Are Home Broadband Prices Going Up or Down?

Are home broadband prices going up or down? It might seem an easy question to answer. "Up," of course, many will say. But ask a different question: what are the price trends compared to other essential products. One might get a different answer. 

Home broadband pricing comparisons are more tricky than you might suppose. One has to choose which sorts of plans to compare. Is the comparison to be made of the most-affordable plans, those in the middle or the highest-priced plans? 

And what if half or more of all customers buy service bundles, not stand-alone internet access plans? Does one exclude buying behavior from half or more of the audience? And what if a significant percentage of customers are on promotional plans? Does one compare those, or only the “standard” plan pricing when promotional periods end?

In other words, it does not make sense to compare price plans most consumers do not buy. Though judgment and choices must be made, what are the plans “most” consumers actually buy? As a rule, that will mean comparing not the value plans or the highest-cost plans, but plans someplace “in the middle of the range,” as that is what most consumers actually buy. 

All that and we have to include the impact of inflation, which distorts longer-term “real” price trends. Finally, there are changes in product quality over time. Does one compare 10 Mbps plans to 100 Mbps or 1,000 Mbps over time? And if so, how does one adjust for quality improvements? Such hedonic adjustment applies whenever legacy products have changed in some key way that makes them new products.

The classic example has been personal computer technology. But internet access also has changed in similar ways over time. 

source" USTelecom

It is hard to answer the question “have home broadband prices risen since 2009?” without using hedonic adjustment and also adjusting for inflation. The Bureau of Labor Statistics uses hedonic adjustment to track producer prices for home broadband, for example, since speed and other attributes change over time. 

The rationale is that a dial-up internet connection is not a  comparable service to home broadband at various speeds (10 Mbps, 100 Mbps, 1 Gbps, for example). Since prices tend to stay about the same over time while speeds have increased for the “most bought” tiers of service, BLS adjusts prices to account for quality improvements. 

source: Bureau of Labor Statistics 

In other words, home broadband prices might not be “too high.” Where many other essential products have seen price increases--even before the recent bout of high inflation--home broadband prices arguably have decreased. 

Ignoring hedonic changes, Compared to 2008, fixed network broadband costs have fallen, globally, though there is a slight rise in developed nations, driven by consumer preferences for higher-priced and higher-speed services, according to International Telecommunications Union data. 

source: ITU 

Consumers do not like price increases, it goes without saying. But nominal price increases, when inflation is at any rate above zero, are going to happen. Real price increases must adjust for currency differences, inflation rates and hedonic quality changes, not to mention actual consumer behavior.

BT Pauses Digital Voice Changeover: Customers Were Confused, Disappointed

BT says it botched the transition of voice services on its fixed network from analog to voice over IP, and is “pausing all further Digital Voice switch-overs for customers who don’t want to move to the new technology straight away,” says Marc Allera, BT CEO, consumer division.

As it happened, BT underestimated both the customer confusion and the disruption power outages would cause for a service that formerly was network powered and often required new equipment to support broadband connections for those who did not have such service. 

The pause will allow BT time to create resiliency solutions including hybrid phones that switch to mobile in case of local power outages; battery backup units; mobile-only replacements for landline service and better mobile service to support those alternatives. 

“We underestimated the disruptive impact this upgrade would have on some of our customers,” says Allera. “With hindsight we went too early, before many customers, particularly those who rely more heavily on landlines, understood why this change was necessary and what they needed to do.”

SOURCE: itu 

The customer expectations issues are likely enhanced by the huge switch in use of voice services. Use of fixed network voice peaked globally about 2004. Since then, people have increasingly preferred mobile as the device and network for voice calls. In the United Kingdom, mobile voice usage has displaced fixed network voice, for example. Mobile call volume is an order of magnitude higher than fixed network voice volume. 

Twenty years ago, as service providers began the transition to IP voice, great concern was expressed about the end of network power, as the vaunted “five nines” (availability at 99.999 percent of the time) levels of service would be ended. 

Executives in most cases seemed not to factor in the abandonment of fixed network voice services and the replacement by mobility services. Customers quickly understood that mobile phones do not work if battery power is exhausted. 

That was never the case for fixed-line services, where customers expected their phones would continue to work in cases where local power was lost. 

In truth, powering issues had effectively grown for decades, even before the replacement of analog voice with VoIP. As consumers switched from corded phones to cordless, they already had begun to experience “loss of dial tone” whenever local power was lost. 

The issue BT might have faced was that most younger consumers had moved off the landline voice network or never had such service. 

That means a growing percentage of landline voice users are older and presumably less used to new technology, which exacerbates the technology transition. BT in this case appears not to have thought through the cultural issues it would face.

When "Data" Does Not Match "Perceived Reality" Perhaps the Data or Your Perceptions are "Wrong"

Trying to figure out what people really pay for home broadband is tricky. Prices differ by provider, location and the number of competitors in a market. Prices also vary by the level of government subsidies and take rates of such subsidies. 

One has to decide which plans to compare, and those choices shape the outcomes. The other issue is the inability to adjust the analysis for discounts and promotions that affect what customers actually pay. In other words, the retail tariffs we choose to compare  are not necessarily reflective of active consumer behavior. 

The most recent example of this is an analysis of home broadband costs by the Internatiomal Telecommunications Union, which reports that the “lowest-priced home broadband plan” offered by the largest U.S. supplier average more than $130 a month.

If you follow U.S. broadband prices, you know that is incorrect. Since the largest U.S. ISP is Comcast, the ITU must have looked at Comcast’s stated prices. And if you check, you can see that the stated retail price (after a promotional period) does jibe with the ITU figures. 

source: ITU 

 

The issue is that Comcast customers do not seem to be paying triple-digits for the “lowest-cost” home broadband plans. 

That seems wildly incorrect. Methodology is an issue. The lowest-cost budget plans typically are in the $10 to $15 a month range and support speeds around 50 Mbps (moving higher, as do speeds on all plans). 

Those are the plans ITU should have reviewed were it looking at the comparable “lowest-cost plans offering 5 Gbytes of usage and minimum speeds.” 

source: HighSpeedInternet.com. 

But those plans are rarely listed on websites showing available plans. You would have to hunt to find plans offered by all leading ISPs for low-income households. 

Instead, the ITU researchers seemingly looked at prices shown on the Comcast websites that do not represent the comparable lowest-cost plans. To be sure, Comcast, the largest U.S. ISP, shows charges of $30 a month for services operating at 100 Mbps. 

And, to be sure, Comcast also says those prices are good only for one year, with sharp price increases after 12 months. Comcast says its 100-Mbps plan will grow to $81 a month after 12 months. 

The issue is that it would be hard to find anybody who actually pays that amount for a 100-Mbps service, even after a 12-month period. 

The average U.S. home broadband service  costs about $64 a month. If the cost of the lowest-priced plan really were more than $100 a month, as the ITU analysis suggests, the “average” U.S. price could not be as low as $64. By definition, the average would have to be much higher. 

According to Openvault, only about 20 percent of U.S. households purchased services operating at 100 Mbps or less in the second quarter of 2021 and only 18 percent in the third quarter of 2021 and 17 percent by the fourth quarter of 2021. 

source: Openvault 

And that is why methodology is so important. Actual measurements of home broadband speed show only 17 percent of subscribers are provisioned for speeds less than 100 Mbps. Only nine percent are provisioned for speeds of 50 Mbps or slower. 

The point is that any analysis of home broadband focused on the lowest tier of service, in terms of speed or price, would not tell you very much, in any country. What is arguably much more useful is an analysis of the “typical” plans customers buy, and not the highest or lowest price plans; fastest or slowest speed options available. 

Unless one is clear about methodology, it is easy to make unclear or misleading statements, such as “X percent of customers do not have access to Y speeds.” Does that mean such customers cannot buy because the service is not available? Or does it mean they could buy, because the service is available, but they choose not to buy, preferring some other plan?

The answers matter. 

I may choose not to buy a Tesla. That does not mean I cannot buy a Tesla. Some will rightly argue that home broadband is a necessity, and a Tesla is not. Noted. But virtually all the global data shows that, over time, the cost of home broadband globally has declined, measured as a percentage of gross national income per person. 

To be sure, according to the ITU, fixed broadband prices (adjusted using the purchasing power parity method) have risen since 2015, after dropping since 2008, while mobile data costs have dropped steadily. 

But 2020 prices were still lower than in 2008, and that assumes we accept the data as accurate, which I do not. If the same methodological issue applies to other markets, then prices are overstated. 

Beyond all that, there are hedonic adjustments, referring to the change in a product’s performance over time. Beyond price, the performance of our smartphones, personal computers or home broadband are vastly different than they were 20 years ago. 

Is the $300-per month 756 kbps internet access connection I was buying about 1996 the same product as the gigabit connection I now buy that costs possibly $85 a month? Is that gigabit connection the same product as the 300-Mbps connection I was buying a year ago, even if that product “cost less” than the gigabit connection?

Methodology always matters when evaluating home broadband availability, quality and cost. In this case, the ITU analysis seems quite flawed.

When the Data is Wrong, So is the Analysis

Very few issues seemingly are more contentious than the issue of whether internet access prices are high or not; rising or not. Internet service providers do not wish to be accused of price gouging; policymakers do not wish to be accused of not doing enough; some policy advocates  must argue there is a problem to be solved, or there is no issue to debate. 

Nor is this an easy matter to quantify. If one points out that price inflation has occurred for most of modern history, then of course “prices” will be higher, not lower, over time.  

U.S. consumer prices in 2022 are 11.77 times higher than average prices since 1950, according to the Bureau of Labor Statistics consumer price index.

source: U.S. Bureau of Labor Statistics 

General U.S. price levels  since 1996, when many people started buying internet access, have increased almost fifty percent. So arguing that prices--any prices--have increased over the last decade, several decades or longer does not mean much. 

All prices have increased. 

source: OfficialData.org 

The only meaningful issue is whether prices for some products, such as home broadband, have increased more, the same or less than the average for all consumer prices. Nor is that an easy exercise. 

Methodology also matters. 

The International Telecommunications Union says that, in the U.S. market, the prices for the lowest-priced plans offering at least 5 Gbytes of usage have increased from less than $40 per month in 2008 to more than $100 a month in 2020. 

That seems wildly incorrect. That might be the case for gigabit services--which can approach $100 a month--but cannot be correct for the budget plans that are in the $30 a month level. The methodology is off, as Comcast, the largest U.S. ISP, only charges $30 a month for services operating at 100 Mbps. To be sure, Comcast also says those prices are good only for one year, with sharp price increases after 12 months. 

Comcast says its 100-Mbps plan will grow to $81 a month after 12 months. The issue is that it would be hard to find anybody who actually pays that amount for a 100-Mbps service, even after a 12-month period. 

The average U.S. home broadband service  costs about $64 a month. If the cost of the lowest-priced plan really were more than $100 a month, as the ITU analysis suggests, the “average” U.S. price could not be as low as $64. By definition, the average would have to be much higher. 

According to Openvault, only about 20 percent of U.S. households purchased services operating at 100 Mbps or less in the second quarter of 2021 and only 18 percent in the third quarter of 2021 and 17 percent by the fourth quarter of 2021. 

source: Openvault 

source: ITU 

Other issues must be confronted when comparing prices across countries. Adjusting for currency and living cost effects, the International Telecommunications Union, for example, says mobile prices (not adjusted for inflation) have dropped, while fixed network prices for the lowest tier of service have climbed a bit since 2015, but only after having dropped since 2008. 

Still, prices are lower than in 2008, all that noted. 

source: ITU 

Keep in mind that this analysis is only of the cheapest plans in each country offering at least 5 Gbytes of usage and a minimum speed of 256 kbps, supplied by the largest internet service provider in each market. 

The analysis is not of the service plans “most consumers buy.” The plans are based only on posted retail tariffs and do not include any discounts customers may have based on promotions or other criteria. Nor does the data take into account whether plans offered by all providers that are not the “biggest” in each market. Nor does the analysis include the prices paid by consumers on the most-popular plans, using any discounts or promotions. 

There are other important drivers at work, as well. Since 2008, ISPs in developed countries have been rapidly increasing “typical” speeds, while consumers have been gradually changing the service plans they buy, shifting from lower-speed plans to higher-speed plans that cost more. 

Beyond all that, the latest ITU data on U.S. home broadband plans seems wildly incorrect.

Home Broadband Prices Can be "Higher" Without Being "Too High"

We often hear, often without use of supporting data, that U.S. home broadband prices are high and speeds slow. When data is used, it most often is comparative to other countries. That can be done, with or without adjusting for purchasing power across countries. 

As has been the case for other U.S. connectivity services, the United States does not typically rank “first” on such global comparisons. Any rank between nine and 15 would be expected. There are valid reasons for that, in substantial part due to the large percentage of the U.S. land mass that is lightly or uninhabited. 

But there are other ways to compare prices. Consider general price levels and inflation, for example. 

In one sense, we can note that U.S. price levels are “higher” for almost every category since 1950, for example. 

Prices in 2022 are 11.77 times higher than average prices since 1950, according to the Bureau of Labor Statistics consumer price index. A dollar in early 2022 only buys about 8.5 percent of what it could buy in 1950. By the end of 2022 the dollar will buy less, as the inflation rate has exploded. 

source: U.S. Bureau of Labor Statistics 

So are prices higher in 2022 for virtually anything than in 1950? And, if so, would we really expect prices for home broadband to be “lower” in an absolute sense?

But you might object that internet access did not exist in 1950. So consider general U.S. price changes since 1996, when people were buying internet access. Since 1996, U.S. prices have increased almost fifty percent, accounting for inflation. 

source: OfficialData.org 

In other words, according to the U.S. Bureau of Labor Statistics, a unit of U.S. currency in 2022 buys about 52 percent of what it bought in 1996. Stated another way, price levels in 2022 are about 50 percent higher than they were in 1996. 

So virtually any product can be accused of “costing more” in 2022 than it cost in 1996. 

Some may intuitively feel this cannot be the full story where it comes to digital products. That hedonic change.

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. 64 kbps internet access is not the same product as 10 Mbps broadband. And 10 Mbps broadband is not the same product as gigabit or multi-gigabit home broadband. 

In comparing digital prices over time, one must adjust for inflation and hedonic quality changes to really understand real prices. 

This is an applied instance of Moore;s Law at work. The cost of computing power, for example, has continually dropped since 1940, for example. 

source: Hamilton Project

So has the cost of bandwidth seen hedonic changes and falling prices. Many will note the revenue per unit trends and cost per unit trends that are part of the capacity business. 

Compared to 2008, fixed network broadband costs have fallen, globally, though there is a slight rise in developed nations, driven by consumer preferences for higher-priced and higher-speed services, according to International Telecommunications Union data. 

source: ITU 

To be sure, most of the improvement has happened, since 2008, in developing countries. Prices in developed nations have been relatively low, and stable, since 2008. 

But while prices have stayed essentially flat, speed and bandwidth consumption allowances have risen steadily. In real terms, and adjusting for hedonic changes, U.S. home broadband prices have dropped dramatically since 2017, according to Bureau of Labor statistics. 

The point is that if all prices in the U.S. market have gone up since 1950, since 1996 or for any other time period, so would we expect prices for home broadband to rise, with the general change in overall prices. 

It is possible to argue that even if home broadband prices have risen, the reasons are inflation--all prices are higher--or product quality changes (hedonic change) or consumer preference for different products (gigabit speeds rather than 100 Mbps to 300 Mbps). 

A Tesla is not a Honda Civic. People pay more for the former than for the latter. But does that mean “car prices” have risen? Yes and no. Inflation drives prices higher over time. But when product differentiation is possible, consumers make different choices about what to buy. 

A Civic owner who then buys a Tesla is arguably not buying the same product. When customers can buy a 100-Mbps service at the low end or 5 Gbps on the high end, “average” price is misleading. 

Beyond that, which prices do we choose to compare? Do we analyze the services “most frequently bought?” Do we use posted retail prices or do we also include buying patterns that feature price discounts, such as product bundles? 

Do we measure price per household, per user, per megabit per second, per consumption or something else? 

If consumer demand shifts, how do we incorporate such shifts into the analysis? It is permissible to argue that home broadband prices “have risen.” It also is intellectually honest to admit that all prices have risen over time. 

One may argue that U.S. prices are “too high.” But it is honest to explain “in relation to what?” Are we comparing a continent-sized situation to a small city-state? Or are we comparing a substantially-rural market to a highly-urbanized market? 

In Canada, 14 percent of the people live in areas of density between five and 50 people per square kilometer. In Australia, 18 percent of people live in such rural areas.

In the United States, 37 percent of the population lives in rural areas with less than 50 people per square kilometer.

Put another way, less than two percent of Canadians and four percent of Australians live in such rural areas. In the United States, fully 48 percent of people live in such areas.

Coverage is an issue in such rural areas. About six percent of the U.S. land mass is “developed” and relatively highly populated. Those are the areas where it is easiest to build networks. 

But about 94 percent of the U.S. land surface  is unsettled or lightly populated, including mountains, rangeland, cropland and forests. And that is where networks are hardest to build and sustain.

That does not directly shape retail prices. But density does affect when and where sustainable networks can be built, even including government subsidies. 

Are home broadband prices “higher” in 2022 than in 1996? A reasonable person could answer “yes” without also arguing prices are “too high.”

Will the 80/20 Rule Apply in Telecom?

Most of us are familiar with the 80/20 rule, which suggests that roughly 80 percent of value or outcomes are generated by about 20 percent of actions. Formally, it is the Pareto theorem. 

Pareto applies to most aspects of the connectivity, data center or computing businesses. It even applies to revenue generated by mobile cell sites. Half of mobile revenue is driven from traffic on about 10 percent of sites. Fully 80 percent of revenue is driven by activity on just 30 percent of cell sites. 

source: Medium 

 

Pareto also seems to apply broadly to global connectivity provider revenue and profits as well. Annual global connectivity provider revenue has been estimated at about $1.5 trillion for 2021 and 2022 (including video entertainment subscriptions). 

source: IDC

But as much as $820 billion to $1.1 trillion in revenue is earned from mobile services. Being conservative, assume mobile revenue globally is $820 billion, while total revenue is $1.5 trillion. That implies mobile represents 55 percent of total revenue. 

At the same time, one can note that fixed network data revenues were about $400 billiion in 2020, while voice contributed about $170 billion, for a total of about $570 billion, or 38 percent of total revenue. 

source: N-IX 

Globally, most people using the internet do so using the mobile network. Most people in developed regions have access to both fixed and mobile modes. The percentage of people using fixed internet access alone is almost too small to measure. 

.source: Omdia 

The “mobile-only” pattern of internet access has been in place for close to a decade, as mobile internet usage began to spike upwards since 2010, to the point that half of all the world’s people were using mobile internet by the end of 2019, according to GSMA figures. 

The shift of subscriptions from fixed to mobile happened about 2002. 

source: ITU 

source: ITU

At the same time, one can note that fixed network data revenues were about $400 billiion in 2020, while voice contributed about $170 billion, for a total of about $570 billion. 

On the other hand, capital investment for the fixed network was about 68 percent of total in 2021. So you see the pattern: nearly 70 percent of capex to generate 38 percent of revenue. Conversely, 30 percent of capex spent on the mobile networks generates 55 percent of total revenue. 

 

.source: Omdia 

Though not an idealized Pareto distribution, the distribution of revenues and capital investment is beginning to approach the Pareto distribution. .