Broadband Briefing: How important is pricing for broadband take-up?

One of the assumptions underlying Labor’s National Broadband Network (NBN) is that poor bandwidth is stopping a lot of people from taking up broadband.

Increase the bandwidth so that almost everybody can get 100 Megabits per second (Mbps), the thinking goes, and broadband take up will rocket.

Is that right?  Is bandwidth the most important factor in determining how many people will be prepared to purchase a broadband connection?

Or is it the price that consumers will have to pay which is more important in determining take up?  In my view, history suggests that price is what matters.

In my 2009 book Wired Brown Land I traced the history of fixed line broadband take up in Australia.

Telstra launched consumer-grade DSL in 2000, but initially the prices were very high.  At launch, the monthly charge for a 512 Kilobit per second service was $89 for a customer who also took voice telephony from Telstra, and $105 for a non-Telstra customer.

For several years prices fell only gradually, but in 2004 Telstra changed its strategy. It introduced an eye-catching entry-level price of $29.95 for a low-end user taking a 256 Kbps package.  A high end service – which in 2001 had cost $430 per month – was now only $150 per month.

In a June 2004 press release, Telstra revealed that following the price reductions demand had jumped 46 per cent in just five months. According to Telstra Group Managing Director Bruce Akhurst: ‘By dropping broadband prices, Telstra set off an avalanche of consumer demand.’

Akhurst could have said the same thing another way: before the February 2004 price reductions, Telstra had suppressed demand for DSL by keeping prices high. Telstra wanted to wring as much profit as possible out of its narrowband, or dial-up, Internet business.

But as the dial-up business began to lose momentum, Telstra shifted its strategy. Once Telstra decided it wanted to drive for growth in broadband, it dropped its retail broadband prices.

The effect of Telstra’s change of heart can be seen very clearly in the ACCC’s figures for ADSL take up in Australia. Before the 2004 change in strategy, ADSL numbers had grown quite slowly. Telstra launched consumer ADSL in late 2000; by December 2003, the number of services had reached only 241 000. But in 2004 growth rocketed ahead and by the end of that year there were over one million ADSL services; by the end of 2005 there were over two million.

Looked at another way, in the two years 2004 and 2005 over 1.6 million Australian households decided to take up a DSL service. They clearly saw value in having a broadband connection – but previously it had been too expensive. So 1.6 million households had to wait to receive a service which Telstra could readily have delivered to them five years earlier, had it chosen to do so.

Labor’s NBN policy ignores the most important factor in the consumer take up decision: how much will they have to pay.

By establishing NBN Co as a monopoly network owner, and mandating uniform national pricing, broadband prices are likely to stay significantly higher than in a competitive market. If history is any guide, that will mean only one thing: broadband take up will stay disappointingly low.