Being Stingy with Broadband Speeds

I’ve never understood ISPs that build fiber networks and then sell small-bandwidth products. The fiber technologies in place today can easily provide gigabit speeds to every customer without straining the network. The cost of providing 10-gigabit electronics keeps dropping and is now only a few hundred dollars extra per customer. Why would a fiber-based ISP have speed tiers that provide 50 Mbps?

I’ve found that it’s not unusual for an ISP with a low-bandwidth product on fiber to also charge a lot for gigabit bandwidth. There are a number of ISPs that charge $150 to $200 for a residential gigabit bandwidth product.

Bandwidth pricing philosophies differ around the industry. There are ISPs like Google Fiber, and Ting that only offer gigabit broadband. These ISPs are declaring that their fiber is a faster technology and they are marketing based upon that technology advantage.

The big ISPs in the country have trained the public that extra bandwidth is expensive. The cellular companies are the king at this game and will sell an extra gigabyte of usage for as much as $10. The big ISPs like Comcast and AT&T charge a lot for any customer that exceeds an arbitrary data cap. These pricing philosophies make a lot of money for the big ISPs, but this pricing conveys the false message that extra customer usage drives up costs for an ISP, and that customers that use more data ought to pay more.

Anybody who understands how ISPs operate realizes that there is little or no incremental cost for a given customer to use more bandwidth. It seems counterintuitive, but a household that uses a terabyte of download for a month doesn’t cost the ISP any more than the customer that uses 200 gigabytes per month – all due to the way that ISPs pay for wholesale broadband. ISPs buy enough bandwidth to satisfy the busiest hour of the day – and the rest of the day a lot of the bandwidth sits unused. There was zero incremental cost to ISPs for wholesale broadband when their customers started downloading and uploading a lot more data during the daytime due to COVID-19 – because the daytime usage still didn’t exceed the evening busy hour.

An argument can be made that faster speeds are more efficient for an ISP.  Consider the difference between two customers that each download a 1-gigabyte data file. A customer with a 50 Mbps product is using the network, and potentially interfering with other traffic for twenty times longer than the customer with a gigabit bandwidth product. Faster speeds reduce collisions between data streams, and a fiber network with fast customer speeds is significantly more efficient than one with slower speeds.

This is not to say that I’m advocating that ISPs should sell only the gigabit product since that is the most efficient use of a network. I think ISPs with only a gigabit product are leaving revenues on the table – unless the product is priced low enough to be affordable for everybody. I think companies that only a gigabit product at $70 or $80 are pricing out of the financial reach of many homes.

I get to peek behind the curtain of a lot of ISPs, and I know that an ISP with a smart tier of products can have more customers and more revenues than the ISP with only one product. I’m positive that an ISP with a $60, a $70, and an $80 product will do better than an ISP with only a $70 gigabit product.

The COVID-19 pandemic has finally forced the industry to confront broadband affordability. Even in markets where there is fast broadband available, we found out during the pandemic that there are a lot of homes without broadband for students because their parents can’t afford it. ISPs have not cared much about the homes that can’t afford broadband – and in most markets, that’s anywhere from 10% to 40% of the market. ISPs have been happy selling expensive broadband to those that can afford their prices and have given little thought to those that can’t.

I am truly puzzled why ISPs with fiber networks have broadband products between 25 Mbps and 75 Mbps. That’s like buying a race car and driving it on the freeway at 25 miles per hour. A cable company is not afraid of a competitor that wants to fight the market battle at speeds the cable company can match. The cable companies are afraid of ISPs of affordable symmetrical data products they can’t match.

3 thoughts on “Being Stingy with Broadband Speeds

  1. Spot-on Doug. Often times our ‘backup’ fixed-wireless connection for a business has more bandwidth, and a much lower cost, than their primary fiber connection. We see businesses buying fiber connections with 20-50Mbps which astounds me. Probably all related to pricing.

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  2. This is not entire true that “there is little or no incremental cost for a given customer to use more bandwidth”. Most of the money are spent in forms of capital investments and any profit would be used to fund new capital investments so a $10-$20 price difference in current products could mean some additional one or two years to invest in new networks.

    You don’t see much investment in new networks, whether it is 5G or FTTP because companies incorrectly forecast the cost and demand when planning current networks years ago so they’re stuck with low IRR investments troubled by dwindling revenues and heavy debts.

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  3. While I understand Mr. Dynkin’s point about investment returns, there are a number of other ISP markets internationally that do not have bandwidth-based pricing.
    What will change this paradigm in the marketplace is when the customers in the U.S. insist on non-bandwidth-based pricing.

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