3 UK and the broadband first-mover disadvantage

Posted by Rob Gallagher Monday, November 3rd, 2008

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Some of you may scoff at the notion that the mobile group 3 could teach fixed-line ISPs a thing or two about the broadband business. After all, 3 spent the best part of a decade - and an estimated $20 billion – in order to become a “new kind of media company” before realising that the killer apps for its next-generation wireless network were cheap voice and unfettered Internet access. But in doing so, it has learnt an important lesson that operators rushing to bring ultra-fast cable and fibre broadband services to market could do well to consider.

3 has been offering mobile broadband services that allow PC and laptop users to access the internet via USB dongles in most of its markets since 2006. Stephen Ness, head of pricing for 3 UK, presented the company’s experiences at the Telecoms Pricing conference held in London last month by Informa Telecoms & Media’s sister company, IIR. One of the most surprising conclusions 3 has reached is that being first to market is not necessarily a good idea, even though mobile broadband has arguably proved to be the most successful service mobile operators have launched since SMS.

Ness argued that early adopters tend be heavy users, who like to use – or even abuse – their connections to the max. The cost of supporting these customers compared to the flat-rate tariffs they pay means that margins are low. The temptation then, would be to set prices high. Bad idea, said Ness. Heavy users are willing to pay high prices, because they plan to get their money’s worth. Lighter users are not, which could leave an operator charging high prices with a customer base largely made up of a relatively small number of barely profitable heavy users.

All in all, to paraphrase Ness, it is better to let your competitors tie those customers into lengthy contracts first, before you launch lower-priced offers which appeal to the mass market. These will no doubt attract some heavy users, but at least the cost of supporting these customers will be offset by higher margins from a larger base of lighter users.

This may be advice some fixed-line operators do not want to hear. One-upmanship on broadband speeds has always played a major part in fixed-line competition; the billions operators are investing in ultra-fast cable and fibre networks reflects this. The problem is that early adopters of new fixed-line broadband technologies have tended to be very heavy users indeed. Just like with mobile broadband, many looked to get some kind of return on the high DSL and cable broadband prices they were paying. They found an answer in peer-to-peer file-sharing applications, such as Napster, Kazaa and eDonkey, which offered access to a wealth of ‘free’ music, films and software packages.

The deal was not so sweet for operators. File-sharers flooded their networks by leaving their PCs downloading and uploading day and night, which could in turn lead to slower speeds for lighter users looking to put their broadband connections to more innocent uses. At one point, file-sharing traffic was thought to account for over 80% of traffic on some ISPs’ networks. That figure has fallen as the light users of the mass-market have taken up broadband and legitimate music and video services have grown in popularity. P2P’s share could now be as low as 22%, according to Sandvine, a vendor of network management equipment. Can you see the parallels with the pattern that Ness described?

If fixed-line operators are not careful, history could repeat itself. The massive increases in speeds that next-generation cable and fibre services promise means they are bound to attract heavy users. The problem is that many of today’s mass-market Internet services simply aren’t built to take advantage of this extra bandwidth. The picture on YouTube will be no sharper, nor the quality of Skype calls any clearer. The reality is that most Internet firms are unlikely to upgrade or launch high-bandwidth services until ultra-fast broadband itself has gone mass-market. Until then, early adopters looking for a return on higher subscription fees may turn to the few applications that work noticeably better over ultra-fast broadband – including, you guessed it, file-sharing.

If it’s any consolation to operators planning next-generation broadband launches, they may not have to worry too much about how high they can set their prices. Our research shows that a number of other challenges relating to marketing and competition means that they will only be able to charge a slight premium, if at all (subscription required). Perhaps the best way for operators to avoid the broadband first-mover disadvantage is to set prices for next-generation broadband at today’s mass-market rates.

3 UK’s presentation and others given at IIR’s Telecoms Pricing will be available for download from the Broadband & Intelligence Centre Portal (subscription required) shortly.