Home Broadband Prices have Dropped in Real Terms, Over the Last 2.5 Decades

U.S. home broadband inflation-adjusted costs have declined since the mid-1990s, according toan analysis of U.S. Consumer Price Index data. That will often not be obvious when observers consider only “current” prices for home broadband, and compare them to past “retail” prices. 

Comparing prices internationally over time is even harder, since there additionally are currency issues and general cost of living differences between nations.

Two primary forces are at work: price inflation over time and changes in quality or performance and features of the “same” products over time. Still, despite the oft-heard complaint that home broadband prices are "too high," they actually have dropped over two decades.

Consider U.S. prices.

According to the U.S. Bureau of Labor Statistics, prices for internet services and electronic information providers are 21 percent lower in 2021 versus 1997, for example. 

Other communication and computing related prices also have fallen, often in both stated and “real” terms after adjusting for inflation. 

According to the U.S. Bureau of Labor Statistics, prices for communication are 22  percent lower in 2021 versus 1993.

Between 1993 and 2021: Communication experienced an average inflation rate of -0.88 percent per year. 

Compared to the overall inflation rate of 2.26 percent during this same period, inflation for communication was significantly lower.

Also, according to the U.S. Bureau of Labor Statistics, prices for computer software and accessories were 74 percent lower in 2021, compared to 1997. Information technology, hardware and services are 92.64% lower in 2021 versus 1988. 

Prices for information and information processing are 27 percent  lower in 2021 versus 1993. 

Hedonic adjustments also are exceedingly common in computing and information products over time. The obvious examples are the price and performance of dial-up internet access in 1995 and broadband in 2021; the cost of computing operations; data storage or bandwidth. 

Hedonic qualIty adjustment is a method used by economists to adjust prices whenever the characteristics of the products included in the consumer price index change because of innovation. Hedonic quality adjustment also is used when older products are improved and become new products. 

That often has been the case for computing products, televisions, consumer electronics and--dare we note--broadband internet access services. 

Hedonically adjusted price indices for broadband internet access in the U.S. market then looks like this:

source: Bureau of Labor Statistics 

In other words, dial-up internet access and gigabit broadband are not the same product. 10 Mbps broadband is not the same product as 100 Mbps or 500 Mbps service. 

The same trend holds for mobile phone service, phones and other consumer electronics gear. The value and “quality” of a mobile phone subscription in 2000 is not the same as the 2020 value. Nor are the capabilities of a mobile phone the same in 2020 as was true in 2000. 

Frontier Fiber Model Shows How Models Have Changed

In recent investor presentations, Frontier Communications has made three points about its prospects for revenue growth based on optical fiber deployments: the number of consumer broadband accounts; the number of businesses within 250 feet of existing fiber assets and the number of cell towers within one mile of Frontier fiber assets. 

Recent presentations also have shown fiber-to-home home broadband average revenue per user of about $63. 

source: Frontier Communications 

For those of you who have followed the business model for home broadband over the past few decades, that number might seem quite surprising. The late 1990s justification for FTTH was the ability to sell subscription TV as well as faster internet access. Keep in mind that “faster” at that point was 10 Mbps. 

About 2000 the “average” U.S. cable TV bill was estimated to be about $32 a month, according to CordCutting.com. It actually is hard to remember what home internet access actually cost between 1995 and 2000, in large part because most people were buying dial-up services in 1995, while broadband subscriptions did not reach parity with dial-up until about 2005. 

In August 2000, only 4.4 percent of U.S. households had a home broadband connection, by some estimates.  

But a dial-up cost in the $10 a month to $15 a month range is close enough for 1995. Consumer broadband with speeds in the less-than-1.5 Mbps region cost more than that, perhaps in the $30 a month range by 2005. 

The point is that a telco customer with a voice line generating $30 a month, plus internet plus video could have been worth about $100 a month in revenue. Ignoring for the moment the issue of market share in each of the services (compared with a competing cable TV company), the potential revenue was as much as $100 a month for an FTTH-passed consumer location.

Now Frontier says ARPU for an FTTH customer is about $63 a month. Assume that figure includes some amount of voice revenue and zero video revenue. The change in revenue expectation (not adjusted for inflation) per potential customer is roughly 40 percent lower than might have been the case in 1995. 

The biggest change is the assumption that future revenue will be driven principally by one service--home broadband--not three potential sources. 

That was impossible to foresee in 1995. Absent the potential upside of video, and being charitable about the future of fixed network voice, most executives would have argued that the upgrade to FTTH would never make financial sense. 

So lots of assumptions have changed. Among them, in Frontier’s case, is the expectation that business customer revenues from cell tower backhaul and business broadband and services will underpin the FTTH network business model. 

The mid-1990s expectation of higher revenues from video and internet was only partially validated. Linear video no longer figures into the model, though over-the-top streaming might, for some access providers. 

Revenue contribution from voice arguably has been far worse than initially expected. 

So consumer revenue is principally driven by home broadband. Overall payback models for FTTH now lean on business customer revenues and backhaul. 

It is part of the change in FTTH business models in the U.S. market.

How Big a Market for 100 Mbps Home Broadband at $25 a Month?

Verizon's 5G fixed wireless now is available for $25 a month. Those plans come with extras such as streaming content subscriptions. Typical  download speeds of 90-170 Mbps with higher speeds and peaks over 1 Gbps in areas where millimeter wave capabilities are activated.

Typical upload speeds of 15-30 Mbps with peak upload speeds over 100 Mbps. 

Based on current buyer behavior, that might appeal to 20 percent to perhaps 30 percent (or more) of the home broadband market, the lower figure representing customers who already buy service at 100 Mbps or less. The higher figure adds customers who might prefer faster speeds, but for whom a $25 monthly cost is preferable to $50. 

Single-user households or price-sensitive customers are likely possible buyers. 

source: Openvault 

For Verizon, fixed wireless is important as it extends Verizon’s home broadband coverage so much. The company expects fixed wireless will represent 71 percent of its home broadband passings by about 2025.   

Will U.S. Telecom Market Turn to Bigger Bundles?

AT&T says it added total postpaid net adds of 1.3 million in the fourth quarter of 2021, including some 880,000 postpaid phones. “Each of the 2021 quarters has improved,” said John Stankey, AT&T CEO. 

For the full-year 2021, postpaid phone net additions were 3.2 million, “AT&T’s highest annual postpaid phone net adds in more than a decade,” the company says. 

Many observers believe the rather-torrid pace of net additions in the mobile service market should cool in 2022, though. 

Covid restrictions on schooling and work also are considered to have accelerated growth, possibly pulling forward some latent demand. Some amount of higher subsidies should also have helped boost sales. 

Competition from cable TV companies and Dish Network eventually will affect growth prospects as well. 

And some argue that a wave of promotions likewise has stimulated demand that is essentially pulled forward as well. Stankey does not agree with that argument. “Our cost per acquisition is dropping,” he said. “Our lifetime embedded value is increasing as churn goes lower and average revenue per user grows.”

In the event that such growth drivers end, overall growth rates could--or should--slow. In that case, net market share gains by some companies or others will become more important. T-Mobile, for example, has been gaining share for years.  

AT&T also added 270,000 fiber-to-home subscribers for the quarter. “We did really well with home broadband as well,” said Stankey. 

Full-year 2021 fiber net adds totaled about one million, the fourth consecutive year in which the company has added one million or more fiber subscribers. 

AT&T ended the year with an additional 2.6 million FTTH-passed customer locations, compared to its prior expectation of about 2.5 million. The company still is targeting 30 million FTTH home locations by the end of 2025. 

AT&T also ended the year with 73.8 million total global HBO Max and HBO subscribers, ahead of prior guidance suggesting accounts between 70 million to 73 million. “Warner Media knocked it out of the park,” said Stankey. 

Cash flow also improved, he added, driven by efficiencies, lower churn levels and profitable growth. 

In operational terms, Stankey also suggested the industry might well be seeing a turn towards consolidated offers where single-supplier offers might be viewed more attractively. One example might be the value proposition that “it doesn’t matter where you go, we will handle your bandwidth,” Stankey said. 

As you might expect for a firm that has the largest fixed network position in the market as well as mobile assets, Stankey believes there “could be a reordering of industry structure” coming that favors firms with broad fixed and mobile offerings. “My gut tells me there are more consolidated offers coming,” where one firm supplies all a customer’s needs. 

Zero Trust Grows from Consumerization of IT

The rise of “zero trust” approaches to security is a recognition of the importance and prevalence of consumerized cloud-based apps, where one must assume there is no difference between apps, processes or identities inside the enterprise and coming from the cloud. 

In essence, zero trust is built on the assumption that perimeter defense is no longer possible or desirable. Where it once was assumed that operations “inside the perimeter” were safe, zero trust assumes nothing is safe. 

 source: McAfee

In other words, even internal interactions on the enterprise side of the firewall and security system are treated as though they were cloud-based and external operations. In a direct sense, that change in security architecture is directly an outgrowth of the shift to cloud-based applications and mix of consumer tools and “IT-sanctioned tools” in the workplace. 

source: Logrhythm 

Use of “non-sanctioned” employee personal devices and cloud-based apps in the workplace has been quite common for a couple of decades, leading to new corporate approaches to such innovations. 

This phenomenon has been frequently referred to as IT consumerization and is notable because it reversed the typical way information technology diffused. 

In the past, IT innovations were developed for enterprises or big government, then spread to mid-market and then small business before reaching consumers. 

Easy-to-use cloud-based applications  and powerful personal devices (PCs, tablets, smartphones) reversed the process. 

Online data storage, social media, and web-based email services and other personal applications actually originated in consumer markets and then were brought to work. 

Consumerization of IT has also come to encompass user experiences and user interfaces that mimic consumer user experience  and user interfaces. So consumerizing enterprise apps and experiences also became a trend. 

Workers seem to prefer apps and experiences that have a consumer ease of use about them and enterprise apps are being redesigned with that in mind. 

Though initially opposing the trend, most enterprises have learned to live with employees preferring the use of consumer tools (Google Apps, Skype or Dropbox) in addition to, or instead of, enterprise IT alternatives. 

Initially seen as “rogue IT,” widespread use of such consumer tools has reshaped enterprise IT, and produced the zero trust approach to security.

Backing Up Home Broadband Using 4G

Information technology diffusion, 40 years ago, generally ran from enterprise to mid-market to small business to consumer users. Tools available in the business gradually became affordable to smaller businesses and then in consumer appliances.

The internet tended to reverse the process: new technologies moved from consumer markets into enterprises, mid-market and small business. Cell phones were one example. Consumer social media and cloud-based applications of every sort provide examples.

Software as a service provides another example. Instead of waiting for formal information technology departments to create a needed capability, department heads often found they could buy capabilities on credit cards without waiting.

Stil, sometimes the older pattern emerges. Some businesses have used 4G for backup of their primary business broadband connections, for example.

Vodafone Always Connected is a 4G backup for home broadband, now offered in Ireland. If the home broadband line has an interruption, access is switched automatically to the 4G mobile network using an in-home appliance. 

When the fixed network issue is resolved, the connection switches back to the home broadband fixed network.

That “4G as a backup” strategy has been used for some time by some business customers who want a failover strategy for their primary fixed network connection. 

To my knowledge, this is the first mass market service to offer the same feature to consumer customers. 

The Vodafone Always Connected device is self installed and delivered by mail. 

It uses its own standard subscriber information module. The device connects to the USB port at the back of the customer’s existing broadband modem. The device autoconnects. That is pretty much it. 

Vodafone notes that this backup service works only when 4G is available, as is the case for about 99 percent of locations in Ireland. 

Vodafone points out that the backup solution works when there are:

• Alterations to connections and wiring inside your home,

• Any local or exchange faults on your broadband,

• Fallen lines due to building work or;

• Storms, high winds, or adverse weather conditions that cause damage to the fixed broadband network.

Instances where it does not help: 

• The customer modem does not have power. For example, if there is a power outage, your modem will not be powered and Vodafone Always Connected will not work.

• The 4G mobile network is down at the same time as your broadband or;

• There is any damage to a customer’s modem.

Of course, when there are local power outages, then the appliances and devices using the internet (TV, PC, dongles and devices using Wi-Fi) also will not work, unless the customer has a backup power source. But that is the case for all locally-powered devices. 

As was the case for locally-powered cordless phones, they are useless when local power is lost, even if the connection remains operational. 

Widespread power outages are another problem. If cell towers are damaged or power is lost over a wide area, for many hours, then the mobile network itself is likely to be unavailable as well. 

For most consumers, higher levels of backup are probably not considered worth the cost and effort. That would entail generator power and battery backup for the whole house and ample supplies of fuel, plus the proper permits. 

Still, the feature is an interesting extension of a business service to the consumer market. For most of the internet era, the diffusion of technology actually ran the other way: from consumer to business. 

We often forget that many current business-grade tools initially came to work when workers wanted to use the same tools they had available to them as consumers. 

The service costs €5 a month.

Co-Investment Changes FTTH Business Model

For a number of reasons, the business model for telco and cable TV fiber to home is changing. A higher degree of government subsidy support; a desire for investment in FTTH facilities as alternative investment and competitive dynamics in the home broadband industry all mean the business case for FTTH improves. 

As one example,Cable One is part of a joint venture with GTCR LLC,  Stephens Capital Partners, The Pritzker Organization and certain members of the management team to build optical fiber to premises networks by Clearwave Fiber.

Clearwave Fiber holds the assets of Cable One’s subsidiary Clearwave Communications and certain fiber assets of Cable One’s subsidiary Hargray Communications. 

At the same time as capital investment requirements are changing, there is a shift in the assumptions about business model. 

In the late 1990s FTTH was seen as the only viable way for telcos to take market share in the linear video subscription business from cable TV operators. So the revenue upside was subscription video and internet access speeds. To be sure, video arguably was seen as the bigger revenue driver, as late 1990s telco FTTH speeds were in the 10 Mbps range. 

Bundling (triple play or dual-play) also was seen at that time as the way to compensate for competition-induced account losses. While telcos or cable each competing across the voice, business customer, internet access and video entertainment markets might have fewer total accounts, revenue per account from triple-play services would compensate. 

source: S&P Global Market Intelligence 

But something else now seems to have changed. A decade ago, independent internet service providers began to attack the market increasingly based on one service: home broadband. To be sure, many independent ISPs tried a dual-play or triple-play approach for a time. 

But nearly all eventually settled on a home broadband-only approach. Since virtually all independent ISPs face both telco and cable TV competitors, the single-product business model makes some concessions on potential revenue that necessarily must be balanced by lower capital investment and operating costs. 

The latest developments are that such tradeoffs are seen as feasible even for incumbent telcos: in other words, the business model increasingly relies on broadband as the foundation, with some contributions from voice. Video (linear or streaming) plays a lesser or no role in revenue assumptions. 

There are other changes. Subsidies have been rising for broadband deployment, and that also changes the capex requirements. Some of the investment in optical fiber also is helped by the denser optical fiber networks necessary to support 5G networks. Essentially, the payback model is bolstered by the ability to defray some optical media costs from mobile service revenue opportunities. 

Also, 5G supports home broadband using the same transmission facilities as does mobile service, often offering a chance for mobile operators to compete in the home broadband business at relatively low incremental cost. That also helps lower the cost of fixed network FTTH as more revenue is wrung from the installed assets. To the extent that higher revenue produces incrementally higher free cash flow, more capital is available to invest in additional FTTH facilities.

The incremental cost of consumer home broadband is lower once a dense trunking network must be put into place to support small cell mobile networks. 

Also, the value of FTTH facilities has changed as rival investors (institutional investors, private equity) view consumer broadband as a legitimate alternative investment. That boosts the equity value of an FTTH network and supplies new sources of investment. 

Also, the cost of FTTH construction has improved steadily over the past few decades. Also, the expected reduction of operating costs from fiber networks, as opposed to copper networks, now is well attested. So there are opex savings. 

FTTH remains a challenging investment, nonetheless. But it is noteworthy that assumptions about the business model now have changed for incumbent and new providers as well. Where it once was thought an FTTH upgrade virtually required revenue from three services, in an increasing number of cases the investment can be justified based on home broadband alone. 

In greater numbers of cases, the primary value of home broadband is supplemented by some revenues from other sources. But where a triple-play might have produced $130 per month to $200 per month revenues, home broadband might produce $50 to $80 a month. 

That projects increasingly are feasible with a $50 monthly revenue target and adoption around 40 percent to 50 percent shows how much the capex and opex assumptions have changed.