Probably one of the most impressive and discreet economic trends of the last 25 years is the invoicing to several billions of people of some few hundreds dollars every month to connect them to internet and mobile.
Despite the erosion of the middle class’s purchase power, wireless carriers, cable companies and internet service providers have been managing to make cell phone and wifi part of the 21st century Maslow pyramid. They bill their services a significant amount of money to each household around the world. China has ½ billion Internet users, USA has 200 million and with 6.8 billion cell phones in the world for 7 billion inhabitants, it is indeed a massive, long term, worldwide trend.
But how much does it cost ?
We worked on defining what is the cost to be connected in the 21st century. To do the appropriate benchmark we took one major carrier in different countries and assumed what would be the price for a “digital package.” We considered a digital package access to TV, WIFI Internet, and mobile subscription for a family of 2 adults and 2 teens. We also went to a deeper level, analysing the cost for accessing Internet, TV and mobile separately. We selected from three regions and four main countries: USA, China, France, and UK. The price differences are very astonishing as well as the difference of offers.
The first element is the cost and the stake it represents for an average household. In US, the median household income is $50,500. A digital package runs around $380 per month and represents 9% of the budget for a family. For a UK family, it is 7%, and for France where the median income is $22,000, staying connected represents 6% of the income.
The second outcome is the price difference for a service similar from one country to another. For identical services, prices in US are four times higher than in China or France. A digital package is at $380 in USA, vs $103 in France, vs $222 in UK, and $80 in China.
Outside USA, ISP as well as mobile prices are pretty consistent.
Why such differences ?
There are three potential reasons US carriers are four times more expensive than in other countries?
- Coverage: Most of the costs of a mobile carrier or ISP (Internet Service Provider) are massive investment at start based on building a network (usually call CAPEX in finance terms). The cost is covered or amortized on the long run through the number of subscribers. Biggest is your number of customers smaller will be the repercussion of this investment per users.
- Competition: US carriers are also under the same level of competitive pressure. Four companies compete for wireless services (China is about to have its 4th mobile carrier). Nevertheless, it sounds that in some states, ISP are in a quasi-monopolistic situation: California is a good example of the situation with Comscast or AT&T only.
- Spectrum auction: The licence to operate a wireless service is given through a long process auction managed by the Federal States. The total reserve price for the latest auction in 2008 in US was over $10 billions. This cost has to be redistributed in a way or an other through the price offer to the consumer.
- Structural: It is difficult to benchmark financials and structure of companies that are so different in the variety of they business. Indeed Virgin Mobile is a MVNO, privately owned and subsidiary of Virgin Mobile Holding operating in eight countries. Comcast is not providing wireless service. China Telecom is the historical player in China with 300,000 employees. So if structure, average wages are a key element it is practically impossible to compare one company to another.
If you have potentially several rationales, none of them provide a straightforward explanation. It is probably a very useful situation for carriers and ISP.