Does Home Broadband Data Consumption Really Tell Us Anything about Economic Lift?

Is it really possible to quantify the economic uplift from internet access or home broadband operating at 100 Mbps or 500 Mbps? One might argue there is a difference between access at 100 Mbps or 1,000 Mbps. But do we actually know that? 

And consider data consumption as a “good thing” if it is higher. My own account recently surpassed 1 Tbyte per month (and continues to climb). One might argue that is evidence of some sort of “productivity” advantage. It is not.

The reason more data is being consumed is because the household watches streaming video, often in 4K. Consumption of linear video (which does not increase data consumption has dropped to the point that only some live news and sports are ever viewed.

So in my case, higher data consumption has nothing to do with productivity, or learning or work. It is entertainment video consumption, pure and simple. If there were any heavy gamers on the account, that might also drive higher consumption. 

But productivity? The increased amount of consumed data has nothing to do with it.

Many industry trade groups have to walk a fine line when addressing usage, take rates, revenue and speeds, in relation to societal or economic benefits.

Proponents must argue their industries create lots of value for economies and society; are well positioned for growth and at the same time, still need some help. The connectivity industry seems always to be in that position.

A new report on digital communications issued by the European Telecommunications Network Operators’ Association points out that fiber-to-home coverage has passed 50 percent of locations and that 5G coverage likewise has doubled over a single year from about 30 percent to 60 percent. 

On the other hand, ETNO says, peers are doing much better. “Uptake of 5G in Europe has been lagging behind,” says ETNO. “Despite being available to 62 percent of the population, 5G in Europe constitutes only 2.8 percent of the total mobile connections, compared to 13.4 percent  in the US and 29.3 percent in South Korea.”

That implies that uptake is a problem. 

On one hand, ETNO argues that “telcos” have increased their  commercial activities in edge computing, Open radio access networks, internet of things, “big data” and security, making the argument that telcos are innovating and investing. 

ETNO also notes that  average mobile data usage per capita per month, in 2020, was 8.52 GB in Europe, 10.62 GB in the US and 12.52 GB in South Korea.The implication there is that usage volume is a problem. 

Average spend per capita on communications in Europe is forecasted to be €33.8 per month, lower than global peers (€71.7 in the US, € 36.1 in South Korea). So lagging average revenue per account is deemed to be a problem. 

source: ETNO

Service provider revenues in Europe are also lower than in other geographies. Mobile average revenue per user (ARPU) was €14.4 in Europe, compared to €37.9 in USA and €25 in South Korea. Again, this is viewed as a problem, ETNO notes. 

source: ETNO

The same general pattern holds for home broadband revenue, ETNO says. 

source: ETNO

ETNO also argues that average home broadband downlink speeds are higher in some peer markets. 

source: ETNO

The message is equal parts “we are vital contributors to society and economy” and “our financial survival is imperiled.” Says ETNO, “networks are vital, but the financial outlook remains unclear for the telecoms sector.”

This is the sort of argument any industry would make when it wants to show it is important for the government to support the industry, and also arguing why that support is required. 

Aside from arguments over which other participants in the ecosystem should be compelled to contribute additional support (capital investment, usage fees, support payments), how one thinks about usage, customer revenue magnitude, ISP revenue magnitude and prices are an areas where more debate is possible.

For example, the explicit assumption is that higher data consumption by customers is better than lower data consumption. Higher customer spending is assumed to be better than lower spending. 

The assumption is that uptake of the newest networks is good, in and of itself. Hence, higher 5G adoption rates are good; lower rates are bad. 

ETNO notes that average public market equity values for ISPs are lower than for other categories of firms, the typical argument being that content and app providers earn higher multiples of revenue and therefore are valued more highly. 

That is obviously true, but also ignores the fact that each industry can have a different market valuation, for reasons the market assigns. Growth companies are valued differently from value assets. Retailers are valued differently than software and information technology companies. 

Different parts of the financial services business are valued differently as well. The point is that markets assign valuations. The mere existence of differences only indicates that the market values some firms and industries higher or lower, for reasons related to growth potential, business moats, revenue consistency or any number of other reasons. 

The implicit argument made by suppliers and proponents of information or communications technologies is always that society and the economy profit when such adoption happens. Most often, the claims go further and argue that economic growth actually is driven by the rate of new technology adoption. 

All of those assumptions can be challenged. At some level, we might all agree that universal availability of electricity is correlated with economic growth. But correlation often is not evidence of causation. If areas with the same degree of access to electricity still have different outcomes and growth rates and magnitudes, something else is at work,. 

Also, most policymakers embrace lower consumer prices as a positive good. So some would argue lower prices are a good thing, not a “problem.” 

Also, demand is different from supply. In arguing that consumption is an issue in Europe, ETNO essentially argues that lower demand is a problem. As much of a problem as that might be for ISPs, it is not so clear that demand actually is a “problem.” 

We need to separate two different issues. One issue is making sure home broadband and high-quality mobile service is ubiquitous. But a separate issue is how consumers avail themselves of those resources. 

But data consumption, data rates, average revenue per account or average cost per access might not have much to do with social or economic uplift. 

Marketing Claims Aside, How Much Capacity Do Home Broadband Users Really Need?

How much internet access speed or usage allowance does a customer really need? It actually is hard to say. U.S. data suggests there are clearer answers about what customers expect to pay, which is about $50 a month, on average, even if some studies suggest wildly higher prices.  

source: Broadband Now 

Average prices are lower or higher than $50 a month, depending on what adjustments are made, such as adjusting for currency differences or cost of living differences between markets. Adjustments of that sort tend to show rather uniform global pricing of internet access, also adjusting for “quality” (speed, for example) differences. 

Also, any assessment should be based on service plans people actually buy, not posted retail prices for any particular tier of service. Bundle pricing adds another layer of complication. 

Internet service provider business models always require matching supply with demand; deployment speed and cost. What is needed to market effectively against competitors also matters. 

Time to market does matter. “It took us 22 years to pass 17 million households with fiber: 22 years,” says Hans Vestberg, Verizon CEO. “That’s how hard it is.”

“We basically had 30 million households covered with fixed wireless access in less than one year,” he also notes. 

So there is the trade off: rapid deployment of a lower-cost network versus slower deployment of a higher capacity network; wide coverage now versus higher capacity later; lower capital investment versus high. 

As typically is the case, wireless platforms can be provisioned faster than cabled networks, at lower cost. The Verizon data illustrates that fact. 

Cost also matters, as no internet service provider--especially those in competitive markets--can afford to spend unlimited sums on its infrastructure. Verizon and T-Mobile tout fixed wireless access in large part because they can afford to supply itt and can supply it fast, at lower costs than building fiber-to-home would cost. 

But marketing also matters: internet service providers do compete on the basis of speeds and feeds; do compete on price; do compete on perceptions of quality; terms and conditions and value. 

In that regard, even as home broadband speeds continue to rise, marketing claims are a battleground. Cable executives, for example, make light of fixed wireless as they claim it will not scale the way hybrid fiber coax and fiber-to-home can. FWA proponents argue that the platform does not have to scale as fast as FTTH or HFC to provide value for segments of the customer base. 

For example, even households that buy the fastest tiers of service rarely have a “need” for all that capacity. According to a survey by HighSpeedInternet.com, survey respondents say the “perfect plan” features a “610 Mbps fiber connection for $49 per month.”

In the third quarter of 2022, about 15 percent of U.S. households bought service operating at 1 Gbps, while 55 percent purchased service running from 200 Mbps to 400 Mbps. 

source: OpenVault 

 

The point is that, no matter what they tell researchers, U.S. home broadband customers do not seem especially eager to buy gigabit services at the moment, or services running at about half that speed. 

Speed demands will keep climbing, of course. But it does not appear, based on history, that most consumers will switch to buying the fastest tiers of service, or the lowest tiers of service, either. Historically, U.S. consumers have purchased internet access costing about $50 a month, with performance “good enough” to satisfy needs.

In fact, one might make the argument that is consumption (gigabytes consumed) that matters more than speed. Average data consumption stood at about 500 gigabytes per month in the third quarter of 2022, according to OpenVault. But the percentage of power users consuming a terabyte or more was growing fast: up about 18 percent, year over year, and representing about 14 percent of customer accounts. 

So speed claims are about marketing, as much as customer requirements. “It's turned into really a marketing game,” adds Kyle Malady, Verizon Communications EVP. ISPs compete on claimed speeds, even if there is little evidence most households require gigabit speeds at the moment. 

Beyond a certain point of provisioned capacity per user and device in any household, additional speed brings subtle if any benefits. Consumption allowances do matter, especially for households that rely on streaming for video entertainment. 

Nobody can give you a convincing answer why gigabit per second or multi-gigabit per second networks are required, beyond noting that multi-user and multi-device households need a certain amount of capacity if all are using the ISP connection at the same time. 

No single application, for any single user and device, requires a gigabit connection. So the real math is how much total bandwidth, at any moment, is needed to support the expected number of users, apps and devices in simultaneous use. 

For a single user or two, using one or two devices each, simultaneously, it is hard to see how a gigabit or faster connection is required. 

Some version of that argument--that a customer “does not need” a particular capability, is at the heart of much ISP marketing. ISPs whose platforms have some speed limitations point out that the limits do not matter for some customers, or that the price paid for higher-speed services does not provide value, commensurate with cost.

U.S. Home Broadband Actually is Neither Slow Nor Expensive

Critics of U.S. home broadband often claim that service is slow and expensive. Both opinions can be challenged. In fact, U.S. median home broadband speeds were among the fastest in the world in 2021 and climbed in 2022. 

source: Ookla 

“Price” sometimes is a bit more subtle. Though prices have declined in every speed category, some might still argue “prices are too high.”

For example, ana analysis shows that U.S. home broadband prices have fallen since 2016, according to a study by Broadband Now. 

Broadband Now says that the average price for internet in each speed bucket starting in the first quarter of 2016 compared to the fourth quarter of 2021 has fallen:

• The average price decreased by $8.80 or 14% for 25 – 99 Mbps.

• The average price decreased by $32.35 or 33% for 100 – 199 Mbps.

• The average price decreased by $34.39 or 35% for 200 – 499 Mbps.

• The average price decreased by $59.22 or 42% for 500+ Mbps.

The analysis is subtle because if there is a movement by customers from lower speeds to higher speeds, which clearly is happening, then “prices” might climb, though not for the same products. Customers are choosing to buy higher-priced, higher-performance products, instead of the lower-priced, lower-performance products they used to buy. 

Other studies show the same trend.  

Also, because of inflation, price levels rise over time. 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, which keep getting better, while prices either stay the same or decline. Such hedonic change applies to  home broadband. 

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 

 

Quality improvements also are seen globally. 

Adjusting for currency and living cost differentials, however, broadband access prices globally are remarkably uniform. 

The 2019 average price of a broadband internet access connection--globally--was $72..92, down $0.12 from 2017 levels, according to comparison site Cable. Other comparisons say the average global price for a fixed connection is $67 a month. 

Looking at 95 countries globally with internet access speeds of at least 60 Mbps, U.S. prices were $62.74 a month, with the highest price being $100.42 in the United Arab Emirates and the lowest price being $4.88 in the Ukraine. 

According to comparethemarket.com, the United States is not the most affordable of 50 countries analyzed. On the other hand, the United States ranks fifth among 50 for downstream speeds. 

Another study by Deutsche Bank, looking at cities in a number of countries, with a modest 8 Mbps rate, found  prices ranging between $50 to $52 a month. That still places prices for major U.S. cities such as New York, San Francisco and Boston at the top of the price range for cities studied, but do not seem to be adjusted for purchasing power parity, which attempts to adjust prices based on how much a particular unit of currency buys in each country. 

The other normalization technique used by the International Telecommunications Union is to attempt to normalize by comparing prices to gross national income per person. There are methodological issues when doing so, one can argue. Gross national income is not household income, and per-capita measures might not always be the best way to compare prices, income or other metrics. But at a high level, measuring prices as a percentage of income provides some relative measure of affordability. 

Looking at internet access prices using the PPP method, developed nation prices are around $35 to $40 a month. In absolute terms, developed nation prices are less than $30 a month. 

According to an analysis by NetCredit, which shows U.S. consumers spending about 0.16 percent of income on internet access, “making it the most affordable broadband in North America,” says NetCredit.

Looking at internet access prices using the purchasing power parity method, developed nation prices are around $35 to $40 a month. In absolute terms, developed nation prices are less than $30 a month.  

Methodology always matters. The average U.S. home broadband service  costs about $64 a month. In fact, U.S. home broadband inflation-adjusted costs have declined since the mid-1990s, according to an analysis  of U.S. Consumer Price Index data. 

U.S. home broadband is neither “slow” nor “expensive.”

Comcast Boosts Home Broadband Speeds, Has Been Doing So at Moore's Law Rates for Two Decades

It should come as no surprise that Comcast is activating home broadband speed increases this week across its entire footprint. Comcast has increased home broadband speeds at Moore’s Law rates--doubling about every 18 months--for two decades.  

“Comcast has increased speeds 17 times in 17 years and has doubled the capacity of its broadband network every 18 to 24 months,” Comcast says. 

That is one reason why cable operators continue to hold between 65 percent and 70 percent share of the installed base of home broadband accounts in the United States. Telcos have simply not been able to increase bandwidth at Moore’s Law rates, though that should change as more of the network is converted to optical fiber access. 

The original insight for Microsoft was the answer to the question "What if computing were free?" Keep in mind the audacious assumption Gates made. In 1970 a computer cost about $4.6 million each. Recall that Micro-Soft (later changed to Microsoft) was founded in 1975. 

source: AEI 

The assumption that computing hardware was going to be “free” would have appeared insane to most observers. In 1982 Gates did not seem to go out of his way to argue that hardware would be free, but he did argue it would be cheaper and far less interesting than software. 

 Gates made the argument in 1994. Gates was still saying it in 2004.  

The point is that the assumption by Gates that computing operations would be so cheap was an astounding leap. But my guess is that Gates understood Moore’s Law in a way that the rest of us did not.

Reed Hastings, Netflix founder, apparently made a similar decision. For Bill Gates, the insight that free computing would be a reality meant he should build his business on software used by computers.

Reed Hastings came to the same conclusion as he looked at bandwidth trends in terms both of capacity and prices. At a time when dial-up modems were running at 56 kbps, Hastings extrapolated from Moore's Law to understand where bandwidth would be in the future, not where it was “right now.”

“We took out our spreadsheets and we figured we’d get 14 megabits per second to the home by 2012, which turns out is about what we will get,” says Reed Hastings, Netflix CEO. “If you drag it out to 2021, we will all have a gigabit to the home." So far, internet access speeds have increased at just about those rates.

Both supply and demand are part of the equation, however. Perhaps the driver of supply is Moore’s Law. 

But the fundamental driver of bandwidth demand  is multiple users and multiple devices, more than the bandwidth required by any single app, any single user or device, even if some apps--such as video--increase bandwidth demand by at least two or three orders of magnitude compared to narrowband apps. 

The point is that home broadband bandwidth now is shared by multiple users, apps and devices. And that is why bandwidth demand keeps growing, aside from the use of more bandwidth-intensive apps and devices. 

“The number of devices connected in Xfinity households has skyrocketed 12 times since 2018, and the need for fast, reliable, and secure Internet will continue to grow,” said Bill Connors, President of Xfinity, Comcast Cable. 

The net effect is that every household now acts as a “multi-user” location. And that matters because any amount of bandwidth X is divided by the number of users, connected devices and apps in simultaneous use. In principle, that means Comcast customers require an amount of bandwidth that is X/12. 

source: Comcast 

We should look for continued increases in capacity, at about a Moore’s Law pace, for the indefinite future.

Are There Hard Limits on Home Broadband Growth?

How much more revenue can the internet access business generate, in markets that are near saturation (almost everybody who wants it already buys)? To be sure, internet service providers will keep boosting speeds and seek to add value to their service features. 

Home broadband has become an “essential” utility in many markets, so demand remains consistent. On the other hand, competition is growing, so retail prices can face pressure. And market share matters in near-saturated markets. 

Weigh everything and one might conclude that revenue growth is going to be difficult, even as customers are shifted to higher-cost plans, where possible. 

The fundamental limit is that households will only spend so much on internet access. Basically, households tend to spend between 1.5 percent to 2.25 percent of gross domestic product on communications services. 

Over time, household spending on connectivity services has fallen. Nor has business spending moved much, either.  

Think of any business. How much will they spend on marketing, sales, labor? The percentages might change a bit, over time. But those percentages are relatively fixed. Consumer spending does not change too much from year to year. 

Nor does the percentage of income spent on various categories change too much. 

source: IDC

In Myanmar, a new mobile market, spending per household might be as high as eight percent of total spending. In Australia, communications spending (devices and services) might be just 1.5 percent of household spending.  

In South Africa, households spend 3.4 percent of income is spent on communications (devices, software and connectivity). In Vietnam, communications spending is about 1.5 percent of total consumer spending.

In the United States, all communications spending (fixed and mobile, devices, software and connectivity, for all household residents) is perhaps 2.7 percent of total household spending. U.S. household spending on communications might be as low as one percent of household spending, for example. 

That means spending on communications services will tend to vary by revenue growth and the health of the economy. Some consumer demand also is shaped by new housing construction, as well. More homes mean more connections. 

The implication is that total market growth always is constrained on the demand side. That is not to say that demand growth is impossible: value can change over time. But value does not always correlate in a linear way with willingness to pay. 

The extreme examples are  luxury goods, where higher prices might actually increase demand (think yachts, jewelry, artwork).

For most products, higher value leads to higher price. But computing appliances and data services have been outliers. Products improve so rapidly (twice as capable every 18 months) that product obsolescence is built in. 

To the extent that internet access increases at Edholm’s Law or Nielsen's Law  rates, home broadband services at any speed are continually devalued. 

Edholm's Law suggests that bandwidth will increase at the same rate as Moore’s Law suggests transistor density will grow. Nielsen’s Law of Internet Bandwidth states that a high-end user’s connection speed grows by 50 percent each year, doubling roughly every 21 months.  

Cloonan's Curve predicts how much bandwidth a typical customer of home broadband services might actually buy. Cloonan’s Curve essentially describes home broadband consumer behavior.

Most customers do not typically buy the fastest-available service, as that also is typically the most-expensive tier of service. Instead, they tend to buy the mid-level service. 

The caveat is that Cloonan’s Curve obviously does not apply to service providers that sell only a single tier of service, at the advertised headline rate (“gigabit only,” for example). 

source: Commscope

This illustration of downstream bandwidth plans actually purchased by customers suggests that although both Nielsen and Cloonan rates increase at about 50 percent per year, most customers buy services that offer six times to 20 times less speed than the fastest-available service tier. 

But usage and price are not connected in linear fashion. Over time, cost per bit tends to decline with volume supplied. And, no matter what the volume supplied, retail prices only grow incrementally, at rates roughly in line with inflation, or below. 

In fact, there is evidence that internet access prices have dropped over the past two decades, in the U.S. market, for example. That is especially true when evaluating plans people actually buy, rather than retail tariffs. Looking only at posted retail prices, and not at actual behavior, can lead to significant distortions.