I ran across an article written by somebody in Provo, Utah who claims that the penetration rate for paying data customers on the Google network has fallen to around 20% from a previous penetration rate of 30% when the network was operated by the city. I have no idea if the 20% penetration rate cited is accurate, but it is not surprising since Google also offers 5 Mbps for free in the City as part of the deal for buying the network from the city. I’m sure that a lot of households and students are taking the free option.
But the article did prompt me to think about cherry picking – the phenomenon where telecom carriers tend to mostly pursue customers who spend the most money. This topic is of particular interest when talking about Provo because the network that Google now operates was once an open access network. And I think the pre- and post-Google situations are worth comparing.
Back when the city operated the network they operated it on an open access basis, as required by Utah law. This means that the city was prohibited from being an ISP, but they could sell access to other last-mile service providers on the fiber network. Provo sold lit fiber loops on the network for roughly $30 per month. ISP using the network were then free to sell any services that a customer wanted to buy.
An open access network leads to a form of cherry picking in that no ISP is going to buy a $30 fiber loop and then offer a standalone inexpensive data product. There just is not enough profit in such a situation to sell a standalone $40 or $45 data products. Instead an ISP in an open access network will either price standalone data high, or else bundle it with lots of other stuff. You can contrast this to Qwest who would have competed against iProvo by selling low price DSL. I am sure that Qwest had some data products in the $30 per month range. They would have been much slower than the iProvo fiber but would have been attractive to the budget-minded customer.
And then consider Google who is definitely a cherry picker. They sell a gigabit of data for $70 per month. There are very few markets where a significant percentage of households are going to find that affordable, regardless of how attractive they might find the speed. I don’t know what Google’s target penetration rate is, but they can’t be shooting for the same overall penetration rate as the cable company can shoot for. The cable companies have a full range of products from slow to fast, from cheap to expensive.
I work with hundreds of ISPs and the one thing that I have consistently seen in every market across the country is that when customers have a choice between a low and a high priced data product that the vast majority of them will take the lowest priced data product that will give them a speed they can live with. Cable companies don’t expect more than a few percentage of households to buy their fastest and most expensive data product.
And so, even if the author of the article is right, I’m not sure that this is a negative thing for Google. If the city was selling broadband to 30% of households in an open access environment, then one has to imagine this represented a broad range of products at different prices and speeds. There would have been no really cheap products due to the $30 monthly loop rate, but there still was probably a range of packages between $50 and $200 with various combinations of data, video, and voice.
If Google has been able to get 20% of the people in Provo to pony up $70 per month for broadband they might be very happy with the results. They bought the network for $1, but obviously had to make some capital investments to get the network capable of gigabit everywhere. I see nothing automatically distressing about a 20% penetration rate of a very high margin product.
There are a lot of other new ISPs hitting various markets around the country today. A few of them are also peddling gigabit as their only product like Google. But most competitive ISPs still sell a mix of products. Whenever I talk to these companies I always caution them that given a choice that very few people are going to buy the gigabit if there is an affordable 100 Mbps alternative. I’ve seen a number of business plans that predict a high penetration rate of the fastest data product, but I’ve just seen human nature rear its head in almost every market I’ve ever worked in. Given a choice people will save money when they can. And all of the marketing in the world won’t get the to spend more than they are comfortable with.