October 30, 2012

Why 1-Gbps in U.S. Will Never Be as Low as 1-Gbps in Hong Kong or Korea


With the possible exception of Google Fiber's 1-Gbps symmetrical broadband service pricing in Kansas City, Mo. and Kansas City, Kan., or the similar 1-Gbps services offered by Sonic.net, few U.S. consumer customers likely would agree that retail prices for 100-Mbps or faster services are "affordable."

Business users have different expectations about price and value, and might argue that a 100-Mbps access service offers great value, especially compared with retail pricing of much-slower T1 services, for example.

In fact, some providers of business-class access already are arguing that they cannot really compete with cable operator access services on a price-performance basis. Sam Kumar, CEO of Denver competitive local exchange carrier Microtech-Tel, argues that CLECs no longer can compete with cable TV operators in the small or mid-sized business Internet access business.

Still, many observers would point to prices for 100-Mbps services in other countries as examples that U.S. services are overpriced. It is hard to argue with the observation.

Prices for residential gigabit service are about $26 per month for Hong Kong Broadband’s service. And South Korean operators are aiming for 1-Gbps service costing about $27 a month, according to a study by Joe Savage, Telecom ThinkTank principal, and Michael Render RVA Market Research principal.

By way of contrast, U.S. 100-Mbps services are pricing in triple digits. In other words, Hong Kong offers two orders of magnitude more bandwidth than the typical U.S. service, at a price that is an order of magnitude lower. Those are huge differences.

But there are logical reasons for such price differences. Prices roughly correlate to the capital investment required to pass a subscriber in the serving area, the authors say.

For example, it costs $200 per home passed in Hong Kong, compared to $1,000 to $4,000 per home passed in Europe and North America, the study notes.

That has direct implications for retail pricing. In other words, based strictly on the costs of the infrastructure, consumer broadband "should" cost an order of magnitude more than in Hong Kong.

Google Fiber in Kansas City, and Sonic.net services offered in some parts of Northern California, are among the first examples of service providers trying to deliver 1-Gbps service, at vastly lower prices.

The issue is whether a cable company or telco, with different cost structures, can afford to replicate that level of retail pricing. Some would argue they cannot.

And price does matter. U.S. ISPs have seen price resistance whenever monthly recurring costs are in triple digits, for example. Some ISPs have found scant interest for 50-Mbps services, based largely on price resistance, one might argue.

Before Google Fiber, though, there is Sonic.net, which has been offering 1-Gbps service to consumers for $70 a month, including two phone lines with no-extra-charge domestic long distance. Comcast’s 105-Mbps service in San Francisco costs about $200 a month, by way of comparison.

Gigabit subscribers report that they are online an average of eight hours per day. That compares with the “typical” U.S. Internet user average of 2.5 hours per day. By definition, 1-Gbps customers are not “mainstream.”

In addition to being “early adopters” and “technology enthusiasts,” they stream high-definition content, engage in multi-player online games and tend to be content creators.

Should the Sonic.net and Google Fiber price-performance model become more widespread, something that will take quite some time, it is likely that users will start to migrate to the higher-speed services.

One might bet, though, that if a range of speeds (1 Gbps but also hundreds of megatbits per second) are offered, at correspondingly lower price points, most consumers will simply buy the lower speed services, because that works for them.

Surveys have shown that most users are happy with speeds they now get, for example.

The larger point, though, is that there are good reasons for 1-Gbps Internet access retail price differentials, from country to country. Construction cost alone accounts for at least an order of magnitude difference.

Differences in costs for all other inputs also make a difference. The relative level of gross national product per person likewise has a big impact. As a percentage of disposable household income, $5 in some countries, $27 in other countries, or $100 in yet other countries might represent roughly equivalent shares of disposable income.




Edited by Rich Steeves



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