Why Can’t Broadband be Free Too?

Chris “The Long Tail” Anderson has an excellent story in Wired – “Free! Why $0.00 Is the Future of Business” – that pushes forward the concept that “freeconomics” is taking over the Internet as the technologies that power the Internet become increasingly less expensive. Here’s his thesis in a nutshell:

“It’s now clear that practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the marginal cost. There’s never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing.”

Amid the emergence of free and the decline in technology costs, there is one thing within the ecosystem that is resistant to price declines: broadband access. The more we use the Web to access free services such as video, the more we value broadband service. This, in turn, gives broadband ISP the ability to hike prices with few, if any, complaints.

Simply put, broadband is an online anomaly – and an exception to Anderson’s thesis – because there is little competition. If you’re lucky, you have two choices in a market – cable and DSL – although WiMax teases everyone as a potential alternative. Today, you pick you broadband poison (DSL or cable) and pay your monthly fee.

Other than the cablecos and carriers being able to capitalize on on a sweet supply-demand equation, is there any reason why broadband prices continue to rise when the cost of equipment (modems, routers, switches, software, fiber-optic cable, etc.) to power these networks is, theoretically, declining.

In an ideal world, shouldn’t broadband prices be staying stable or even dropping while broadband speeds get faster? Why shouldn’t broadband ISPs be passing along the savings to consumers?

Here’s another thought/question: shouldn’t the broadband ISPs be sharing the wealth with all the free services that consumers are using these days. YouTube, for example, is a huge marketing tool for broadband because you need a fast connection to really enjoy streaming video. Shouldn’t the ISPs be paying YouTube a co-marketing fee?

While freeconomics is taking over the Web as most everything becomes a freemium or ad-supported service, broadband is becoming the most lucrative online business. The more that’s available to consumers, the more bandwidth they’ll want, and the more broadband ISPs can charge by offering different service tiers.

If consumers were upset about rising ISP prices, wait until bandwidth caps become increasingly implemented as ISPs look for other ways to generate revenue. IPDemocracy had a post recently speculating that Toronto-based Rogers Cable is going to launch metered broadband service across the board. This could mean the disappearance of all-you-can-eat plans that consumers have happily gorged on since video emerged on the scene.

While there may be no such thing as a free lunch, there’s plenty of free stuff to be had online – as long as you’re willing to pay for the privilege of accessing it using a broadband connection.

One more thought about Internet access: Doesn’t it seem somewhat ironic that when the technology was far less advanced, there was no lack of competition – remember all the dial-up ISPs that used to exist by riding on top of the telephone system? Today, the ISP business is either a monopoly or an oligopoly.

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  • Colin Smillie

    I think you’re ignoring the increases in speeds over the last few years. I hate to be in the position of defending Rogers/Bell but both have increased their speeds substantially. Instead of passing along cost saving to consumers they have increased the bandwidth available.

  • no

    Monumental quantities of ignorance. 11/10 for utter blogshit.

  • Mark Evans

    Colin: True. Speed has been a tool that broadband ISPs have used to justify higher prices.

    no: Thanks, I guess, for your frankness.

  • Dan Grossman

    The broadband companies aren’t seeing any decline in their costs to pass on to consumers. They’re seeing their lines saturated month after month despite continually spending millions to roll out new lines and add new bandwidth providers. The more bandwidth we use, the more each customer costs the provider, and that is growing much faster than any theoretical drop in their hardware costs would (in reality, they’re upgrading to new hardware, they’re not just adding more of old hardware).

  • Darlene

    They tried this in the UK, when Talk Talk Broadband launched “free” internet for landline customers, prompting Orange and others to follow suit. It was an absolute nightmare both for Talk Talk and for customers who were getting horrible QoS and constantly busy customer service calls.

  • Christopher Schmitt

    Freeconomics only works when barriers to entry are low and as a result you have lots of competition.

    The lack of broadband Internet competition compared to the old dial-up Internet days shouldn’t be a surprise. There used to be plenty of ISPs competing for the same customer when they all had the same subscriber access costs: $0. i.e. The customer paid for the modem and phone line, not the ISP.

    Now it’s different. Competing ISPs fork out big bucks to the telephone companies and cablecos for the right to let their customers access the ISP’s service. That imbalance is why there are really only two high-speed Internet providers today: Telcos and Cablecos. The remaining ISPs have a sliver-thin market share. This is something the CRTC doesn’t seem to care about.

    Unless something changes you won’t see broadband prices coming down anytime soon.

  • Geoff

    Rogers already has caps on bandwidth consumption. So, I guess the new program will simply set lower ceilings on consumption?

    Guess their traffic shaping systems from Sandvine aren’t doing enough to limit bandwidth consumption (anyone else have VOIP service that has degraded noticeably over the past few months after years of excellent quality?)

    And, as long as the CRTC continues to protect the telco/cableco oligopoly from any real competition, the consumer will always suffer while the corporation maximizes profits. Rogers can whine all they like about capital equipment costs, their bottom line is still doing very nicely.

    I swear I would pay a premium if I could just find workable broadband alternative.

  • Erik

    Dan’s right about the plant upgrades…after a couple of years of fat free cash flow following the first wave the early naughties, they’re back in investment mode. And it’s the very same free services that are driving that…esp video in all its forms (legal and otherwise).

    But those aren’t the only costs in the equation…for example, customer care. I can call Rogers tech support 24×7 and get a human…maybe not a smart one…but one I can yell at. That can cost up to 20% of the price of the service. Try calling YouTube for support…

    And speaking of “price of the service”, those billing systems…and paper bills…and billing support reps…and dunning letters…and no-pays…all cost money too.

    And Google doesn’t send installers to wire your house. And they don’t have to pay for right of way on electric poles and subway tunnels.

    Some of these costs are fixed and some are marginal, but either way they need to be covered. And its not unreasonable for the operator to have some margin as well.

    The ISP’s are the nexus of costs in the industry…the entire freeconomics model relies on their existing as a utility paid for by the consumer. For this very reason, the freeconomics model will never apply to the ISP’s themselves, any more than it can apply to the Electric Company.

    And by that I mean Toronto Hydro, not the old Morgan Freeman clips I’m watching on YouTube right now.

  • ModusMarketing

    Interesting article! My company is in business of giving away free Word-Processor/PDF writer software as a webmarketing research. And so far it’s what we expected: Internauts like FREE.

  • fakhry

    Hello, I would like to know about roger cabel in canada
    1) perfect competition
    2) Monopolistic competition
    3) oligopoly: undifferentiated
    I need those information for my project.

  • Anon’ish

    I have so much to say here I don’t even know where to start. Alright first –

    Person who said: “Monumental quantities of ignorance. 11/10 for utter blogshit.” – Which cable company do you work for?

    Mark – years and years ago before “cable modem” or broadband were household terms, Tom Jermoluk (@Home’s 2nd, I think, CEO) was absolutely certain that broadband would be free within a couple of years, and would be “paid for” by advertisers. What he failed to understand, and eventually caused the bankruptcy of Excite@Home, was the sheer greed of cable companies, Comcast and AT&T Broadband in particular. Contrary to popular belief, it was not the (albeit) dumb purchases of BlueMountain etc that caused @Home to die, it was ATT Broadband, Comcast, and Rogers.

    What the general public fail to understand is that cable companies are very, very old fashioned. And the own (OWN) the FCC, via dozens of PACs. @Home stock price constantly fluctuated because of worries that the FCC would force cable to open its lines to competitors (a la Ma Bell). It never happened, because the cable companies just bought their way out of the problem. Cable internet was considered a data service not a telecommunications service by the FCC. That classification was upheld by the Supreme Court in the Brand X decision in 2005 (cable spent a fortune on lawyers to ensure it).

    You are right, costs HAVE gone down (I know this for a fact as a former cable company employee in the broadband division) – and those costs will never, ever be passed on to customers. Remember how the DSL companies did a slew of “19.95/mo for 6 months” in an attempt to sign up new customers? None of the cable companies bought into it – they all refused to lower prices and get into a price war. Instead they upped the speeds (which cost them less), cut a few corners in customer service (see their JD Power ratings), and spent heavily on advertising the shortfalls of DSL – which admittedly DSL has done to cable as well, but to a much lesser degree.

    Oh and other than WiMax we can also dream of broadband over power lines. Stress dream. I think our only hope is that Google launches 400 satellites and offers free broadband to the world.