Lowenstein's View: What should cellular, pay TV and broadband services cost?

Mark Lowenstein

A familiar refrain among consumers is that cellular, pay TV, and broadband are overpriced. But if you take a look at the cost of providing some of these services, plot them against demand and usage patterns, and consider some of the unique aspects of the North America market and geography, a different picture emerges. So here's my take, in terms of what looks reasonable from the perspective of the consumer, and service providers' requirement to operate a viable business.

Cellular

The 'base price' is typically $15-20 per line, which includes unlimited domestic voice and text. The amount of 4G data is now the main variable, or 'currency'. For standalone users, prevailing prices are in the $10 per GB range. The best deals are on volume or family/shared plans, where pricing is $4-5 per GB, and as low as $3 per GB. This is 40-60% less than it was three years ago.

So, what should it cost? Well, consider that usage has been rising on average 50% per year, that operators are consistently spending 15-20% of revenues on capex to keep up with this demand, and have to pay billions of dollars to the government to get more spectrum "supply". One should also consider the challenges of relatively low population density in the U.S., compared to parts of Europe and Asia, which make it more expensive to provide network coverage and capacity.

If one takes a look at operator cost models and allows for a reasonable margin, I'd argue $15-20 for voice/text, and about $4-5 per GB, is a reasonable price. For a 5 GB/month user, that looks like about $40 per month.

The only way this changes dramatically is if there is a significant drop in operators' cost to deliver a GB of data. The LTE Advanced and 5G roadmaps, plus SDN/NFV initiatives could provide a step change here. Opportunities such as LTE Unlicensed and spectrum sharing are also potential game changers, as they deliver additional capacity at relatively low incremental cost. Of course, operators could lower their overall cost structure (which we see in some MVNOs, for example), but this would result in some compromise to the customer experience, in the manner of a discount airline. 

The industry could do itself some favors from the standpoint of greater transparency on pricing, eliminating silly charges such as activation fees, and offering more reasonable rates for international calling and roaming.

Broadband

The biggest trouble with broadband pricing in the U.S. is that most people don't know what they're actually paying for broadband, because it's often part of a "triple play" type service that typically includes pay TV and landline phone. Try to 'unbundle', and broadband pricing that looked like $50-60 per month turns into $80 per month. That's too high…and it is also starting to subsidize pay TV.

Two things have happened in the broadband world over the past three years. First, consumption has increased dramatically, exceeding 100 GB per month in a typical household, and closer to 250 GB in 'cord cutter' households. Second, average speeds have gotten a lot better, with a typical plan now offering 50 Mbps.

Broadband pricing is actually quite a bit less expensive in other developed countries. Density is one factor, making it easier to build a competitive network, especially in cities. Also, in many countries, regulators require broadband providers to make their networks available for resale, so there are competitors and MVNOs like we see in the U.S. wireless business. Keep in mind that nearly half the U.S. population only has access to one good broadband service (defined as minimum 25 MB). Given that the competition picture is unlikely to change in the foreseeable future (except in certain cities), I'd rather see continued investment in improving speeds than a race to the bottom on price.

So, on an unbundled basis, what is a reasonable price to pay for broadband, considering our density challenges and steadily rising consumption patterns? I would say $50 per month for a 100 MB service is a good starting point for a typical household. There should also be more defined tiers: premium broadband of $10-20 extra per month for a 500 MB or greater service; and budget broadband of $30 per month for a 25 MB service (which is also where fixed wireless could enter the picture).  I would also like to see the operators provide better options for consumers to purchase broadband or pay TV on a standalone basis. I also bundle in landline phone with most broadband, which is practically a giveaway but should not cost more than $10 per month if its' VoIP.  

Pay TV

Cable companies are the whipping boys of consumer technology, as consumers are consistently annoyed by steadily increasing fees for pay TV. And the pay TV providers have done themselves no favors with egregious charges for cable box rental and other unnecessary or overpriced fees.

That said, most consumers don't understand that programming costs charged to the operators have been growing at a faster rate than inflation, too. One can see this in the eroded profit margins for that segment of the business, very public battles over programming costs, and a growing willingness among SPs to offer 'skinny bundles' or OTT options. For those on a triple play type service, broadband sort of subsidizes their pay TV.

I am no apologist for the cable companies, but if consumers want to blame someone for escalating pay TV fees, they need to look downstream at the increases in rights fees being charged by sports leagues such as the NFL, and channel bundling practices of media conglomerates such as Viacom and Disney. Consumers also need to understand that producing good programming costs money -- look at what HBO and Netflix are spending, annually, to produce original content.

It also makes for an interesting exercise to start with a blank slate and build a list of programming a la carte. Start with a $20-30 ante for a 'basic package', consisting of broadcast TV plus some cable channels (like Sling TV), then add in some sports, HBO, and so on, and you're quickly in the $50-60 range. If you're a cord cutter but want good content, building an OTT package consisting of Hulu, HBO, Netflix, and perhaps some sports gets you to $40 per month pretty quickly, and involves some sacrifices in usability and access to some programming, especially live sports, news, and major events.

So, what should pay TV cost? If we want to support good content, I think $60 per month for today's typical bundle is not unreasonable. We do need greater flexibility, and things appear to be headed in that direction, with skinny bundles and better ability to buy content a la carte. Sports, some of the more popular programming, and media company concentration will continue to present challenges to reducing cost and complexity.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.

Read more on