Bandwidth Hawk

It’s time to rethink the way broadband deployers use promo pricing. Regulators are annoyed. Customers are fighting back. Bankers are confused. Most importantly, the old promo tricks don’t work as well as they used to, and churn has been increasing.

By: Steven S. Ross, Broadband Communities

Justification for promotional pricing has been shrinking. Carriers must rethink the costs and benefits. True, prices most consumers pay for basic broadband are outpacing inflation again after years of cuts. Wall Street has noticed and has finally rewarded large carriers’ stock prices after years of the communications sector lagging the overall S&P 500 Index.

But smaller, private and closely held carriers that, in the aggregate, account for half of all new broadband connections, are hurting. Interest rate cuts are due and should help. But the cuts are also likely to tighten the supply of funds available for lending to carriers in the first place, just as they are needed to match new federal funding. Regulators have also taken notice, and have issued a flurry of new rules, many of which are being disputed in federal courts.

It is true that prices some consumers pay are lower, because lower-priced fixed cellular and wireless are in the mix, but the feeling on Wall Street remains bullish because cellular prices are also rising and will continue to do so now that there are only three major national carriers.

Wall Street also is neutral to welcoming on the possible reemergence of the Affordable Connectivity Program (ACP) and the Broadband Equity, Access and Deployment (BEAD) program’s existing requirement for a lower-tier price option, but for different reasons. The ACP was, and would again, create a low-price tier, but carriers get the monthly fee directly from the government and incur low marketing costs aided by community outreach. BEAD tiers are customized, in theory, state-by-state and even county-by-county.

Promo pricing is costly!

Historically, carriers relied on promotional pricing to snag new customers and encourage testing of add-on services. But the promotions were always short-term because there was little competition. The impact on carriers’ revenues and profits has become much higher than immediately obvious, as “introductory” pricing periods have crept up from a typical three to six months, to a full year, and as new customers are typically renters. Under today’s conditions, if your promo price is 50 percent off, your average price over the course of a customer’s two-year lease is only 75 percent full price.

That can translate into a 50 percent or more drop in profit. Aside from the revenue, marketing costs are tricky to calculate. On the one hand, good promos bring in more customers. But they also mean more customers have to be recruited once a promo period ends. My monthly cash flow and revenue models allow quick calculations of the consequences.

Churn now

Customers are far less sticky than they once were, because so much content now comes in over-the-top. Customers buy content directly, rather than through the carrier. Even PBS has entered the game, offering online content directly to regular contributors.

Hence, promo prices may be self-defeating. In my own large condo building near Boston, my neighbors regularly switch between Comcast and RCN every year or two to get low promo pricing, even though the services are different. RCN serves scheduled TV programming through TiVo, allowing far more upload bandwidth with a slight degradation in quality. RCN prefers that users purchase a cable modem. Comcast discourages it. I get monthly mailed offers and the carriers host parties in the lobby.

OpenVault, a research firm that aggregates broadband data, charted usage by millions of individual subscribers this spring and predicts more than 20 percent of broadband consumers will send or receive at least 1 terabyte (TB) of data a month by the end of the year. Uploads are increasing much faster than downloads, too. That makes adopting the RCN approach more likely.

Thus, it is hardly surprising that smaller carriers dealing with bank finance committees report pushback on their revenue estimates and projected marketing costs even though the cost of serving broadband itself has been dropping.

Even on the transmission costs, a few bankers are nervous about major carriers milking extra charges at interconnect points, when those points are rare in a region. That, in turn, begats middle mile net neutrality regulation the courts may overturn.

Video’s profit margins for carriers tend to be low. So, one strategy has been to offer other “sticky” services, either to other utilities or to landlords, as well as to broadband customers. They include smart-grid services, such as enabling time-sensitive electricity pricing and fault detection, security, enhanced reliability, fixed IP addresses, and other features to enhance secure communication for work-at-home customers. I frequently get asked by carriers to talk to banks about this.

Also, a specialty service with high margin and at most a three-month introductory “get acquainted with this new kind of service” promo price can generate more profit over two years with 1 percent of the customer base, versus video with 30 percent.

Changes everywhere

Local channels help keep customers from buying bare broadband. But the local channels’ key differentiators – local news and weather – are disappearing. Sports channels can often be purchased separately. Why should consumers pay extra for local channels in the years ahead?

‘The Big Three’ cellular carriers (AT&T, T-Mobile, Verizon) are indeed raising their prices with confusing promotional terms, and possibly illegal pricing changes. But the big three also rent their systems to low-price, low frills operators like Consumer Cellular. Major carriers have historically used local providers to supplement fiber backhaul but are now adding more fiber themselves.

Satellite is a near-monopoly right now – Starlink has a big lead in technology and in the sheer number of satellites in orbit. But it is only fully usable to a limited number of users in a given locale at the same time, and it already is priced higher than fiber or fixed wireless where available. Still, as many as 5 percent of all USA customers may eventually rely on low earth orbit satellites.

More pressure: What if the Federal Communications Commission (FCC) and other agencies’ regulatory powers are struck down in the Universal Service Fund and E-Rate cases? As discussed in July, there are now three major Supreme Court decisions that limit agency authority.

The ground rules for local bank loans may also be changing. The agencies, especially the FCC, have been criticized for insisting that banks issuing letters of credit to broadband grant applicants have at least a B- “Weiss Bank Safety Rating.” Weiss, with no ties to Wall Street, has been rating banks for over 50 years and has a great track record predicting bank failures. But it has been attacked by many state regulators and by the Bank Policy Institute, a Washington trade association for big banks. Weiss’s competitors include Standard & Poor’s, Moody’s, Fitch Group, and others.

The FCC could choose another rating service. It has already loosened its standards to make financing cheaper in the short run by allowing Rural Digital Opportunity Fund (RDOF) carriers to keep existing letters of credit from 1600 banks that were Weiss downgraded below B- in the past two years.

That’s just another example of how outdated promo pricing could jeopardize the industry – by jeopardizing the stability of banks that help fund it.

Comments? Questions? Contact the Hawk at steve@bbcmag.com.

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