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If Bottled Water Prices Can Be Differentiated, So Can Broadband Access

By Roland Klemann, Cisco Internet Business Solutions Group (IBSG)

Demand for Internet services continues to build. The increasing popularity of smartphones, tablets, and video services is creating a “data tsunami” that threatens to overwhelm service providers’ networks.

So far, service providers have mainly reacted to the data flood with technical counter-measures—for example, by deploying Wi-Fi and small cells to offload data in heavy traffic areas such as sports stadiums and downtown urban areas. The Cisco Internet Business Solutions Group (IBSG) believes that operators should also act on the demand side, which can be best influenced by pricing.

Back in the early 2000s, network operators were clamoring to build their Internet customer base; they replaced their old metered models for dial-up Internet, and enticed new subscribers with unlimited, flat rate, “all-you-can-eat” broadband data plans. This pricing strategy has enabled mass-market penetration—first in fixed, then in mobile. But it has not increased ARPU.

While flat rate pricing plans have contributed to the waves of Internet data swamping the capacity of broadband operators, these plans have done little to create value from all that traffic. In fact, the decoupling of connectivity and service layers can destroy value if you compete on easily comparable flat rate access prices only. Flat rates shift the focus from quality and service differentiation to price competition, and expose operators to the risk of cost-plus-based pricing, with diminishing returns.

In some countries, fixed-broadband providers have started altering flat rates by introducing some forms of usage-based pricing: “throttling” data download speeds for the heaviest users, switching them to potentially more costly metered data plans, or introducing new tiered price plans. Just in the last few months in the United States, both Time Warner Cable and Comcast made announcements about their plans to experiment with usage-based pricing.

While usage-based pricing models are required to fight “bandwidth hogs,” they must be carefully introduced and managed. Customers have learned to love flat rates. The 2011 Cisco IBSG Connected Life Market Watch study found that Read More »

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