ANALYSIS OF THE BROADBAND MARKET – APRIL 2001
THE LONG WAIT FOR BROADBAND
In spite of current problems with the development of broadband, we remain optimistic about this market.
The main reason for this is the fact that in every area that affordable broadband has been rolled out large numbers of residential users and SMEs are desperately waiting to be connected. No advertising or marketing is needed – the simple fact that such a service has become available in a city of suburb is often enough to create a waiting list.
Very few carriers, however, are able to roll out their services quickly enough to satisfy the demand, and, as Stephen McClelland recently wrote in Telecommunication International:
Consumers blame the operators, Competitive carriers blame the incumbents. Incumbents blame the regulators. Investors blame the markets. Media commentators blame the government and regulators bemoan the state of the industry.
As we said only recently, it is quite amazing that the telco market is growing at such a phenomenal rate, and it is certainly no thanks to the industry. There is no recession in the telco market from a demand perspective – it is the supply side that is unable to get its act together. A very sad story indeed.
OVER-PROMISED AND UNDER-DELIVERED FORECASTS
At no stage have we been prepared to subscribe to the ridiculous figures that were put about in the USA – that within a few years the majority of people would be using broadband. The issue is far too complex. Similar broad-brush predictions are being made regarding mobile Internet (WAP and GPRS), m-commerce and 3G.
If only it were that simple. But unfortunately it is not sufficient just to invent a new technology and wait for the stampede.
Our forecasts regarding broadband are based on Internet users. After two years of usage these customers are very much aware of what the Internet can do for them. There is no single killer app. Some people use it for banking; others for research; games is another popular application; but many more people use it for very personal purposes, based on their hobbies, work or lifestyle. After 2-3 years these users are becoming frustrated with the fact that they constantly have to dial up to check their e-mails or to have quick access to information. What should be a 5-minute search can easily turn into a 15-minute source of frustration. As a result, they limit their access as much as possible to once a day, at the office, or during the weekend.
These users are more than ready for broadband.
THE PRICE HAS TO BE RIGHT
However, the price has to be right There is no way that households will spend hundreds of dollars on communications. They already run up large bills – for example, an average telephone bill is at least $60 per month. Their mobile bill also comes close to this amount; ISP charges are around $25; and some users have pay TV and so add another $50 a month to their bill.
This adds up to well over $150 per month, and there is little likelihood that they will be willing to pay a large sum on top of that for broadband access. As soon as the total of these costs hits the $100-plus the ‘ouch’ factor cuts in. People are becoming acutely aware of costs and $125 is the ceiling for most households.
USER DEMAND OR INDUSTRY PRESCRIPTION
So, people are going to make choices, and in Internet households pay TV is usually the first casualty. The mobile bill is the next item to be scrutinised and users begin to shop around for combinations of fixed telephone charges, Internet and broadband. While the industry would love to pile all these charges on top of each other, customers are not about to accept this.
As long ago as 1998 we predicted that the ‘magic number’ for broadband in Australia would be A$50 per month (in the USA – US$25). Once this subscription level becomes available widespread deployment will follow. At this stage pent-up demand, based on that amount, sits at around 20%-25% of all Internet users. As Internet usage further matures a 75% penetration could be reached amongst Internet households, over a 5 year period.
Access providers who are aware of this pattern could tap into this market and make value-added offers to customers who are seeking a total package.
AND THE LEADERS ARE:
Very few telcos, however, possess the internal marketing and sales capabilities to develop the necessary business models. So the easy way out is simply to say that there is no business model for broadband.
We argue that new models, such as permission-based marketing, will provide a better framework in the near future – once data centres and customer relation management have become an integral part of the business world. However, such models will have to be based on open networks, and most telcos are not yet ready to embark on this, and so they limit broadband access.
Broadband access amongst Internet households 2001
Country Internet HH penetration
Korea 57%
USA 11%
Hong Kong 8%
Singapore 7%
Taiwan, France, Denmark 6%
Germany 5%
Spain, UK 3%
Australia, New Zealand 1.5%
China 0.4%
(Source: Paul Budde Communication, based on NetValua and industry data)
A substitution effect is also increasingly creating more bandwidth penetration in countries that have a high ISDN penetration. Germany, in particular, is experiencing a rapid conversion from ISDN to ADSL. This country leads the world in ISDN. It has a penetration of 38% of online households, and is followed by Denmark (20%), Hong Kong (5%) and China (4%). In Taiwan, the USA, Singapore, Australia and New Zealand less than 1% of e-households use ISDN.
Paul Budde
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