Users Want Faster Access--But How Much Will They Pay?
iw.com
By Arik Hesseldahl, July 27, 1998
No one doubts that consumers want broadband Internet access. Many ISPs,
cable companies, and phone companies are promising services that will make
users throw away their analog modems in favor of high-speed, "always-on"
connectivity.
But determining the potential size of the broadband market--and the pricing
the market will bear beyond $19.95-per-month 56-Kbps dial-up access--is
an exercise in uncertainty.
The answers vary, depending on whom you ask. Sprint, which plans to roll
out its high-speed ION service for consumers in late 1999, estimates that
there are now 40 million homes in the U.S. that want faster Net access.
Meanwhile, the Yankee Group projects that by 2002, only 7 million
households will subscribe to some kind of broadband service, mostly cable
modems and Digital Subscriber Line (DSL) access. Then there's Forrester
Research, which projects that 15 million households will subscribe to
broadband services by 2002, with more than 85 percent of those connected
via cable modems.
But one thing all observers agree on is that price will be a critical factor in
determining the success of any broadband services, and most feel that a $40
to $50 monthly rate is the limbo stick that service providers should seek to get
under to be successful.
Today, rates for high-speed Internet access fall in the $50 to $100 range, with
no coherent pattern in the industry [see diagram, right]. But most analysts and
industry executives say any prices higher than $50 rule out general consumers
and leave only a smaller market of less price-sensitive subscribers, such as
telecommuters whose employers pick up the cost.
"In our focus group testing, we've seen that $49.99 is the magic number," said
Dev Ittycheria, director of marketing for TCG CERFnet, which offers DSL
services in several U.S. markets. "People don't want to pay more than that.
They think of it in terms of about the same amount they pay on their cable bill."
So how should pricing for high-bandwidth services be structured? The
University of California at Berkeley is conducting the Internet Demand
Experiment study to answer that question. Since March, 60 test subjects have
been using ISDN lines that run as fast as 128 Kbps for Internet access. Every
Sunday, the pricing structure changes to charge per minute, per byte, or by
some other measure.
"We've found that people are very price-sensitive," said Hal Varian, dean of
the School of Information Management and Systems, who is leading the
experiment. "Users will cut down their demand for bandwidth if it's in their
economic best interests to do so." Eventually, service providers are likely to
settle on some kind of usage-based model and move away from
unlimited-usage plans, Varian said. But he said ISPs will also have to offer
pricing options that will enable consumers to buy more bandwidth on
demand--much as cable companies do today by offering basic cable plus
premium channels and pay-per-view movies.
Copyright 1998 Mecklermedia Corporation.
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