Another twist to broadband: add low costs to high prices (1)

I'm pasting in below my October Comment for Telemanagement, which will be published shortly (now online). I'm splitting it into two parts since it runs over 1,800 words, though I tend to have doubts about the assumption that visitors don't like to read more than a few hundred words in a single post. My Google Analytics says average time on the site is creeping up, so maybe readers are getting used to my verbose style.

The OECD ranks Canada as the 6th most expensive broadband jurisdiction among its 30 member countries, based on average monthly price per advertised Mbit/s (adjusted for purchasing power).

The discrepancies get worse – i.e. Canada gets more expensive – as we go from lower to higher speed tiers. This trend is confirmed in the Berkman Center’s Final Report to the FCC (Next Generation Connectivity), which combined datasets from the OECD, TeleGeography and PointTopic for its custom pricing analysis. For next-generation speeds (over 35 Mbps), Canadian retail prices are the second highest out of the 19 countries with NGN offerings – only the United States is worse (Berkman, pp. 73-77).

The Berkman report suggests (p. 67) that high prices probably result from “a combined effect of cost and lack of competition that varies by location.” Berkman cites evidence (from the Pew Internet Project) showing that as the number of service providers decline in a given area, retail prices rise significantly. But as Berkman cautions:

“This does not necessarily mean that the price where there are only one or two providers reflects the absence of competition. It may be that the high prices reflect the high costs of providing service in a given area, which in turn results in a lower level of competition as competitors are dissuaded from entering these markets by the high costs of entry. To assume that prices reflect purely higher costs and not the lack of competition would be equally speculative” (p 67).

Why don’t broadband prices fall?

In the US and Canada, high prices didn’t happen all of a sudden, nor are they going away any time soon. Why have they tended to hold steady or drop only marginally from year to year? MIT’s Technology Review ran a short piece recently that cites a new study by two American economists (Shane Greenstein and Ryan McDevitt). They looked at contracts from 1,500 different DSL and cable service providers, covering the period 2004-2009. What they found was “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” (other coverage here).

The TR piece leans too much on the importance of CPUs in deploying and upgrading broadband networks, since that also involves costly, labor-intensive tasks like trenching – which don’t obey Moore’s Law. Nevertheless, so many electronic goods drop rapidly in price after their introduction that we treat that as the norm. The Moore’s phenomenon has been paralleled by dramatic drops in hard-drive storage and, to some extent, bandwidth costs – which only adds to the mystery as to why that hasn’t been reflected in broadband pricing.

For Greenstein and McDevitt, the mystery has a lot to do with costs and how far removed retail prices are from any cost-based structure. Their claim is that while deployment may be expensive, maintenance is far cheaper than what might be inferred from prices:

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.

The OECD’s broadband data provides another angle on this issue – a time series measuring the evolution of speeds and prices in member countries from 2005 to 2008 (OECD broadband portal here; spreadsheet 4k, Evolution of a representative broadband subscription over time). To create this dataset, OECD staff selected two representative suppliers from each country, one for DSL and one for cable. For Canada, the selections were Bell Canada and Shaw respectively. Actual values are shown for each year, then expressed in terms of compound annual growth rate (CAGR):

  • Bell: speed grew 13%, price dropped -1% (2005-08)
  • Shaw: speed grew 0%, price dropped -10% (2005-08).

The pattern noted by Greenstein and McDevitt holds here, except for one anomaly that’s not explicit – bit caps. The worksheet indicates that across the 30 member nations, only four have bit caps (as of 2008) for both DSL and cable: Australia, Belgium, Canada and New Zealand.

Even if caps are large enough not to affect a lot of subscribers, they work against progress towards NGNs, because as networks approach the speeds enjoyed in Japan and Korea – upwards of 100 Mbps – caps will be punitively expensive for subscribers, yet will have no value in supporting traffic management. Nevertheless, this is the role caps have been officially assigned by the CRTC – as “economic” Internet traffic management practices, or ITMPs. 

Next: Giving hidden costs new meaning…