Friday, July 14, 2017

Degrading Customer Quality of Experience as a Successful ISP Business Strategy

            In a recent New York Times article, the head of the cable television trade association, Michael Powell, made a curious observation about Internet Service Provider business strategy.  He sees no revenue enhancement possibilities in deliberately lowering the value proposition of broadband Internet access by blocking or degrading specific content deliveries: 

            “They’re as self-interested as Google or anybody else, but they believe they’ve found a good business selling internet access on open, unobstructed pipes. They don’t see how one could create a profitable business model by degrading the experience of their consumers.” See https://www.nytimes.com/2017/07/13/business/net-neutrality-broadband-companies-fcc.html?_r=0 

            Mr. Powell may have made a plausible observation about the broadband market, but there is another big transport market where a rush to the bottom enhances a carrier’s bottom line: commercial aviation.  Three of the four major carriers in the U.S. have created a new Economy Minus service option where previously bundled features are prohibited, or available at a surcharge.  United even prohibits “Basic Economy” passengers from carrying onboard a small bag. 

            Economists and others might welcome the proliferation of pricing options where consumers have to reveal preferences by paying for specific service enhancements.  But in most cases, the legacy carriers offering this new degraded service option have not lowered the fare.  They have reduced the service bundle and now priced out specific elements.   

            So much for not profiting from a degradation in the value proposition. 

            An ISP already has experimented with unbundling and separately pricing specific service elements.  For a brief time in selected markets, AT&T floated a new $29 monthly fee for enhanced privacy protection for broadband customers.  See https://arstechnica.com/business/2015/02/att-charges-29-more-for-gigabit-fiber-that-doesnt-watch-your-web-browsing/.  Most consumers thought privacy protection constituted an integral part of their subscription, but of course they haven’t read their subscription agreements that would disabuse them of that presumption.

            ISP service diversification, unbundling and pricing experiments evidence a maturing market.  As part of this transition, absent an explicit prohibition, expect these carriers to follow the airlines’ lead in pushing the envelope on price increases and service element unbundling.