Ecosystems and emotions – how to succeed with superfast broadband

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By Jon Tee

What can suppliers of superfast fixed broadband services learn from success in the smartphone market? Ofcom’s recently published International Communications Market Report 2011 contains some striking indicators in relation to the UK market that might be a cause of some concern to fixed network operators trying to sell very high-speed (‘superfast’, >25Mbit/s) fixed broadband connections.

The report notes that the proportion of the UK population with smartphones has continued to rapidly increase, reaching 46% of UK mobile users at August 2011 (a doubling over the previous 18 months). Furthermore a significant proportion of smartphone users (46%, again) used their smartphones to access the Internet during October 2011. However, Ofcom also reports that despite the fact that 57% of UK households could get a >25Mbit/s fixed broadband service (using the Virgin Media cable broadband or BT Openreach's FTTC/FTTP broadband network) only 4% of UK households had taken such a service (at June 2011).

What can be read into this snapshot contrast between high adoption of smartphones and comparatively low take-up of ’superfast’ fixed broadband?

From the perspective of fixed network operator looking for revenue growth from rolling out very high-speed fixed broadband services on a first glance this seems like it should be worrying. While there seems little evidence that mobile broadband in the UK is being directly substitutive of fixed broadband (just 5% of UK households are ‘mobile-only broadband’ on the Ofcom data), it could suggest that consumers are choosing to spend money on smartphones and mobile services while choosing not to spend more on upgrading their fixed broadband connections to ‘superfast’ speeds.

The first point to make is that a snapshot comparison is unfair: smartphone adoption in the UK began to accelerate following the launch of the iPhone some four years ago back in November 2007. Virgin Media’s first 50Mbit/s service was launched in December 2008 while BT Retail’s 40Mbit/s FTTC Infinity service was first launched in January 2010 and its 100Mbit/s FTTH variant only in November 2011. We are in the early phases of the adoption curve. The second is that for households close enough to upgraded exchanges, fixed broadband speeds have been increasing anyway with the rollout of ADSL2+, which may have delayed decisions to jump to even high speed services. It is possible that the UK is just in the early stages of adoption of very high-speed fixed broadband connections.

But there is another way of looking at these figures.

BT and Virgin Media see their very high-speed broadband services as revenue drivers. Higher speed services are priced at a premium and the hope is that customers will upgrade to faster and more expensive services over time. If this doesn’t happen – if a significant proportion of people decide that they would prefer to spend more on a mobile service that comes with a smartphone and data allowance rather than more on a faster fixed broadband service – then running these networks profitably without a high volume of high-spending customers will be significantly harder. In a low-growth, high unemployment economic environment it would seem to be an unwise assumption that there is not overall spending constraint on communications services. It is more likely that individuals and households will be actively choosing between quite different kinds of services (e.g. smartphones and higher-speed fixed broadband) – especially given the premium costs of most smartphones.

The high adoption of smartphones is also striking given that the UK is currently a relative laggard in terms of high-speed mobile networks: it does not expect to auction LTE spectrum until the second half of 2012 with LTE networks not up and running until 2013 or 2014. In contrast LTE has been available in Sweden since late 2009, in Japan and the USA since late 2010 and with Canada, Germany and South Korea since this year. In other words, the absence of LTE does not appear – at least at the moment – to be doing anything to hold back smartphone adoption in the UK (though its absence will be an increasing challenge for mobile network operators as smartphone usage, and expectations, increase).

What are the implications of this for fixed network operators?

It is worth recalling some of the reasons for the rapid growth in smartphone adoption:

• the convenience of a smartphone (always with you – mobile – instantly on)
• the much increased usability of modern mobile operating systems with large touchscreens
• the plethora of applications available through mobile app stores
• inbuilt WiFi on devices enabling high data speeds on the mobile device within the home (even better than when outside the home)
• initial unlimited data allowances (now often limited but after individual behaviour has changed)

Smartphones (and tablets) are attracting large numbers of buyers because they support a diverse range of applications (supported by a thriving ecosystem of app developers) on a convenient and easy to use form-factor multi-function device. The marketing for smartphones tends to focus on what the these devices let their owners do: communicate with their friends in a variety of ways, read the news whenever they want, check travel times, take and share pictures, play games, find where they are on a map. In contrast, very high-speed fixed broadband services tend to be sold based on them being ‘fast’, ‘fastest ever’, ‘4x faster than’, ‘future-proof’ – a marketing approach which lacks the emotional appeal of emphasizing that the purchase will able an individual to communicate with and capture and share content with friends or the practical appeal of being able to get useful (location-sensitive) information conveniently.

Selling speed isn't enough

This is partly an extreme characterization: in the UK both BT and Virgin Media have invested considerable effort in developing their content capabilities, for example. Nonetheless, the question remains: how can operators hoping to sell very high-speed fixed broadband services convince households to spend more money on these services?

The drivers to needing very high-speed fixed broadband services are relatively straightforward: multiple devices simultaneously trying to accessing content (especially HD content) and applications requiring high-bandwidths to give a good user experience (e.g. streaming media, some online gaming). In other words, to drive take-up of very high-speed fixed broadband connections, fixed broadband providers need to be do everything they can to encourage the proliferation of applications and devices within the home that will use and consume bandwidth (rather than focusing on selling speed).

Some examples of different approaches, learning from smartphone success, might include:

• bundling desirable tablets with very high-speed broadband connections (at a discount) to encourage take-up
• actively encouraging an ecosystem of app developers to create software applications that will significantly benefit from very high-speed broadband, and partnering to ensure these applications work seamlessly on these connections
• shifting marketing towards emotionally engaging customers with desirable applications and devices and away from an emphasis on speed and technology.

In addition, companies such as Virgin Media, that also sell mobile services can help encourage demand for higher-speed broadband services by driving up the proportion of their subscriber base that use smartphones (given that much usage of smartphones is in the home, over WiFi and fixed broadband networks).

The success of some smartphone vendors in engaging customers and in providing a platform for developers to create a hugely diverse range of apps for every conceivable market segment offers lessons for fixed network operators. 2012 represents a window of opportunity for UK fixed network operators to embed demand for very high-speed fixed broadband before the potentially much more substitutive challenges of LTE networks emerges in 2013/14. To fully capitalize on this may require some adjustments to strategy.

Jonathan Tee, Principal, Telecoms and New Media, Innovation Observatory
jontee@innovationobservatory.com

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