)
Frontier	4,063,000	(101,000)
Windstream	1,025,800	(21,800)
Cincinnati Bell	307,100	(300)
FairPoint^	304,193	(1,160)
Total Top Telco	34,242,093	(233,260)

source: Leichtman Research

If at least 90 percent of U.S. mobile subscriptions include mobile broadband access, that implies 400 million U.S mobile internet access accounts could be in service by the early 2020s, dwarfing the 94 million fixed network accounts.

The point is that it might well prove nearly impossible to predict how internet access market share might change, by access platform or provider, over the next decade.

source: Ericsson

When Apple, Comcast, Facebook All are Key Content Distributors, Something Important Has Changed

One hallmark of market disruption caused by technology revolution, especially when accompanied by deregulation, is that new competitors enter older markets. Often, the most-disruptive new entrants are those from outside the traditional industry boundaries.

Consider that, in new discussions about releasing new movies to the streaming window faster than ever, primary distributors include Comcast and Apple. Such a new “premium movie download” product would allow viewers to watch streamed movie content just weeks after theatrical release.

Obviously, what is important about that pairing of names is that a major device manufacturer and one of the largest linear video distributors are linked. We are used to thinking of cable TV companies, TV and radio broadcasters as “content distributors.”

We are less used to device suppliers occupying that role, any less than we have been used to asset-light firms such as Netflix, Hulu or Amazon being “content distributors” as well.

That same sort of porous boundaries can be seen elsewhere in the communications business. Voice and messaging are supplied asset heavy and asset light, by facilities-based service providers and over-the-top app providers. Internet access sometimes is provided by traditional “access provider connections,” and at other times by Wi-Fi, a private network, in-building signal distribution platform.

In coming iterations, 4G and 5G will be provided simultaneously by “access” and private local area network assets, using Licensed Assisted Access and other methods of aggregating mobile network and fixed network spectrum assets.

The main point is that markets undergoing technology and other disruption often see the emergence of new competitors and rearranged industry structures. So it is that Apple and Comcast both are key content distribution vehicles. Facebook has become an important content distributor as well.

Another hallmark of industries under disruption is that revenue shares and magnitude tend to shift.

That shortened release window for streaming almost inevitably will reduce revenue shares earned by theater owners and increase revenues earned by streaming distributors. The incentive for content owners is a way to boost lost revenues from the DVD release window, which has dwindled.

source: project-disco.org  

source: Moffett Nathanson

No Need for 5G?

At least some observers might have argued that “we do not need 3G.” Some might have argued there “is no need for 4G.” So it is not surprising that some argue there is no need for 5G, either.

One argument might be that data growth actually is not as robust as many believe it is. Video is the reason most-often given for why capacity is needed. But some might point out that video already represents more than 50 percent of total mobile network. Some might argue that future growth, though substantial, is a glass half filled. In other words, there will be significant growth, but not orders of magnitude growth.

Many of the new use cases likewise will be satisfied by existing fixed network assets.

Others might argue that, although 5G will enable many internet of things apps, 5G will not be needed for many such apps and use cases.

The point, some might argue, is that the commercial revenue drivers for 5G are not entirely clear. So argues William Webb, Ofcom senior technologist, for example.

“Users will not value the higher data rates that are promised and will not need the higher capacity forecast,” Webb  argues.

The countervailing argument is that demand will exist, or can be created. That essentially rests on the view that services and revenues based on 4G have reached--or will reach--saturation soon.

Since 5G offers new capabilities, it also can support new use cases and revenue models, either speeds much faster than 4G or with a different set of features (supporting low battery consumption use cases).

Others might argue that 5G will enable new business models precisely because it eliminates the price and performance advantage fixed networks traditionally have held over mobile networks, making mobile a full network substitute for the first time, and essentially allowing mobile to cannibalize fixed network revenues.

Networks that can deliver the highest speeds and greatest reliability will command the highest average revenue per connection, Juniper Research argues. That means 5G actually will be strategic for mobile operators.

That noted, demand will have to be created. In terms of commercial IOT revenues, Juniper Research believes average revenue per connection from IoT will be “disappointing, including smart cities and digital health.”

For starters, such devices will not require much bandwidth, implying relatively low revenue per connection.

That might not be so much the issue as the relative value of the transmitted data, in context. Almost by definition, the value of data collected from any single sensor hinges on its predictive role for the application it supports. A single sensor that can predict the failure of an expensive piece of machinery might have very high value.

A single sensor measuring pressure, temperature, vibration or performance might therefore be highly valuable. But many sensors, though valuable, will not have large immediate value.

Customers are not likely going to be willing to pay a high percentage of total potential gain or loss to be alerted to changes that suggest such potential gain or loss. In other words, customers might well be willing to pay a few percent of the value of any product’s value, but not 100 percent percent of that value, especially when a simple “replace it when it fails” approach is possible.

How much recurring cost will a consumer be willing to spend to know a light bulb is going to fail, compared to the alternative of simply replacing that bulb when it fails?

In other words, the market value of a recurring payment to learn about future device or component failures varies. Such value might be very high for many industrial and commercial purposes, but generally very low for most consumer applications.

That is one reason some believe 5G fixed wireless will be so significant. A single consumer 5G fixed wireless connection, in the U.S. market, for example, should generate monthly revenue between $50 to $100, depending on bandwidth, about the range of similar fixed network connections.

That is a big deal, when many internet of things connections might generate only a few dollars a month of revenue.

Also, consumer demand for internet access--including higher-bandwidth versions--is well known, and large. That means it has potential to directly and powerfully affect total service provider revenues. Many other new IoT apps will generate comparatively small revenues, at first, and so not move the revenue needle appreciably.

Fixed wireless could have a significant impact.

That impact might not be seen in all markets, or even many markets, at first, Juniper Research, for example, argues that most 5G connections, in 2025, will be active in just three countries:

China, the United States and Japan.

Together those countries will have 55 percent of all 5G connections by 2025, Juniper Research estimates. The United States will account for over 30 percent of global 5G IoT connections by 2025, with the highest number of 5G connections for fixed wireless broadband and automotive services.

Where Cable ISPs Compete, They Win?

The U.S. internet access market is one of the few in the world where cable TV operators have been driving consumer internet access speed advances over the last decade. The United Kingdom is another such market.

In 2016, for example, on U.S. fixed networks, “average” speed increased 40 percent in a single year, and most of that was driven by Comcast and other cable TV operators.

In the United Kingdom, in 2016, Virgin Media, the U.K. cable operator, was far and away the fastest ISP, offering speeds more than twice as fast as BT or BT’s wholesale customers and about four times faster than ISPs using unbundled local loop access.

source: Ookla

source: Ookla

But speed is not the only significant business model impact in the U.S. and U.K. markets. At least as important--and arguably more important-- is the dramatic change in potential market shares obtainable by any former telco in such a market.

Facing accomplished competitors with scale, skill and other business resources, including their own facilities, a former incumbent telco might reasonably expect that its addressable market shrinks as much as half. In the U.K., Virgin Media’s network reaches perhaps a quarter of locations; in the United States cable operators have close to 100 percent coverage of telcos.

Verizon’s experience with its FiOS service suggests a telco facing a cable opeator might get 40 percent to 45 percent of the internet access market, even when fiber to the home is the access platform.

"At the end of the second quarter of 2017, cable had a 64 percent market share versus 36 percent for telcos,” said Bruce Leichtman, Leichtman Research Group president and principal analyst.

Unless something breaks the current trend, telos could collectively become something of an afterthought in the access business, with market share as low as 28 percent by 2020, according to New Street Research.

source: New Street Research

Stranding 60 percent of the deployed capital in FTTH access networks is one very good reason for some service providers to look at 5G fixed wireless. If the maximum share is range bound around 40 percent to 50 percent, then any solution that minimized stranded assets will improve the business case.