Saturday, November 12, 2011

How Much Will Consumers and Business Pay for Really-Fast Broadband?

As the Federal Communications Commission shifts universal service programs to support broadband access rather than voice, the European Commission pushes for ubiquitous 30-Mbps service across the community, with a further objective of 100-Mbps service for roughly  half of potential consumers by 2020, it is fairly clear that there is widespread support for the idea that faster broadband can have important economic and social benefits.

If Federal Communications Commission Chairman Julius Genachowski gets his way, the FCC will set a goal of 100-Mbps service delivered to 100 milliion American homes by 2020. 100 Mbps or faster is the FCC goal

Genachowski says his preferred approach to a national broadband policy would require ISPs to offer minimum home connection speeds by 2020. The “100 Squared” initiative might in fact be too modest a goal, he suggests.

"We should stretch beyond 100 megabits," he adds. But "availability" is only part of the business equation. Demand is the other part. And at least so far, there isn't much evidence that substantial numbers of businesses or consumers are willing to pay for 50 Mbps, 100 Mbps or potentially 1 Gbps service. 

It might be a different story is the cost of such service were no more than what consumers now pay, but it seems highly doubtful investment can be raised, if that were to be the expected outcome.

Few customers now buy 50-Mbps services where such speeds are available, in large part because the cost is in the triple-digits range. Proponents might argue that the goal is 100 Mbps for not much more money than people now pay for 4 Mbps or 7 Mbps service, but it is hard to envision how even "free" opto-electronices could support such a value-price combination.

In other words, even if all the active elements actually were provided for free, could service providers actually build ubiquitous networks offering 100 Mbps or faster speeds, and price in middle-double digits? So far, the answer appears to be negative.

About 60 percent of the cost of building an FTTH network is construction work, ducts and cables, not to mention cabinets, power supplies and other network elements. Still, in some dense areas, it might be possible to do so, since the construction and cable might amount to about $1200 per home passed. Again, keep in mind we assume totally free opto-electronics.

In suburban areas the business case is marginal, at best, since about $2400 might have to be spent on construction and passive elements.

Since the FCC goal only calls for connecting 100 million homes out of possibly 113 million, we can safely assume the cost of most rural networks of such capacity need not be considered.

Of course, opto-electronics are not "free." But the point is that construction costs, were nothing else an issue, would still be a tough proposition, if the goal is very high speed access at prices most consumers would pay.

American consumers will be paying more for broadband in the future, if for no other reason than that most mobile plans will require it, and those charges will be paid for on a "per-device" basis, not "per home."

What seems improbable is that U.S. consumers are willing to increase overall broadband spending by an order of magnitude (10 times) to have 100 Mbps or faster service on a fixed basis.

One can of course argue from history. Prices for lower-speed broadband services have declined over time, while the prices for the faster tiers have remained stable, but speeds have increased. The issue is how much price compression is possible.

"In order to earn a return for investors, you have to be conscious of what consumers will pay. I don't know this is something consumers will pay for," Piper Jaffray analyst Christopher Larsen says. "It's a nice goal, but it's a little on the over ambitious side."

And in a capital-intensive business such as communication networks, being too early, with too much additional capacity, processing or storage, can be ruinous. One might point to the dramatic bubble in capacity investing, competitive local exchange networks or e-commerce sites around the turn of the century.

Equally to the point is the serious gap that developed between 3G mobile networks, especially in Europe, and the promised new applications that proponents expected would develop.

It has been roughly a decade since European mobile operators placed big spectrum bets on "third generation" mobile broadband, and then largely watched as killer apps failed to emerge, customer use of the new networks remained sluggish, and executives ruefully noted they had overpaid for spectrum.

As operators now gear up for a transition to 4G, we will hear similar talk about new applications the network will enable. The difference is that, a decade after launch, the  "killer app" for 3G turns out to be mobile broadband access.

Right now, 4G is mostly “just” faster access. But 4G looks to be a potential replacement for fixed-line broadband, so maybe, early on, a lead application for 4G will be displacement of fixed-line broadband connections, and not any particular new application.

Some might argue that a lead app for 4G is turning out to be personal Wi-Fi hotspots, for example, another “access” function. A decade from now, we are likely to have discovered that some important new applications, enabled specifically by 4G, have arisen. But it will take some time, if 3G is any predictor.

At some point, the gap can be bridged either by “build it and they will come” improvements in processing, storage or communications that outstrip known demand, or “build it and they will come” applications that might be usable by only a fraction of potential consumers.

Some think the logjam can be broken only by moving faster towards faster networks, to create the right environment for application developers. That tends to be an opinion held by people whose core business interests do not require investing the money.

Service providers are quite a bit more circumspect, and “greed” is not the primary reason for such views. In fact, experience teaches service providers that consumers are quite careful about spending their own money on communication services, devices and features.

One case in point is a study of small-business broadband by Columbia Telecommunications Corporation, which conducted a nationwide survey on behalf of the Small Business Administration.

The really significant finding is that respondents won't pay all that much for 100 Mbps or 1 Gbps connections. Businesses Want 100 Mbps, 1 Gbps, but won't pay

And price resistance is stubborn. Even when the price for such a service is just 10 percent to 20 percent higher, businesses are significantly less likely to switch to a 100-Mbps service from what they currently buy.

As you might guess, if small businesses are hesitant to spend 10 percent to 20 percent more to get 100 Mbps, they are even more hesitant to spend more for an extremely fast Internet connection of 1 Gbps. This is especially true for prices that are 40 percent or more higher than their current prices.

If you asssume the average prices now range between $70 a month to $124 a month, then survey respondents show significant resistance to paying much more than $84 to $149 a month for 100 Mbps service, or $98 to $174 for 1-Gbps service.
This graphic might confuse you. The taller the bars, the less likely the respondent is to take the action indicated. The tallest bar, a score of "5" would mean "highly unlikely" to take the action. SMB broadband demand report

A score of "1," shown by a shorter bar, would indicate strong willingness to take the action.

The point is that small business users aren't willing to spend much more to upgrade from their current level of service to 100-Mbps service.

The most surprising finding is that even the same prices, or prices 10 percent 5to 20 percent lower do not cause small business respondents to become certain of switching. Scores around "3" indicate a "maybe, maybe not" attitude.

No matter what these respondents say about wanting higher speeds, they don't appear to be willing to pay much of anything for it.

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