European Research Update

Broadband Ubiquity and the Growing Case for Usage-based Models

by Glenn Hower | Sep. 1, 2013

Initiatives for broadband network expansion are taking a more prominent place in public policy worldwide as business, education, healthcare, and leisure sectors are all increasing their reliance on high-speed Internet connections.

Through a combination of legislation, regulatory framework, and incentives for private development, national governments throughout the world are adopting national broadband plans and establishing national broadband networks to encourage universal broadband access for their populations. According to the International Telecommunications Union, as of 2012, 121 nations have adopted a national broadband plan, with 25 others indicating their intention to adopt a plan in the future.

Broadband network expansion reflects telephone network expansion of the past, so much so that governments are diverting Universal Service Funds to broadband expansion. The highly developed markets in the United States, Canada, Australia, and Western Europe serve as important cases in the global development of broadband connectivity. Several European nations specify broadband access as a legal right, so broadband network expansion carries greater legal weight in those nations than in other geographic regions.

Western Europe

In Western Europe, many nations have firm incumbent telecommunications companies controlling broadband networks, which simplifies broadband plans and implementation.

At the same time, the incumbents complicate broadband expansion due to reduced competition, which precludes expansion to areas with low profitability without government intervention. The Digital Agenda for Europe, part of the European Commission’s 2020 Initiative, sets guidelines and goals for digital connectivity achievements throughout the European Union. Goals include standardizing information and communications technology between nations, simplifying online purchasing across national borders, and establishing universal broadband coverage and minimum speeds for the entire European Union populace.

The European Commission seeks to establish basic universal broadband access to all Europeans by 2013. By 2020, the European Commission aspires for all Europeans to have next-generation network access of at least 30 Mbps and for 50% of European households to have access to broadband connections of 100 Mbps.

The Commission also seeks to establish high-speed broadband funding through EU instruments and attract capital for broadband investments through credit enhancement backed by the European Investment Bank and EU funds. The European Commission plans to invest in communications research by leveraging private investments through strategic pre-commercial procurement and public-private partnerships.

The European Commission reports, as of 2013, high-speed broadband coverage in the European Union stands at 99.9%, coming from a combination of wireline, fixed wireless, mobile, and satellite services.

Fixed broadband covers over 95% of all European Union homes and 83% of rural homes. Over 50% of European homes have access to next-generation networks offering download speeds of at least 30 Mbps. Despite high geographic coverage, almost one-fourth of European homes do not have an Internet connection subscription.

Broadband Usage and Usage-based Models

Household entertainment is moving to the Internet via over-the-top content distribution, online gaming, and user-generated content. High data content, particularly video content, demands greater data speed and capacity, and the broadband world is attempting to keep up. According to U.S.-based CDN (content delivery network) Akamai Technologies, most of the developed broadband markets in Western Europe, Asia/Pacific, and North America see at least 50% of broadband connections above 4 Mbps.

Increased reliance on broadband places a strain on network infrastructure, and video content in particular contributes to network congestion. High-data video demands higher speed connections to deliver a satisfactory customer experience. Between competitive pricing pressures and necessary upgrades to infrastructure, profitability per customer is shrinking. In several markets, a portion of broadband providers purchase network usage on a wholesale basis from larger operators or those that have available network capacity, which affects cost for buyers and revenue for sellers.

In the United Kingdom, for example, national regulator Ofcom continues to lower wholesale rentals amid incumbent British Telecom’s cries that the pricing cuts are too deep, hindering their profitability and minimizing the available capital for further network improvements. On the other hand, wholesale buyers complain that the cuts are not deep enough. As consumption increases, this variable cost for supply comes into conflict with flat-rate pricing structures for broadband services that are common in most markets. Ultimately, operators must consider business models that increase ARPU and keep pace with rising costs.

Possibly the most public reason presented for usage-based pricing is an attempt to distribute network connectivity fairly. Charging for actual usage will either reign in extreme network use or proportionally charge for high data use, aligning costs and revenues.

Usage-based pricing may also help offset lost revenues on the video side of the operator’s business due to OTT video services. Usage of OTT services contributes to strain on network capacity, a decreased customer experience, some cord cutting and cord shaving, and decreased usage of the provider's VOD services. Usage-based pricing can potentially offset a portion of these losses and potentially discourage consumers from turning to OTT services in order to avoid data overage charges.

In fact, usage-based pricing for broadband may lead to an unbalanced playing field in video as broadband providers launch their own OTT video services. In many cases broadband providers do not count data use for their own OTT video services against subscribers’ monthly data. So, the effective cost of using an OTT service from anyone except the broadband provider is higher, even if the actual service price is the same.

Despite the benefits of usage-based pricing to the provider, implementation is far from standard. Currently there are only two markets in Western Europe where the majority of providers employ usage-based pricing models: Belgium and Germany.

Consumers are largely accustomed to unlimited usage within their subscriptions, so backlash from these plans is common, discouraging many providers. While it is likely that the market will adapt as it did in the mobile sector, being the first in a competitive market to implement usage-based pricing is an unenviable position.

Time Warner Cable was one of the first broadband providers in the U.S. market to experiment with usage-based pricing but was forced to quickly abandon the trial because of angry complaints from customers. Interestingly, consumer dissatisfaction grew from the idea of usage-based pricing itself, since few subscribers actually received charges for overages. Overall, as with many examples in the technology field, it may be better to be a fast follower rather than an initiator in usage-based pricing.

The current case studies indicate a provider looking to implement a usage-based system must spend time and labor on codifying an appropriate pricing system. Transparency is important. Consumers want to be able to track their usage in order to avoid end-of-the-month bill surprises. Many providers have introduced tools for usage tracking, and easy access and user-friendly interfaces are critical to encourage use and maintain customer satisfaction.

The current case studies indicate a provider looking to implement a usage-based system must spend time and labor on codifying an appropriate pricing system. Transparency is important. Consumers want to be able to track their usage in order to avoid end-of-the-month bill surprises. Many providers have introduced tools for usage tracking, and easy access and user-friendly interfaces are critical to encourage use and maintain customer satisfaction.

Parks Associates will discuss these issues in-depth at the upcoming CONNECTIONS™ Europe, November 12-13 in Amsterdam, including sessions such as "The Future for the Set-top Box" and keynotes from Orange, iControl Networks, and Securitas Direct - Verisure. Register Now




Glenn Hower

Glenn Hower

Senior Analyst

Glenn Hower currently studies entertainment content and delivery services. Glenn is experienced in entertainment content production and distribution systems with a particular emphasis on radio, television, and film content.

Glenn earned his BA in music with a focus on the music business and industry from the University of Texas at Austin. He earned his MS and MBA from Texas Woman's University in Denton, Texas.

Industry Expertise: TV & Video Content Production, Content Licensing & Distribution, Television Services, Broadband Services, OTT Services, Digital Music

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