Posted
Sep 2010
Why Broadband Prices Haven’t Decreased
Creating the first broadband consumer price index
Based on the research of Shane Greenstein And Ryan McDevitt
After a new technology is introduced to the market, there is usually a predictable decrease in price as it becomes more common. Laptops experienced precipitous price drops during the past decade. Digital cameras, personal computers, and computer chips all followed similar steep declines in price. Has the price of broadband Internet followed the same model? Shane Greenstein decided to look into it.
Since there are no public data on what has happened to broadband prices over the last decade, Shane Greenstein, a professor of management and strategy at the Kellogg School of Management, and his co-author Ryan McDevitt, an assistant professor of economics and management at the University of Rochester and a graduate of Northwestern University, analyzed the contracts of 1,500 DSL and cable service providers from 2004 to 2009. They found evidence of only a very small price drop, between 3 and 10 percent, nothing like the rates of price decrease that characterize the rest of the electronic world.
Pricing Policy
It might seem like the cost of obtaining access to broadband Internet service would be prohibitive for many, but Greenstein notes that cable television wires already pass by more than 95 percent of US homes, while 75 percent of homes are close enough to a telephone switch for a DSL provision. “Any place with a population above 50,000 is not going to have a problem getting service,” Greenstein says.
Greenstein says many observers believe broadband prices have stagnated largely due to the concentrated market structure.
Greenstein says many observers believe broadband prices have stagnated largely due to the concentrated market structure. Other factors have also concentrated broadband supply, including economies of scale and regulatory rules. In most urban markets, only two wireline providers supply the vast majority of homes, and the remainder are served by a range of wireless Internet providers. Revenue from homes makes up 70 to 80 percent of revenue in wireline Internet access market, while business demand makes up the rest.
“So if you were in such a market as a supplier, why would you initiate a price war?” Greenstein asks. With no new entries on the market, suppliers can compete by slowly increasing quality but keeping prices the same. According to Greenstein, quality is where providers channel their competitive urges.
Meanwhile, once companies have installed the lines, their costs are far below prices. “At that point, it becomes pure profit,” Greenstein says. A company might spend around $100 per year to “maintain and service” the connection, but people are paying nearly that amount every other month. Greenstein says that it is not surprising that prices were high during the buildout phase in the early and mid-2000s, since the firms were trying to recover their costs. “However, we are approaching the end of the first buildout, so competitive pressures should have led to price drops by now, if there are any. Like many observers, I expected to see prices drop by now, and I am surprised they have not.”
Table 1. Adjusted Revenue for Access Markets
A New Trajectory
At the start of the 21st century, less than 5 percent of households had access to broadband Internet as most used dial-up systems. However, broadband soon achieved access to more homes through cable and telephone lines. Near the end of the decade, optical fiber lines had joined the ranks of broadband Internet providers. The decade started out with broadband representing just 6 percent of the total revenue from Internet services and that figure had grown to 72 percent by 2006. Greenstein and McDevitt decided to base their consumer price index on data from the second half of the decade, from 2004 to 2009, when the use of broadband really exploded.
They began by poring over 1,500 contracts from different years and services, including both standalone agreements and bundled contracts, in which a user combines Internet with cable television and/or phone service. They found that, even though prices stayed relatively constant, the quality of service rose through the years—for example, in 2004 the median cable modem contract price was about $45 with an upload bandwidth of 3000 bits per second, while in 2009 the median contract cost $53 but had an upload bandwidth of 8000 bps.
Greenstein says that a related problem may begin to creep into the system. With only slow quality upgrades and the rampant growth of streaming video online, most observers expect broadband to have multiple bottlenecks in its access networks soon.
The broadband consumer price index created by the Kellogg researchers has some limitations. An official price index would include a weighted average, which would give more share to the biggest providers to reflect the market more accurately. Greenstein and McDevitt were unable to create a weighted index because they lacked confidential data from the Bureau of Labor Statistics about market shares.
The most surprising discovery, Greenstein says, is that national decisions are being made without the type of data that he created in the consumer price index. “As an observer of communications policy in the U.S., I find it shocking sometimes how often government makes decisions by the seat of their pants,” he says. Without real data and statistics, decisions are based solely on who has better arguments—in essence, a debate. A better consumer price index will help produce better decisions for the future of the Internet and its users.
Related:
Shane Greenstein blogs about this topic and related subjects in Virulent Word of Mouse.
35 Comments
Sep 10 2010
Interesting article and research. It’s amazing that pricing for such a ubiquitous service has not been indexed before. Although, given the puny cost reductions compared to other hi-tech products and services, I imagine the service providers are not too eager to discuss the specifics.
Any reaction from government or press organizations?
Sep 14 2010
Isn’t an 1100% profit-margin price-gouging?
Sep 14 2010
Dare I say the reason broadband prices haven’t decreased is a lack of competition? In most broadband markets you have extremely limited choice when it comes to choosing a broadband provide, the cable or phone company, so it’s not like you can shop around for the best price/service. If you look at the examples given where prices have dropped significantly over the past decade you have a great deal of choice when many companies are competing for you money.
I skimmed over this paper and didn’t see any mention of a lack of competition or the inherent duopoly that exists. Until this is factored into a study the verdict is still out on this.
Sep 14 2010
Upload speeds of 3000 and 8000 bits per second (bps) aren’t even considered broadband by most standards. A more normal value is around 128 - 256 kilobits per seconds (kbps).
Sep 14 2010
We used to have 3 broadband providers in my area, including two cable providers. When one of the cable providers bought the other, the prices jumped significantly higher ($20-$30 higher per month) and reliability went down. Verizon even stopped expanding FIOS, leaving our area with crufty old DSL despite a customer service rep telling me there was high demand in my area last time I asked.
Sep 14 2010
Interesting article. However, the upload bandwidths stated near the end can’t be right. They should be at least hundreds of *kilo*bits per second. If you can’t even get this right, how can anyone believe anything else you say?
But your point is well taken: broadband *is* way too expensive.
Sep 14 2010
In the interests of shareholders, telcos put as much or more creative effort into lobbying and policy making as they do offering services. That’s why I distrust telcos in general and favor net neutrality - proactively preventing what responsible public companies will try before it becomes too entwined to undo.
However, comparing broadband price trends to consumer electronics is an apples to Legos analogy. The $50/month isn’t pure profit - it pays for the fiber that has to be buried to support everyone, the technology to light it up, and the risk that enough subscribers will join in a given neighborhood where service is offered.
Sep 14 2010
Crap! Just take a look at what happened in France since “free.fr” got in. The only reason why the price did not dropped in america is because those company are all playing together to have high profitability. Nothing else.
Sep 14 2010
You missed this part of his article basically saying that you only have two options:
“Greenstein says that a 2003 decision to leave regulation up to the broadband companies themselves has caused much of the stagnation in broadband service prices. In most urban markets, only two wireline providers supply the vast majority of homes, and the remainder are served by a range of wireless Internet providers. “
Sep 14 2010
Remember, this *lack* of competition is why we need to turn *every* ISP into a lowly common carrier. They should *know* their place. As long as they connect to public networks, they may not discriminate and should be subject to strict regulation.
What this study shows is that padding the pockets of ISP CEO’s is the name of the game here.
Sep 14 2010
Same with laptops and other gadgets.
2000 - spent $350 for Win98 laptop. Today - spent $350 for Win7 laptop.
2000 - spent $200 for TV. Today - spent $200 for TV.
2000 - spent $300 for VCR. Today - spent $300 for DVR.
Prices have not dropped for other electronic devices, so why do we expect prices to drop for high-speed internet? It is illogical. Actually now that I think about it: ONE thing has dropped. I used to spend $19 for my AOL dialup internet in 2000, but now it costs $7, and I even have the option to get it free (netzero).
Likewise I can not buy DSL for only $15. It didn’t used to be that cheap.
.
Sep 14 2010
Nine years ago I paid over $100/month for 128k. Now I pay $15 for 750k.
That qualifies as a drop. I think this article is yet another example of “lying with statistics” to make a point. (which means my comment will probably never see the light of day)
Sep 14 2010
My personal experience is that since I first bought a broadband connection something over 10 years ago now, my monthly fee has dropped by a factor of 6 and my speed has increased by a factor of 50 - actually more, but for the sake of round numbers, we’ll call it that.
So I’m getting 300 times better broadband than when I started - if that’s not a massive improvement, nearly on a par to the crash in prices and increase in capacity that disk storage has gone through, then I don’t know what is.
Of course, I’m not an american. Maybe the basic problem is that you need a bit of decent regulation to stop your telcos exploiting all their customers - or is that too much like socalism?
Sep 14 2010
@Commodore64_fan: One data point (your experience) is not enough to generalize to the US. Greenstein and McDevitt tracked 1500 contracts, making sure the data is consistent and comparable over time.
Sep 14 2010
Commodore64 - One thing you have to remember is that if you live in a place with good competition your prices would be expected to drop but most places don’t have more then 2 service providers. Even places like St. Louis don’t have more then 2 hardwired service providers.
Plus I don’t understand why its more expensive to get internet only ($55 a month) vs having TV bundled with internet ($45 a month)? That just seems unreasonable to me.
Sep 14 2010
Bad comparison. Broadband is apples, electronic gadgets are oranges. Better to compare to another utility like electricity, or phone service. Also, you should look at cost per Mbps, not absolute cost. In that case, you would see that cost per Mbps has fallen dramatically as the band gets more broad.
Sep 14 2010
“Same with laptops and other gadgets.
2000 - spent $350 for Win98 laptop. Today - spent $350 for Win7 laptop.
2000 - spent $200 for TV. Today - spent $200 for TV.
2000 - spent $300 for VCR. Today - spent $300 for DVR.
Prices have not dropped for other electronic devices”
Um… you clearly didn’t purchase any of these things in 2000. There was NO laptop available for $350, not even refurbs. I worked for one of the largest tech resellers in the country, and had a list of “used/aftermarket” sources numbering in the hundreds as well. Trust me, didn’t happen.
$200 in 2000 got you a 20” CRT. $200 today gets you a 20” flat panel. Vast difference. About as much diff as dial up vs. broadband, which are considered two different things in this article, just as your examples are.
$300 for a VCR in 2000? What? Was it gold plated? VCRs were down to $50 cheap, $100 decent brand by 2000. And again, a VCR and DVR are so different can’t be considered alike for the purpose of your arguement.
You seems to like more than one kind of fruit with all the apples and oranges going on. And the prices….wow.
Sep 14 2010
I think what a lot of people forget to realize is the underlying cost of the service. You have to realize that the ISPs do continually have to upgrade their networks and hardware. They have service contracts on their network equipment from the vendor (Normally) for 24x7 support and replacement of bad gear. Fiber runs in the city on poles, underground, digging, getting right of ways, conduit etc. All this adds cost to the ISP to provide newer faster service. As the speeds to the consumer increase, the bandwidth the ISP needs to have also increases, therefore that cost goes up too. The ISP normally purchases from multiple provider as well, unless they can come to a peering agreement for traffic passing between their networks at no charge. So I don’t see how they can really compare this to an electronic device, that may appear cheaper over time.
I agree with most, my first broadband connection was a 384kps x 128kbps connection. I was paying $29.99 a month for that. Today, I have a 30 Mbit x 5 Mbit connection and I am paying $49.99 a month for that. So true, my bill went up, but in the same sense using my old pricing, the cost for a 30 Mbit x 5 Mbit connection would be roughly $3999.20 a month, so I think there has been a significant price decrease, wouldn’t you?
Sep 14 2010
The VCR cost $300 because it was a JVC Super VHS model capable of near-DVD quality recording, not that cheap Quasar junk. for 50. (The DVR I used to replace it also cost $300.)
Yes I bought a laptop for $350 (on sale at best buy) in 2000. Also got an XP desktop computer for $300 in 2001… same price desktops cost today.
Wired phone service hasn’t dropped either. In 1995 I used to call home from college at 5 cents a minute (after 7pm and before 9am). Today? Still 5 cents a minute albeit without the time restriction.. Features changed but not price.
Notice I have not insulted you, as you insulted me.
Sep 14 2010
You are wrong when you say it’s “only one datapoint”.
Verizon DSL is available *all across the United States* at $15 for 750k. or $20 for 1000k.. That is much, MUCH cheaper than what it would have cost in year 2001 for equivalent speed. It is not just one datapoint. It was the national pricing of 2010 and 2001 respectively.
Sep 14 2010
@Commodore64_fan: Assuming the deals are comparable in 2001 and 2011, it is still only one contract, ie, one data point. They tracked 1500 contracts, weighted by use (and tried different sources for the weights, including Point Topic reports and FCC reports). The full paper is freely available and it describes the methodology in detail.
Sep 14 2010
...and then there are those of us in other places around the world. $60 (Australian dollars) gets me 40 Gb of ADSL2+ (Roughly 500 kb/sec at my distance from the exchange) with both uploads and downloads counted. My dad pays $30 for 2 Gb, and thats a discount from $60 because he bundles his home phone and mobile phone!
A few years ago I was paying $50 for 20 Gb of ADSL (150 kb /sec) so I guess at least in Australia we are seeing some reduction in internet costs. Albeit from the dizzy heights of extreme overpricing :)
Sep 14 2010
First of all, there are several ways to interpret price changes that happen when service changes. In the example of the average cable modem price and speed in 2004 v 2009, did price increase or decrease? Sure the absolute cost went up by roughly 18%, but speeds went up by roughly 170%. Looked at another way, cost per bit (obviously some zeroes must have been lost in translation here but the ratio is the same) actually declined more than 55%. That seems like a dramatic price decrease to me.
Secondly, and sadly less succinctly, $1,100 of profit on $1,200 of revenue is a 91.67% profit margin. This is a high margin to be sure, but hardly the 1,100% in John Kennard?s comment. And profit margins are only relevant to the extent that they describe how much of the revenue turns into profit that can offset the cost of BUILDING the system. Services that require massive up front infrastructure investments such as DSL, Cable, and Fiber Optic broadband should be viewed on a return-on-invested-capital basis.
For example, let?s assume it cost ABC Cable Company $2,500 per passed home to light up a neighborhood in 2004, and let?s assume 50% of passed homes become customers all on the first day the system goes live (obviously this would help profitability and is totally unrealistic). A simplified all in cost per customer is then $5,000. Using $49 a month as the revenue per customer to ABC Cable (midpoint of 2004 and 2009 numbers from article) and the $100 annual cost number from the article, you get $588 of annual revenue and $488 of profit (an 83% margin which does not include a sales force or any corporate expenses). $488 of annual profit against a $5,000 investment is slightly less than a 10% return. In this scenario, a very high profit margin equals a decent but not great return.
Then, of course, there is expected future competition. Who is to say what broadband technology will be widely available tomorrow or next week or next year that will steal some or all of ABC Cable Company?s customers. In the example above, it would take ABC Cable 10 years to recoup their investment BEFORE they actually generate profits. Think about how much change there will be over just the next 3 years; near ubiquity of free or ultra-low-cost WiFi networks, multiple carrier roll outs of 4G technology, and, depending on what the free market returns appear to be for Verizon?s $30+ billion FiOS buildout and AT&T?s multi-billion dollar Uverse build out, we could see five, six, or even seven legitimate broadband solutions competing for your $45.
Free markets foster innovation, guide risk investment dollars to their optimal place, and largely self regulate industries. Government is right to pick up the slack, but meddling in broadband when we are on the precipice of a connectivity explosion would be so, in a word, European.
Sep 14 2010
An interesting reference point is http://www.greenlightnc.com/ , in Wilson, North Carolina. The municipality built fiber to the home. Then they can get bids for service to the wider internet. It’s pretty competitive.
Where I live in Gaithersburg, Maryland, I have a choice of Comcast TV/phone/internet or RCN TV/phone/internet. I use RCN. It appears that Verizon is preparing to install FiOS. That will be 3 competitors. I can’t imagine that there will be a price war, but I’d be happy to see some little improvement in speed or rates from RCN. Again, the FiOS is presumably imminent, but not available. RCN meets our needs with good reliability.
Sep 14 2010
Roxanne Googin, editor of a telecom newsletter, enunciated Googin’s Law. It states (from a provider perspective) that broadband will either be a valuable monopoly or a worthless commodity.
The marginal cost of broadband approaches zero, which is where the price should be. However, the first builder of broadband in an area can block market entry for other builders.
What we are seeing is the effect of the valuable monopoly, one that the owner can squeeze for all it is worth.
Sep 15 2010
It would appear the lack of competetion exists because of the barriers to entry - mainly, the the cost of building infrastructure and even more specifically, the cost of labor. In China, the broadband is substantially cheaper (something like 1/10th the cost in the US), and substantially faster, mainly because of the competition made possible through cheap labor. Perhaps the government should subsidize some healthy competition in the US. If prices were competitively pushed down to half or a third of the price, consumers could focus more despensible income towards a variety of consumer goods
Sep 15 2010
The authors’ claims regarding costs and pricing are unsubstantiated - both here and in their so-called research. The fact is that broadband is expensive to provide and maintain, and consumers are demanding ever more and more bandwidth at a time when the wholesale price of bandwidth is no longer going down. What’s more, the “researchers” didn’t quote prices as the price to the consumer per megabit, but only as absolute prices (it costs a certain minimum amount to pay the overhead on an account)! In short, the so-called “study” was biased and was intended to reach a pre-determined, politically motivated conclusion. It does not at all reflect the realities of the broadband business. And I can say this with authority, because I operate an ISP myself. Thousand percent profit margins? Not in my wildest dreams. No competition? Tell that to my 9 facilities-based competitors and the dozens of non-facilities-based competitors I face even in a town of 28,000 people. I wonder whether Google, which is seeking to regulate ISPs for its own corporate benefit, financed this “study.”
Sep 15 2010
(1) You keep saying one data point, but Verizon DSL has millions of customers, so that’s millions of contracts. ALL had the option of $15 for 768k or $20 for 1000k. ALL are significantly cheaper than what the same service would have cost in year 2000. (Well over a hundred dollars.)
i.e. Price dropped.
(2) BARRIERS TO ENTRY - the main barrier is the government. They were the ones who gave Cable Companies exclusive licenses to a city or county or state.
Revoke those exclusive licenses, and you’re have all kinds of new companies entering a market to compete against Comcast.
Sep 15 2010
@Commodore64_fan: Number of households—that is factored into the weights for the price indexes! And Verizon is included in Greenstein and McDevitt’s sample.
Sep 15 2010
The reason we don’t see better prices for broadband service is lack of competition. If the carriers were required to sell access at wholesale rates (like they are in the EU), we would see more competition and larger prices drops (again, like in the EU). We also wouldn’t need to put as much regulation onto rate structures (net neutrality) because there would be other companies offering service. In the current situation, you have a monopoly and thus the need for strict regulation.
Sep 15 2010
I just paid $60 for 6 months for Cable broadband… in Taiwan! The US is being ripped off, big time.
Sep 16 2010
Price is only half of the problem with the telcos ( I work for the largest in the US). As it stands currently, there is no incentive for the telcos to provide more bandwidth to consumers. In fact, there is an obvious disincentive in that each of the telcos sell TV programming as their highest priced service. If they open the pipes to allow greater speed downstream then any player can provide HD program, circumventing the telcos’ set top box. Who will build an ultra highspeed network to provide easy access to any competitor? We are stuck with our current internet speeds for the foreseeable future. If we don’t by more TV content, the telcos will will be obliged to charge more for the same internet service, just to break even. The only solution is enhanced regulation and a government build out of fiber-to-the-prem. As one reader commented above, the telcos invest more in lobbying than in network services. Thus, all product innovation in telecommunications will take place in countries where the government supports highspeed internet, not here. Rethink possible, indeed.
Sep 27 2010
I agree with JG above. There certainly seems imbalance.
Robin
Sep 29 2010
I paid $45 for 512kbps downstream bandwidth in Y2k. Now in 2010 I pay the same but have 8Mbps downstream bandwidth.
That’s well over 10 fold increase in bandwidth for the same price is pretty significant.
30Mbps is available now for just a few $ more, so make that a 60 fold increase in 11 years.
Regulation adds cost, always.
Market competition is the only thing that will both drive speed increases and relative cost reduction. Obviously this will differ greatly depending on the market in question.
Mobile broadband is going to really start driving competition in the next few years. My Dad has already ditched his DSL in favor of using a 4G mobile device w/ Wifi hotspot.
Dec 15 2010
When a new product is launched in Broadband prices can come down only if the layer 2 can be kept. Then we can see big reductions. The real issue is that pricing is based on more than one factor.
1: What the market will bare
2: The cost of infrastructure
3: The cost to obtain the client and the length to keep the client.
4: The overall quality of the product i.e. uptime and speed.
When DSL was first brought to market it was very expensive to get a customer on board. Marketing costs , training etc. were an issue.
I also think that the return is not quick considering the headache, unlike hardware this is profitable in 30 days. With Lines it can take 1 or two years. Then the client changes service.
A game Change on some of these old rules may be wireless. If you look at clear and there sales pitch today. They can get a client up in an hour and the client will get 12mb or more download at less than market current rates.
this is the least complicated product to date for users.