The Increasing Cost Of Competition

Every time I read something about the broadband industry, there's some mention of speeds, and most of the conversation revolves around meeting "minimum" threshold levels.

Even though that's an important and worthwhile discussion, I want to bring to your attention something different when you think about the business implications of what we're witnessing: the emergence of Multi-Gig services.

The Multi-Gig Offer Is Here

Over the past year, we have seen a significant surge in companies offering "multi-gig" services. These services provide customers with speeds exceeding the typical 1 Gbps offers from their fiber or cable networks.?

AT&T has been advertising the "gigillionaires" among us with their 2 Gbps or 5 Gbps offers. In addition, Windstream offers 2 Gbps service, Frontier's site quickly discusses 5 Gbps capabilities and even C-Spire Fiber is advertising 8 Gbps!

Not to be outdone, the cable companies are aggressively rolling out DOCSIS 4.0 to accelerate their multi-gig rollouts.

Are Super High Speeds in Demand?

The real question here is what the higher speeds mean to users opting for such offers. In other words, how does signing up for a higher-level plan impact your usage levels?

To answer that question, I found this interesting data from Preseem, one of the leading QoS providers for fixed wireless networks:

The chart shows how people consume data (the y-axis) based on their speed (the x-axis) across a large, representative sample of users. The curves represent different percentiles. Not surprisingly, there is always a group (the 95+ percentiles) who consume more. That said, as speed increases after about 50 to 100 Mbps, consumption remains relatively stable.

While this is fixed wireless and not necessarily fiber, I believe this is fairly indicative of customer behavior regardless of connection type. While we might see more of a lift in fiber networks, the dynamic generally holds based on conversations I have with providers – even though people buy more speed, they don’t necessarily use it!

The Pricing Paradox

Here's where it gets more interesting. U.S. Telecom, the leading industry association for the broadband industry, tracks customer prices and packages over time. They track the most popular package adopted by customers, both in terms of speed tier and average monthly price.?

The chart below illustrates how this BPI package has evolved from 2015 to 2020 and then to 2023, according to the last report available.

Between 2015 and 2020:

• Typical speed packages increased by a little over 10%.
• During that same period, prices declined by ~20%!

Between 2020 and 2023 (only three years):

• Typical speed packages DOUBLED to more than 100 Mbps.
• At the same time, prices declined ANOTHER 20%!

When you think of "yield," which here means how much revenue the provider receives for each Mbps offered, the results are somewhat stark and, honestly, a little concerning. Why?

The issue boils down to the sustainability of the network business. If, as the Preseem data shows, usage levels aren't increasing significantly, we can breathe a sigh of relief that margins are sustainable.

However, to sustain that level of competition, the issue lies in the need to continuously reinvest and escalate the speed offerings in the network at a rate that may not necessarily align with actual usage trends.

Essentially, the entire basis of competition shifting to a "faster is better" proposition is like setting up a CapEx arms race for the industry! If you still don't believe me, here is an interesting data point from Dell'Oro:

This basically implies that we are already shifting from the “10 Gbps Passive Optical Networks” (XGS-PON) to a 25 Gbps capable version, implying even more speed tier competition is coming.

What Should We Do Now?

Honestly, I'm not sure. This dynamic has been present for a long time. My concern stems from the stimulation in the economy for higher speeds driven by government funding, coupled with the aggressive competition that comes with it. It sounds good on paper, but something has to give. Are we on the brink of another telco bubble?

Some industry leaders believe this suggests pricing will normalize and come back. That seems possible when you look at the Consumer Price Index for broadband services. It has not grown at the same rate as produce prices for fiber. It seems like it will come up, but that's a tough story to tell in a climate of driving adoption across the Digital Divide.

This also reminds me of some core issues in game theory , which I think are relevant to this particular situation. In a previous LinkedIn newsletter, I explained the idea of the "infinite" and "finite" player. An infinite player is trying to simply stay in the game, while a finite player is trying to win.?

The road to success in broadband in the coming years appears to be increasingly an infinite player – you are simply trying to stick around. If you are just trying to win (think overbuilders looking for a quicker return), you may not be around in the future.

As the data shows, several networks will overinvest in their speed tiers simply to keep up, and at some point, there won't be enough money to sustain them all. This scenario hints at the possibility of significant failures down the road.

Those who have built a business that sustains itself over the long run will be best positioned to pick up a lot of capacity at what will likely be fire sale prices—at least, that’s what the data seems to tell me.

What are your thoughts on the broadband dynamics ahead of us?

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