A broadband strategy based on cut-rate prices could hurt the commercial viability of broadband providers, a new report says.
Cheap broadband availability, specifically DSL, would trip up broadband providers in the same way that it impeded the viability of dot-com companies, since cheap or free services aren't viable in the long-term, a new report released by consultancy company Ovum says.
The report said that DSL broadband operators around the world are at risk of falling into the same competition trap as Japan and South Korea by basing their marketing strategies on cheap pricing.
Stiff competition among operators in Japan and Korea has led to prices being cut to unsustainable levels. Operators in these countries now have to sell extremely generous service offerings at slashed prices of less than EUR10 per Mbps. This is in contrast to countries such as the US, Germany or France, where the same level of service would cost EUR35, EUR61 and EUR85 per Mbps respectively.
"The cost structure in Asia Pacific may be different from Europe and North America, but it is highly unlikely it can support such price cuts," says Michael Philpott, senior analyst with Ovum. "Sooner or later, Japanese and South Korean operators will have to change their business strategy if they are to survive."
Philpott also warned against giving away advanced DSL broadband services, which could provide valuable revenue streams to providers. "They should remember that offering multiple 'free services' was one of the downfalls of the high-tech bubble," Philpott continued.
But the report notes that as competition in the broadband sector takes hold, operators in other countries are in danger of falling in the price-war trap. In the US, DSL operators are under increasing pressure from cable players and have been dropping their broadband prices and offering free advanced ISP services such as parental control and home networking.
In countries where competition is less of an issue, DSL providers often come under political pressure to provide cheap broadband, the report said. Many countries use their neighbours as their benchmark for the availability of broadband and governments press providers to make cheap broadband widely available. "If government pressure is matched by funding or better regulations then it won't work against the operators," said Philpott speaking to ElectricNews.Net.
The report suggests that operators create a tiered charging structure to prevent the commoditisation of broadband, whereby different tariffs would be created for different types of users.
"Currently 5 percent of broadband users utilise 50 percent of resources," said Philpott. "It would be fairer if tariffs were tiered to take usage into account."