Expect Higher Data Prices

Numismatics_and_Notaphily_iconThe US already has some of the highest Internet prices among developed nation. This is due largely to the lack of competition in most markets, meaning that there is no downward price pressure. Brian Fung of the Washington Post reported on a recent congressional hearing where Craig Moffett, a well-known market analyst, said that prices for Internet access are likely to climb in the future.

Moffett’s reasoning is that cable companies, who have most of the data customers in the country, are losing cable customers (or are running out of the ability to continually raise cable rates), and so they are going to have little option but to raise data rates.

The large cable companies, who together control the majority of the data customers in the country, are mostly publicly traded companies (except for Cox) and they are very much driven by the need to have profits climb quarter over quarter, year over year.

For many years the revenues and the profits of the large cable companies have been driven by two phenomena—the quickly growing data market and continual large cable rate increases. While data customer penetration rates are still growing, the rate of growth has slowed down and the vast majority of homes that want and can afford high speed Internet access already have it. And so the cable companies are no longer going to see the steady boosts to their bottom line that comes from double digit growth in very high margin data customers.

The cable companies have also been living off cable rate increases. They loudly blame cable rate increases on increases in programming costs. But the truth is that they have almost always raised cable rates more than what was needed to just cover higher programming costs, and so each rate increase added to the margins from cable and went straight to the bottom line.

But we are now seeing what I call consumer rate fatigue with cable rates. As cable keeps getting more expensive we are going to see more cord cutters, and even more cord shavers. Cable rates have climbed to the point where the cable companies should now hesitate when thinking of raising rates more than needed to cover cost increases. One only has to do the math to see that raising cable rates only 7% per year will increase an $80 monthly bill to over $100 per month in only four short years. The math is finally catching up to the cable industry, and at a time when there are finally online alternatives appearing for content.

Without those two historic bottom line drivers the cable companies are left with having to raise data rates if they want to grow profits to meet investor expectations. The cable companies are all dabbling with new revenue streams such as home power management, security systems, WiFi phones, and other new products. But these new products don’t have the same kinds of high margins as Internet data, nor is it likely that cable companies will sell enough of these new products to make a real bottom line difference.

The industry has been somewhat spoiled for the last couple decades due to having the powerful triple play bundle of voice, video, and data. While the margins on video aren’t great, the other two products have extremely high margins. The bundles have allowed the cable companies to have relatively high penetration rates of all three services. But nobody expects the new products to do nearly as well as the triple play services. Rather than having a few products with very high penetration rates, the cable companies are likely to end up with a product portfolio containing numerous products, each with a relatively small 5–10% penetration. That is going to make them into very different companies than today.

And so expect to start seeing data rates raised every year. This has already begun with the base rates for many cable companies and the large telcos like Verizon. I would expect the rate increases to be small at first but to climb over time to feed the bottom line expectations.

This is all counterintuitive. Most of my clients have 70–80% margins on Internet service today and it’s probably higher than that for the large cable companies. It takes some chutzpah to raise the rates on a product that is already that profitable. But I completely agree with Moffett and I think this is inevitable that data prices will rise, considering the lack of competition in most of our markets.

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