I’ve been giving a lot of thought lately to the long-term trajectory of broadband prices. This is something that should be considered by anybody who is thinking about competing in a market against a big cable company. It’s not an easy question to get your hands around since there are many factors that might affect future rates. The following are some of the major trends that I think must be considered.
First is pressure on the big ISPs from Wall Street. This is most acutely being felt by the biggest cable companies because they’ve had steady growth in customers and revenues for the last decade as they have slowly decimated the urban DSL market. Their stock prices are predicated on maintaining the historical earnings growth rate, and that will get harder to do every year. I don’t need to be a great prognosticator to see that the day will be coming soon when there aren’t that many more DSL customers left to capture. When customer growth slows, then the only other tool to maintain earnings will be to increase rates.
We already know that the big cable companies are willing to raise broadband rates. Charter and Comcast have both had back-to-back years of raising broadband rates, and it’s about that time of the year for our next holiday present. I calculate the price of standalone Comcast broadband is already at $90. That’s $76 for the basic broadband product and $14 for the cable modem. Charter has imposed back-to-back $5 annual rate increases and is not far behind.
The cable companies are also happy to disguise the true cost of broadband. For example, Comcast must be making a fortune from its data caps. OpenVault reported that at the end of the second quarter of this year that 12.3% of homes are using more than a terabyte of data each month, including 1.5% of homes that are using more than two terabytes monthly. Charter is poised to implement data caps immediately after the end of its agreement with the FCC to not use data caps that came from the merger with Time Warner Cable.
Demographics are also trending the wrong way for cable companies. Population growth rates have slowed, and the U.S. is approaching the zero population growth rates we now see in Japan and some European countries. The prolonged clamp-down on immigration has cut off the other driver of household growth. The large cities where cable companies are centered are also seeing some outflow of people moving to smaller markets as a result of the pandemic, although it’s too early to know if this is a permanent trend.
One of the interesting upsides for the big ISPs is low-income broadband subsidies. If Congress creates a more permanent low-income subsidy with the infrastructure legislation, the big ISPs could get a big burst of new customers and revenues from aggressively pursuing low-income households.
Another issue that should be quietly boosting cable company earnings is the slow death of bunding as millions of homes drop cable TV each year but keep broadband. The cable companies get a bump of $10 or $15 in long-term margin every time a customer breaks a bundle.
The big unknown is competition. In many cities, the big cable companies have become monopolies as DSL dies. But the cable companies are starting to see competition nipping at their heels as other ISPs start filling the void left by DSL. T-Mobile is offering $50 unlimited 100 Mbps broadband from cell towers. Verizon says it’s still on track to roll out 25 million homes with fiber-to-the-curb by 2025. Brand new competitors like Starry are testing the waters and could pop up in dozens of cities quickly. Fiber overbuilders are popping up in markets everywhere to present real competition.
It’s impossible to somehow plot out how these and other factors are affecting the broadband industry in order to guess the future. But since writing a blog lets me pretend to be a pundit, I will venture my best guess. I predict that big cable companies will continue to raise basic rates year after year. People unlucky enough to live in monopoly markets will pay the higher prices. The cable companies will continue to pad revenues with quiet sources of extra revenue like data caps. But in competitive markets, the cable companies will lower rates to remain competitive. The cable companies have unfortunately gotten sophisticated, and similar to the way that airlines have mastered pricing, the cable companies will set rates in each market and for each family based upon algorithms that predict the most they can charge.
These many trends must be creating headaches for the analysts inside of Comcast and Charter. Trying to figure the future for these companies is a mind-numbing challenge. But I have no doubt that that the big cable companies will instinctively go with the old tried-and-true method of raising rates to see what happens.