A lot of fiber overbuilders enter the market and hope to gain customers by offering lower prices. You saw this when Google Fiber offered a gigabit broadband connection for $70, and I see the same thing from many smaller ISPs. But any price advantage disappears if the large incumbent cable company matches the lower prices.
This is an interesting dilemma for municipal cable systems. They often enter the market with a goal of lowering prices in their market. And when the incumbent provider matchers their prices the municipality has achieved their goal since everybody in the city then benefits from lower prices.
But this comes at a cost. Lower prices mean lower margins, and any ISP that lowers prices is hurting their own bottom line. You would think that lower prices also hurt the incumbent providers, but the big ISPs have the advantage of being able to charge more in surrounding communities to offset lower margins where there is competition. They factor in competition when setting their nationwide prices, so it can be argued that competition doesn’t really hurt big companies at all – they make up for competitive losses by charging a little more everywhere else.
There doesn’t seem to be any limit on how low an incumbent provider will go to match prices. Take the example of the cable TV product on the city-owned Click! Network in Tacoma, WA. For many years the city didn’t raise cable prices, and Comcast matched their low pricing. Over time the cable prices in Tacoma were over 30% lower than prices in the Tacoma suburbs and nearby cities like Seattle. The customers in the city benefitted from low cable rates, but the city was losing money on cable TV and over time raised their rates back to the market rates.
This issue is going to be in the news a lot more in the future. In a recent blog I talked about an analyst who believes that Comcast is going to double their broadband rates over the next few years. Even if their rate increases aren’t that drastic I think it’s obvious that they plan to raise rates. This is probably the number one reason they have been lobbying hard to get rid of Title II regulation, since that is the only tool that regulators could use to examine and react to broadband rate increases.
If Comcast and the other big ISPs undertake regular broadband price increases they will create an interesting dynamic in the industry. Anybody with a competing network is going to have to decide if they are going to raise rates to match them. It’s going to be tempting to do so because increases in broadband rates flow 100% straight to the bottom line. But if a competitor doesn’t raise rates, then it’s likely that the big ISPs will raise rates everywhere except where there is significant competition. And that would result in big difference in broadband prices between markets with and without a competitor.
It’s also likely that as the big ISPs raise broadband rates that they will be inviting competitors into the market. I create a lot of financial business plans and there are many markets where it’s hard to make a business case for building fiber at today’s broadband rate. But raise those rates and a lot more business plans become attractive.
The final issue raised by the competition dilemma is customer choice. Most cities desperately want competition in their markets because they can see the large cable companies becoming near-monopolies. One of the primary reasons why cities build fiber networks or lure ISPs to do so is to provide more choice. But you have to ask what kind of choice customers really get when there is no price difference between a competitor and the incumbents?