DSL Prime: Pricing

Even though broadband prices are improving, pricing is not improving. Deceptive pricing schemes remain a problem around the world.

by Dave Burstein of DSL Prime and Future of TV [June 29, 2005]

$30 or $29.95—Verizon spins so well
As Tiscali exaggerates the saving beyond Guam
Tiscali was criticized by the UK Advertising Standards Bureau for promising savings on international calls "up to 85 percent." "The advertisers acknowledged that customers would achieve an 85 percent saving on calls made to Guam only, but argued that the claim would not mislead readers because it was an 'up to' savings claim. ... Because only a small proportion of customers would be able to benefit from a saving of that level, the Authority considered the claim exaggerated the likely savings customers would make." (Thanks, James Enck.) A similar standard in the U.S. would question the new Cox and Adelphia claims of 15 Mbps cable service, because the shared 36 Mbps of bandwidth would tap out if even 3 of the typical 300 customers on a node tried to use it.

Meanwhile, someone at Verizon came up with a very smart response to all those questions about SBC's $14.95 per month for the first year. Last week, Verizon offered a free month if you signed up online, a savings of $29.95. This week, they made headlines by offering a three month $19.95 price on a one year contract. That saves $10 per month, or $30 in total—five cents more than last week's offer. SBC's offer is exciting news if they extend it to the 5 million present customers as well, just another gimmick likely to raise churn if they don't offer a good deal to everyone.

Entire departments at every telco try to find choices and plans that convince you to spend more money than you intend or you expect from the advertising, as anyone knows who has purchased a mobile phone in most countries. FTC Commissioner Orson Swindle complained at PFF Aspen, "Neither my wife nor I can understand our phone bills, and we both have advanced degrees." That's why analysts look to the ARPU, average revenue per user, because the telco pricing is too complicated for an MBA to understand.

Promotional pricing has several advantages beyond the good publicity it generates. It maintains revenues unless existing customers get fed up and leave. A $10 per month reduction for all SBC customers, for example, reduces revenues by $600 million per year; it would have to yield 50 percent more customers, at least, to be income neutral. The same promotion for a million new customers costs only $100 million. CFO Rick Lindner is proud that his company has an ARPU much higher than the "advertised price," pointing out how many customers are drawn in by a low price claim but wind up spending much more. Martin Geddes is more blunt, "The top priority for every telco marketing department is to obfuscate the real price of the product."

I'm working on a deeper analysis of DSL pricing, starting from the $8 to $12 per month marginal cost to serve a customer. Adding pricing from around the world, it looks like the competitive DSL price would be $20 per $25 most places this year. Carriers charging less than $20, outside of India and China, have a low margin business, although payoffs from reduced churn, preventing cable VoIP losses, and other revenues could compensate. In the U.S., where video costs are high, that won't add to profit before the end of the decade. China Telecom and British Telecom, who don't need to buy a program schedule from Hollywood, have better prospects of some video profits.

Guest editorial: Keep prices reasonable for progress
The Gulf News writes: "Claims that UAE broadband Internet rates are cheap are false, readers told Gulf News. Its introductory rate for three months rises from $24.50 to $68 a month which is one of the highest in the developed world. Readers called for prices to be slashed to $29 to stimulate the growth of a wired society in the UAE and as an example to the rest of the Arab world."

Copyright 2005 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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