Low-Cost Broadband Earning More Good Will Than Money So Far
Cable industry efforts to provide bargain-basement-priced broadband service to low-income consumers (CD Feb 2 p8) played to rave reviews from federal regulators. But the programs aren’t expected to make major contributions to company bottom lines, industry officials said. That’s because the aim of the program isn’t to make money for now but instead is to spur further consumer uptake of broadband, said companies participating in “Connect to Compete.”
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The C2C campaign that’s rolling out this year, organized by the FCC, may eventually make money for cable operators by introducing new customers to services that they may eventually be willing to buy at full price, said a commission official. Cable officials for now are downplaying prospects for profits. C2C is backed by 14 cable operators, including Comcast, whose Internet Essentials service for the poor was introduced by the company after it was made an FCC condition of buying control of NBCUniversal last year. All major telcos have sat out C2C, but CenturyLink has a different broadband product targeted to the poor. Verizon probably won’t join C2C, but is looking into how best to use subsidies to encourage low-income consumers to buy broadband, a spokesman said.
"This is not about profit,” said a spokesman for Suddenlink, among the C2C participants. “It’s about advancing a widely recognized and important goal.” Mediacom “did not agree to participate in the ‘Connect to Compete’ program because it was a money-making opportunity,” said Vice President Tom Larsen. “Our analysis of this program was really geared towards determining whether it was the socially responsible thing to do, versus whether we could eventually migrate customers to higher tiers of service in the future.” The Comcast, C2C and CenturyLink programs all propose to provide low-income households with broadband connections for $9.95 plus tax a month, at least initially. The programs offer to sell computers to the subscribers for $150.
Comcast and C2C computers are priced at $150, no matter how long a customer subscribes to cable broadband, while CenturyLink’s $150 computers are for subscribers who commit to at least a two-year service contract. The contracts provide for a variety of assessments, including a $200 early termination fee. CenturyLink’s Internet Basics, whose price rises to $14.95 monthly after the first year of service, also charges $7.49 a month for modem rental after the first year. “We're not competing with cable with this particular offer,” a company spokeswoman said. “This is not a competitive strategy -- it’s about reducing cost barriers for low-income consumers.” The $9.95 monthly fee doesn’t cover CenturyLink’s costs in many areas, she said.
Internet Essentials signed up 41,729 households in the five months ending Dec. 31, for a take rate of about 2 percent of Comcast’s more than 2 million eligible households. The operator has said about 7.5 percent of the new subscribers opted to buy a $150 computer. “The company is making a significant investment in the program, including partially subsidizing the costs for the computer hardware, printing and shipping nearly 11.5 million pieces of collateral material for no charge to schools and partner organizations, as well as marketing and operational costs,” a spokesman said.
"The take rate looks reasonable considering how many people don’t get broadband today simply because they don’t see value in it,” said analyst Paul Gallant of Guggenheim Securities. “I doubt $10 a month covers Comcast’s costs, but the economics work if some percentage of the subscribers decide to also buy telephone or cable service. That foot-in-the-door angle is probably what caught the eye of the other operators who are now planning to follow Comcast’s lead.”
"This initiative by cable operators is largely PR,” said Scott Sleek, director of broadband advisory services at Bloomberg BNA. “Cable operators should have no illusions about seeing a big ROI (return on investment) with this program.” C2C may speed government review of any cable system acquisitions, if the companies being combined already sell affordable service to the poor, Sleek said. “The cable companies may also be buying into the FCC’s argument that broadband access will help people find jobs, which will recharge the economy and give the MSOs a chance to up-sell to the Connect2Compete homes as their financial status improves."
Some cable operators that are sitting out C2C will monitor its progress. “Hopefully, we'll learn from their experience,” said a spokeswoman for the Washington Post Co.’s Cable One.