Tuesday, March 12, 2013

Value perceptions

To the discerning blog-watcher, it's a pretty much tried and true generalisation that when a long-dormant blog suddenly springs back to life, there must be some sort of career or life hiccup underlying somewhere. I am far too discrete to say, but, let's put it this way - you're going to be hearing a lot more from me now, and I am in search of new opportunities and adventures, so don't hesitate to let me hear from you if you have anything interesting in mind.

During my two years at CityFibre, one of the recurring assertions I heard from sceptics was that the UK is somehow an exceptional market, in which there is no scope for a competitive fibre-based infrastructure. I always vehemently disagreed with this view, which seemed invariably to be based on two perceptions:

1) that the UK consumer has been ground down by decades of underinvestment in every category of infrastructure, and is now de-sensitized to such an extent that the barely acceptable passes as the norm. A logical extension of this argument is that, whatever is on offer from the two infrastructure incumbents is good enough, and anyway, where is the proof that there's a market out there for anything different, or, God forbid, even better? And if there is a market, where is the proof that consumers would pay more?;

2) that the structure of pricing in the market is a natural barrier to entry, as consumers are willing to spend far more on a few pints in a ghastly West End pub on a night out than on an entire month's worth of broadband.

I have some sympathy with Argument 2, which relates to the reality distortion field created by LLU economics, under which consumers have come to expect that "broadband" costs tuppence (with the first six months free!), yet blithely accept increases in POTS line rental charges at rates several times the level of consumer inflation, year in, year out. Perversely, the legacy service which has a precipitously declining perceived value, is the cost of entry to the broadband product, which is increasingly perceived as being indispensable to modern life, but still expected to be dirt cheap.

I explained this situation to some Dutch friends recently, who shook their heads uncomprehendingly, and though I'm not a lawyer (I'd rather nail my privates to the floor), I believe such blatantly coercive product bundling is illegal in at least one EU country. Still, if it works and the majority don't complain, why tamper with the status quo?

I've long believed that one way around this conundrum would be a consumer education campaign to encourage a "total cost of ownership" (TCO) view of the world. From conversations I've had with non-industry folk in the UK, it strikes me that most people in my non-scientific sample seem to disregard POTS line rental as some sort of necessary evil about which nothing can be done (if they even notice that they're paying it), and prefer to focus on what a great price they got on their broadband product, often complaining about the quality and reliability of it in almost the same breath.

So, perhaps there are elements of both Arguments 1 and 2 at work here, after all, and the consumer has been thoroughly conditioned by the pricing policies of the Big 4 service providers, who have absolutely no incentive to change their marketing strategies. Hell, even disruptive newcomers Hyperoptic have latched onto this formula, building a mandatory telephony package into their products (or a £10 supplement for broadband only), presumably in order to keep their broadband pricing optically in line with market ranges. Frankly, if it's an established precedent in the market there for the taking, they'd be stupid not to do so.

Therefore, if we take it as read that the UK consumer has been thoroughly conditioned to believe that broadband is a low-value commodity product, then the dilemma for the newcomer deploying superior infrastructure lies in differentiating the product to break the cycle and promote (or perhaps "provoke" is a better word) a reappraisal of the value of broadband in the consumer's mind.

The pricing prevalent in the market today is what it is, and it will always be a constraint to some considerable extent, but it is only an absolute block to progress if fibre is sold simply as "a better form of broadband." So why not sell it as something different, with a (I'm now going to use a term I hate) "value proposition" based on different parameters? If the industry can create a perception of value in the mind of the consumer which sets "true" fibre apart, and then quantify its specific benefits over legacy hybrid copper/coax fibre products, then I believe there may be some mechanism for breaking the "lowest common denominator" mentality which dominates the market at the moment.

Consider for a moment the development of the subset of food products now claiming to be some combination of organic/free range/sustainable/ethically produced/all-natural, in response to a change in consumer attitudes towards health, the environment, and animal ethics. Have they entirely replaced legacy products? No, but they didn't really exist in the mainstream a little more than 10 years ago, and they're not going away. They command a premium among the audience which buys them, because they deliver a perceived benefit - sometimes something quite tangible (better flavour, lower fat content, lower risk of chemical contamination), and conversely, sometimes highly abstract (a feeling of making a difference, saving the planet, not being part of the problem, etc.).

Compared to the complexity of changing the food chain, fibre would seem to have a relatively simple task in selling itself as something with a higher perceived value to the consumer, if only on the basis of crude economic self-interest.

Greater productivity, particularly as it relates to the time compression allowed by higher upload speeds, is an easy one (which Verizon FiOS has cleverly exploited as a key marketing message versus cable). Everyone has some idea of the monetary value of their time (especially lawyers, psychiatrists and management consultants), and being able to quantify the potential time savings in monetary terms is a potentially powerful message in support of premium pricing. "How much would it be worth to you to get a day of your life back every year?"

This recent piece of research from ICM provokes some interesting questions in my mind. ICM found that 22% of respondents to its survey claimed they would be willing to pay between 4% and 10% more for a home with good broadband. The definition of "good" is always highly subjective in the UK, and presumably "true" fibre would command a premium even above "good." Nevertheless, even if we take this 4 - 10% range at face value, it is a not-inconsiderable amount of money.

On a house worth, say £250,000 (people in Greater London are laughing now, but let's just keep the maths simple, eh?), 4 - 10% would imply £10 - 25k, which over 20 years works out at £42 - 104 per month in additional perceived value. Interestingly, the bottom of this range (£42), is pretty much the top of the range for TCO (including the accursed line rental) on a monthly basis in the mainstream broadband market. Am I alone in seeing a disconnect here? By which I mean, a disconnect which can be developed and exploited to challenge consumers' perceptions of the true value of broadband, and nudge them away from thinking that this essential enabler of modern life should cost the same as a packet of crisps?


Ben Felten said...

You're not alone in thinking that. I once figured out that the CAPEX needed to deploy fiber to an average NYC appartment was the equivalent of two weeks of rent of said appartment. Surely that should justify its installation alone as better broadband will make it shift faster between tenants and or slow the cycle of tenancy.

That education sadly remains to be done.

chris said...

Keep posting! We need the councillors and politicians in the UK to read this sort of stuff to counteract the brainwashing of the telcos who have been throwing all their million pound marketing budges at them! Its time for some honesty and truth, so keep telling it like it really is.

PhilT said...

The house price premium was suggested by less than a quarter of respondents, IIRC, so it's not a sea change.

Anything related to the value of a house is expected to be recouped on selling it, with inflation on top, so someone saying they are prepared to spend £25k is implicitly saying they expect to get £30k back when they move on.

We see housing as an investment, broadband as a post-tax household operating cost.

Anonymous said...

Great to see you back James!

John said...

Good to see you back again James.

On a somewhat related note, I think it was you who suggested quite a few years back that a natural investment backer for FTTH could be a pension fund that will take a much longer view of the ROI while still having deep enough pockets to take on the initial cost. Have you actually seen this model anywhere?

James Enck said...

Thanks all, and thanks, John!

The only example I am aware of today is the Communications Infrastructure Fund in the Netherlands, which is backed by a group of public sector pension funds. That said, so far they seem to have only taken on assets which are already built and generating cash flow. It looks like there is still a gap in the market in terms of someone willing to fund "build risk," though I think that will change over time as we have more positive examples of companies making it work. I think that, given the lack of yield available today in "conventional" investment classes, as well as the long asset life of fibre networks, it is still a natural fit for pension funds and insurance companies, but someone needs to write the first cheque!

Stefan said...

Good to see you back blogging with an excellent and perceptive piece.
For many years the house price premium in Sweden was 3%-4% and nowadays its common for homeowners to spend £1000-£2000+ paying a local firm or a larger operator (inc the incumbent) to bring fibre to their area. That's a very long way in terms of customer perception from Sky's "free" broadband. There are plenty of DSL and cable promotions in Sweden of course but after a decade of fibering the customer knows the difference. If a fibre switchover were underway here the average UK consumer would also start to understand the difference after ~5 years or so I believe. There has to be enough of a demonstration effect but once its there the process will start to drive itself.