Completely Unscientific Study of Consumer Internet Prices
Bandwidth is deflationary and I find any arguments to the contrary to be foolish. This is a subject I have written about before here, here, here and here. Over the past few weeks, I have been reminded that it is always easier to solve most networking problems by applying bandwidth. A few weeks ago I found myself reading one of Marc Andreessen tweet streams of conciseness and I replied (see below). After making the tweet I wondered if I was correct?
Since 2006, I have thought that the bundle is going to go away, which was Marc’s last tweet at the top of the stack. I even wrote a book in which that was one of the conclusions. I linked to the book in the last sentence, but please do not purchase it as it is dated and with the paperback version ranked 1,910,644 and the Kindle version ranked #1,765,446 on Amazon, it is not really a best seller. Every now and then someone buys a copy (thank you dad) and I receive enough money to buy a coffee.
“The evolution to a pull economic model will affect the ability of a cable provider to rely upon programming packages. How many channels do the end-users really watch of the 200 channels available? This is where a pull model affects the market structure. End-users will access the specific channels and content they desire, when the want it, to view the content or they will download the content and store it locally for future viewing. End-users will not pay for 200 channels, of which 35 they watch occasionally.” – Six Years that Shook the World, July 2006 Page 334-335The concept of doctrine enables technology people to make assumptions. Assumptions are great as long as they hold. When I refer to doctrine I am referring to procedures that ecosystem participants follow because they have been trained to reason and act in a certain manner within the command and control structure of their business and technology. We design networks, manage companies; evaluate technology and markets according to a common set of doctrines that have been infused into the technology ecosystem culture over many decades.I was thinking along this thought line in mid-October when I posted “I also believe we are all susceptible to diminished breadth in our creativity as we get older. Diminished breadth in our creativity the root cause as to why history repeats itself and another reason why when we change companies we tend to take content and processes from our prior company and port them to our new company. This is especially true in the technology industry. We recycle people; hence we recycle ideas, content and value propositions from what worked before. Why be creative when it is easier to cut and paste? As a casual observation it seems to me that most people working in tech have a theta calculation as to their creativity. I believe a strategy to guard against creativity decay is to look back on the past and critique the work.” In mid October I had not fully fused the thesis of creativity fail or creativity theta with doctrine. The idea to link the two concepts occurred to me last night as I was reading Shattered Sword for the second time.
- We have been waiting on the video tsunami for five years. When does it start? Bueller? Bueller? Has anyone seen the video tsunami? Thesis: There will be no video Tsunami.
- Can we all agree that bandwidth is deflationary? The trend for bandwidth is the same as the trend for storage and compute. Thesis: Owning the compute point is far more valuable than owning the pipes between the compute points.
- Service providers consolidated to protect margins (i.e. ARPU) and to slow the rate of revenue decline, thus extending and lowering theta. Thesis: COs become data centers.
Now that the video tsunami thesis has become passé, the new thesis is the cloud. The cloud is not a value creation engine for hardware. It is enabled by hardware, but hardware trends are deflationary. The value in the cloud will be enabled by software. Thesis: Networking transitions to a virtual software function that runs in the server.
Here is my completely unscientific study of consumer broadband. I live in a place in which I can choose broadband from RCN, Comcast and Verizon. I could even choose wireless broadband. I went back through fifteen years of paying for internet access over a variety of service offerings: 56k dialup, DSL, cable modem and now FiOS. I plotted the bandwidth I am paying for and the price per MB. I pay $89 a month for FiOS 75/75 service. Fourteen years ago I was paying $89 a month for maybe a 1MB (generous estimate) HDSL service from Concentric. Plotting the service bandwidth on the right and the monthly price on the left yields the following chart:
In the tweets from Marc, there is a hidden conundrum not obvious to most outside the networking and service provider industry. In order to provide more for less, a continuous improvement in the cost of the infrastructure is needed to provide more for less. This is the heart of the net neutrality argument and it also at the heart of the history of the telecommunications industry. Study the history of the consent decrees.
Service providers are spending on their networks. Content is king, but content requires continuous improvement of the network (i.e. infrastructure). The larger service providers also pay dividends and buyback stock in the world in which their service pricing velocity is more for less and thus the cost of the infrastructure required to provide more for less has to track the service pricing curve.
This past week I read two investment notes from Jefferies and Cowen regarding pricing trends in service provider infrastructure business as a result of AT&T’s Domain 2.0 program.
“We suspect that both the top line and gross margin softness are – in large part — a by-product of AT&T’s new Domain 2.0 strategy. Based on our checks in recent months, we know that vendors are experiencing significant price erosion through the Domain 2.0 process (we’ve heard about 40% pricing declines in some cases).” – Jefferies
“CIEN announced that it has been selected by AT&T as one of AT&T’s Domain 2.0 suppliers. CIEN’s selection should drive incremental additional rev growth over the long term, but it literally comes at a price in the near term. CIEN noted that its Domain 2.0 agreement with AT&T includes “certain commercial concessions that are structured as upfront incentives” that will adversely impact its rev and gross margin in FY4Q14 and in FY1Q15. Our industry checks indicate that this price concession is meant to be one-time in nature, as opposed to a permanent price discount.” – Cowen
The final point I would make is that each household has some sort of budget for communications, computing and content (the three CCCs). The three C budget allocation is going to be divided amongst mobile devices, broadband, video services (Netflix, Amazon, AppleTV, DirecTV, Cable, etc), software subscriptions, content subscriptions, hardware, etc. My hypothesis is that the three C budget is relatively fixed (or growing slowly) in various economic bands based on income per household. The future is going to be world of continuous improvement in services such as internet bandwidth, an increasing number of content options with a slower expansion of the monthly three C household budget allocation. As always, I could be completely wrong.