Competition in the USA – what could happen?

Broadband revenues under threat?

A review of household penetration, subscriber revenues and the likely effects of increased competition on the US broadband market.

All currency amounts quoted are in international $USD at purchasing power parity (PPP) rates to allow comparison.

The US broadband market is not the most competitive nor even the biggest in purchasing power terms – China now has that distinction. As a result the capital of digital technology and the homeland of all the world’s internet giants has broadband take-up well below countries with a much lower income per head, such as the UK or Taiwan. And when competition does start to intensify, as it surely must, the great ISPs of the USA are heading for a shock – we calculate (roughly it’s true) that they will be losing $2billion per month in subscriber revenues when their market gets as competitive as the UK’s.

As the FCC and President Obama have highlighted a number of times in the past few months there is a lack of competition in the broadband market in the USA.  Often consumers will have access to fewer service providers with less tariff choice and at higher prices than they would like.

Telecoms infrastructure in the US is largely privately held and typically closed to anyone but the owner.  Along with lifting deployment restrictions on municipalities opening up those networks to others would be a major step in stimulating competition.  If you own the network you have to sell access to it at a reasonable, regulated price.

Local loop unbundling (LLU) has been a major component in keeping prices down where it has been employed as a regulatory instrument.  Allowing access to customers over a common network does have a number of downsides, which we don’t propose to discuss in detail but in order to minimise the amount of peeved responses we’ll be getting negatives include

  • Lack of network investment – if I can’t profit entirely from this but have to compete I won’t build it
  • Lack of innovation – if we can’t have our own networks developed with our proprietary IP then we won’t research or build them
  • Lack of any network at all – if you can’t make a profit as a company you can’t exist and if you go bust then there won’t be any networks for anyone
  • It’s not free market – if it’s mine then it’s mine.

None of these seem insurmountable and evidence from other countries suggests that they aren’t.

However if we just do a thought exercise and have a look at what would happen to US prices and revenues if there was a different tariff profile we can ignore anything that makes it too complicated.

Current status of the US broadband revenues

Using data from Point Topic’s Global Broadband Statistics and Broadband Operators and Tariffs services allows us to generate numbers for overall revenue from fixed broadband.  You can see more on how we combine the data to produce these outputs here.

There are a number of assumptions required to allow straightforward calculations.  We’ll assume:

  • Each country has high, medium and low tariff tiers aggregated from the data we collect for that country
  • The tier split we assume is 10% of subscribers on the highest tariff, 20% on the middle one and 70% on the lowest rung.  This comes from an average of the tariff splits we track in the UK.

So for the US we get the following data:

Total fixed subscriptions
(June 2014)
Total households in the US
United States96,888,716121,670,989

High tariff level $299.99 per month, medium $69.48 and entry/low level at $14.99

This compares to China

 Total fixed subscriptions
(June 2014)
Total households in China

High tariff level $110.49 per month, medium $47.72 and entry/low level at $22.72

Remember these tariffs are expressed in PPP $USD and as such should be directly comparable.  So while China has in general a higher entry level it is less expensive at the upper levels.

It’s also worth noting that we haven’t taken account of the contents of bundles that are included in the tariffs so it is possible that consumers value additional elements in US high end tariffs at several times the rate they do in China.

Monthly subscription revenue (US$PPP millions/month) – USA and China June 2014. Subscriber revenue and remaining ‘headroom’ in the market

US and China subscription revenues

US and China subscription revenues

Above we look only at residential tariffs.  We can see that the US operators, under our assumptions, generate about $5.3 billion a month in subscription revenue alone but with the relatively high penetration of the market there is little ‘new’ money to go for.  China meanwhile for comparison generates more revenue, in PPP terms remember, and has more space to grow.

 What happens if you have open networks and competition

One simple way of seeing what would happen if the US market had a different tariff profile is just to substitute values from another market into the model for the US.  To be clear we update the tariff costs at high, medium and low but stick with the same current level of subscription.

For example if we substitute the UKs’ tariff profile we get the following

Monthly subscription revenue (US$PPP millions/month) – USA and USA with UK pricing June 2014. Subscriber revenue and remaining ‘headroom’ in the market

US and alternative US pricing

US and alternative US pricing

If we drop the tariffs to $173.76, $43.14 and $8.63 per month which is equivalent to the UK then we see a drop of over $2 billion a month in subscription revenue.  Whether the industry in the US could bear this is questionable but it seems, at the moment, likely that some version of increased competition will drive prices down in the next five years.

Missing out on subscription revenue makes it difficult for the supplier companies.  Decreasing revenues are particularly hard to handle when a sector has adjusted to super-normal profits which certainly seems to be the case in the US.

The tariff levels the USA market is now accustomed to forms an equilibrium of supply and demand that is nonetheless below where you might expect it to be for such a wealthy country.  The graph below shows what that gap could be.  Several outliers, including South Korea and Saudi Arabia were removed from this analysis.  The remaining 87 markets plot an adoption profile as below.

 GDP per capita and household broadband penetration – June 2013 (most recent complete GDP data)

Broadband as at June 2013 v GDP/capita

Broadband as at June 2013 v GDP/capita

Selling broadband today is either persuading someone to switch from one supplier to another or getting a completely new customer form the diminishing and increasingly resistant pool of those who don’t have broadband.  If you don’t offer your residential market enough choice in terms of suppliers or low enough prices then you risk a static and ultimately uncompetitive marketplace.

Get access to the background data

The background data used for this report is taken from Point Topic’s Broadband Operators & Tariffs and Global Broadband Statistics services. Click on the links, e-mail [email protected] or telephone +44 (0)20 3301 3303 to find out more.