Broadband operators must beware of the dangers of FTTH ‘speed race’

The news last month that Japanese ISP So-Net was launching the Nuro 2Gbps FTTH service for residential users – the fastest residential service in the world – was greeted with envy by bandwidth-starved users the world over.

Although it must be wonderful for Japanese consumers to choose between rival 1Gbps services from the likes of NTT East and West, KDDI and the regional power companies offering FTTH – with So-Net’s latest offering being the cherry on the cake – there are serious implications here for operators.

The reality is that – as Japanese operators now admit – a “speed war” is breaking out in Japan. Operators are locked in a battle for subscribers based on how much speed they can supply, and at ever decreasing prices.

So-Net has launched its initial services at just ¥4,980 ($49) a month – cheaper than the 1Gbps services offered by KDDI and only slightly more expensive than some of the 1Gbps services offered by market leaders NTT East and NTT West. However, neither NTT East nor NTT West is likely to allow itself to be left behind – both are working toward offering 10Gbps residential services in the medium term – while KDDI also has speed upgrades on its road map.

No premium possible
The problem, as operators already know from painful experience, is that subscribers do not pay a premium for ultrafast speeds. They will take them when offered at the same price as their existing service, but they are not going to pay any extra. That means that So-Net, coming into the high-speed game late and without the ability to bundle services the way KDDI does with its fixed/mobile Au Smart Value plan, is going to have to operate on tight margins and has limited options in terms of boosting ARPU unless it raises subscription prices.

Moreover, once subscribers have used the So-Net service and have realized that, for the most part, there is no practical difference between having a 2Gbps or 1Gbps service – or even 100Mbps, for that matter – things could really get tricky.

It is all very well using speed as a marketing hook. But unless, as Hong Kong Broadband Network does, you can offer the fastest available service in your market at the lowest price, it will be hard to create long-term subscriber loyalty.

After all, if I am a speed-seeking subscriber, what’s to stop me from switching to the highest speed available in the market every time my contract expires?

Subscribers are not dumb – well, at least not all of them – and they will eventually work out that download speeds are not the only way to measure the value of a broadband service and that there are a range of other factors to consider.

Technologists and futurists might not care to admit it, but there is no guarantee that new services and applications are going to arrive anytime soon that make a 2Gbps broadband connection necessary, and subscribers will eventually work that out as well. That means that if an operator bases its attraction solely on highest advertised speeds, unless it can pull off the lowest prices in the market, like HKBN, it is going to struggle to hold onto those subscribers if other operators come along offering faster services at a comparable price.

Changing the focus
So, operators such as So-Net need to start thinking about their “second act” as the market impact of their “speed blitz” market entry lessens and other operators copy their speed-based strategy. That means focusing on what other value they can bring to the table to keep subscribers happy, and that’s not easy, as many high-speed-broadband operators in Asia can attest to.

KDDI can keep subs happy with discounted fixed/mobile bundles, NTT East and West can branch out into whole new areas, such as connected-home services, and the regional power companies can bundle FTTH with electricity services, but it is not quite so easy for the likes of So-Net.

One option for So-Net would be to try to use its relationship with parent company Sony – armed with an array of content, gaming and device assets – to build extra value into its high-speed-broadband product for subscribers.

Such a move would be a fascinating tactic, especially since no one else in the market could offer anything like it. But it would very much depend on how much skin Sony would be willing to put on the line for its domestic ISP.

In an increasingly competitive high-speed-broadband market, a market made even tougher by the fact that a significant chunk of subscribers are dumping fixed broadband in favor of LTE, So-Net is going to have to set its sights on a particular market segment and attack it aggressively. It could well be that So-Net could prosper by aiming the marketing of its high-speed services at young people who want the highest possible speeds for gaming and other speed-reliant applications, but that is by no means a sure bet.

The longer-term solution for operators might well be to stop the crazy marketing focus on download speed – which becomes meaningless once you get beyond 100Mbps (some would argue even lower) anyway – and instead look at other ways to create value around their services. After all, any business model that involves creating increasingly better products for consumers at ever decreasing prices is surely doomed to fail.

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