Lessons from the land of cheap broadband
What happens when telcos practically give it away ($13 for 100 megs!)?
NiQ Lai, chief financial officer of Hong Kong's City Telecom (CTEL), stopped by FORTUNE's San Francisco offices this week while on an investor tour. I had one question for him: Short of moving to Hong Kong, how can I get some of what he's selling?
I pay $25 to AT&T (T) every month for DSL that tops out at 1.5 megabits per second downstream, and 384Kbps for uploads. It's not always as fast as advertised. Sometimes it doesn't work at all. Cable offers faster speeds in my neighborhood, but the service also costs more, so I just try to remember the days of dial-up modems and convince myself that DSL is good enough.
But if we had a US version of City Telecom, I'd switch in a heartbeat – which is precisely what the residents of Hong Kong have been doing lately.
City Telecom's 400,000 customers pay $13 a month for 100 megabit synchronous broadband. And they get a money-back guarantee: If they don't clock 80% of the promised speed, the company pays them twice their monthly fee.
"We have a big hairy audacious goal," says Lai, referring to the term popularized by "Good to Great" author Jim Collins. "We want to be the largest IP service provider in Hong Kong by 2016. And three years into our strategy, we're well on our way to doing it."
If you live within coverage area of Verizon's FiOS service (VZ), you pay as much as $150 a month for up to 50 megs downstream and 20 upstream.
How can City Telecom possibly offer service that's more than twice as fast at less than 10% of the price?
Density is a blessing
It's partly geography and partly vision. While Hong Kong has 7 million inhabitants, only a small fraction of the island's mountainous terrain is developed, which means everyone basically lives on top of each other. The population density is 16,380 people per square mile – versus 640 in Japan and 80 in the US. That makes every customer far cheaper to serve. "We have a phenomenal network built at $200 per home. Verizon is talking about a cost of north of $1,000 per home," Lai says. "We built ours at one-fifth the cost."
Of course building the network in the first place required vision. City Telecom was founded 17 years ago as an international calling-card company by two cousins who plowed in 100,000 Canadian dollars to get started. They could have leased lines to get into Internet-service business the way many carriers do, but that would have meant encountering the same last-mile bottleneck. So, they built their own $400 million network over a decade.
And now the company is on a tear. The largest IP service provider on Hong Kong, PCCW, has about 1 million customers, according to Lai, but is growing at a fraction of the pace. It added only 3,000 in the last six months, compared to 41,000 for City Telecom. PCCW recently slashed its prices to match City Telecom, but still can't come near the speeds. But can City Telecom really make a business out of cheap broadband?
Innovation trumps incumbency
Lai insists the company already has. "The network is cash flow positive since 07. We're debt free with 10% revenue growth and 30% EBITDA growth," he says. "Our stock is up 200% in 12 months, and the market is starting to realize what we're doing."
All that success, Lia adds, is a result of having a Big Hairy Audacious Goal and doing everything possible to achieve it. "The telecom industry tends to commoditize people. Our strategy is to commoditize bandwidth, to make 100 megabits the industry norm in Hong Kong," he says. "Our plan is to win by offering the best service at the lowest possible cost structure. Thirteen dollars is not a lot, but if you scale it and drive your cost base down, it's a beautiful business to be in."
If only some US telecom executives felt likewise.
@Mike Miller "…I live in Japan now and have 100MB fiber to my house for $50 and they started offering 1GB for the same price, upstream is limited to 2MB and downstream you can get up to 80MB with the 100MB connection…"
Wait, you're saying that you're getting 100 MegaBYTEs, or 100 MegaBITS at that cheap? I recently had a bit of a laugh to learn that a local broadband company here in wyoming has been advertising 3MB/s, and they barely break 1.2Mb/s, note the difference. (1.2Mb = 0.15MB)
Telecoms in Hong Kong, Korea and Japan are focused on innovation and adapting new technologies. I been in all tree of them and their understanding of “Innovation trumps incumbency” is very clear. On opposite side of spectrum, Verizon and AT&T devote a lot of resources on how to block out Google like companies, stop Net Neutrality, further exploit outdated technologies and their monopoly over frequency ownership. Just look how much AT&T and Verizon are spending on PR spin doctors and lobbyist in DC.
Many US suburban (not rural) Internet users do not even have access to DSL or Cable service. I am one of them. I am located only 15 minutes highway drive from city with 750K greater metropolitan population. Ma Bells abused and neglected suburban copper lines here for decades, while giving FCC empty premises of developing information superhighway. FCC needs to realize that we as nation do not prosper from companies that look to slow down progress.
In Manaus, Brazil I recently signed up with Vivax/Net for 1 mega. For three hundred reals – thats US$173 per month.
So far, 500 kilo was the top my broadband meter has clocked!
@S. Bauer: Thanks for the link. Now the article makes sense. At first I was confused about the money-back guarantee for the speed of the network. You see there is no way to guarantee a constant connection speed for the internet because it will depend on the response of the host server and the traffic in the intermediate networks (between the ISP – backbone – host server). The link explained that the guaranteed speed is between the customer's PC and a specific server owned by the company. If you use that as a measure that would not be too hard to do (you can even have a dedicated line to the test server if you want to cheat and make it appear you have excellent connection speed). However as far as user experience surfing the web and going outside the company's network it doesn't help much.
WOW!
Here in the Virgin Islands I purchase Broadband with a download speed of .5Mbps and pay $50 a month for it.
We have Global Crossing's giant fiber landing here but getting from the cable to your place or mine is just not going to happen.
Dale, (poster from Seattle) congrats on being part of an innovative project, I would pay $6,000 and amortize it over time to get un-restricted Fiber to my home.
In Bingham, Utah, UTOPIA is charging $3,000.00 per home for the User Owned FTTH links. Sound like their project is allot like yours.
In Wilson, N.C., Greenlight is running Fiber to customers home with the local political leaders blessings and charging only $100 for 100Mbps / 100Mbps service. High for Japan and Asia, but better than anyone else here in the USA.
R. Brown, same here in LA, CA; TWC service use to be decent, until they rolled out new service in my area (my guess bandwidth shaping software) since that day my DD-WRT enabled firewall/router shows my service restricted and limited to less than 300Kbps downstream and less than 40Kbps upstream 85% of the time. I never see more than 100Kbps upstream except during the Speed Test, right after the Speed Test my DD-WRT software shows my bandwidth immediately throttled back to 40Kbps or less. And I am paying the highest monthly rate (above $50 per month) for TWC's highest "Internet ONLY" tier of service for my area. I sold my TV. They will not open my lines up. BTW they market/promise "up to" 16Mbps down and "up to" 2Mbps down. Even the Speed tests never show better than 970Kbps upstream, so it feels like FRAUD to me.
That 80% promised clocking speed/bandwidth + fines is a MUST for Americans, otherwise the telco oligopoly will never let consumers have it. I would love to have 80% sustained for "up to" 16Mbps down and 2Mbps up. WOW that would be great. Hey they promised it in order to get me to pay more….
So apologists, stop, whatever the excuse, density, cost, etc…its just an excuse and a tired one at that. I think 20+ years of such tired old excuses is enough.
Local politicians, offer a User Owned FTTH solution to your citizens, enough will purchase that will allow you to roll out service to everyone! Go for it!
As one poster stated, more bandwidth means more job opportunities for Americans. We desperately need these jobs and any action by ISPs to limit American bandwidth is, well, UN American! It is NOT forgivable!
Density is a huge factor in driving down costs and therefore, providing a faster products at lower prices. I believe what I pay for DSL is fair when I stop to consider just how much it costs telephone or cable companies to build out their networks. Let's start at the top, Tier 1 access to the internet costs about $22 per meg, thats what your phone company pays just to get on the "Information Super Highway". I'm am engineering a fiber to the home project which will cost about $6000.00 per household/business primarily because we have about 10 homes per square mile.
It is a shame and maybe lucky I haven't been living in the USA for a while but when I was living in Germany, German Telcom had a monopoly and DSL was like $40 for 128KB from 2000-2004 and you had no other choices, I live in Japan now and have 100MB fiber to my house for $50 and they started offering 1GB for the same price, upstream is limited to 2MB and downstream you can get up to 80MB with the 100MB connection.
The reason the US broadband market is so pathetic is because the people selling broadband here see broadband as a threat to their core business. Thus they seek to limit it instead of growing it. The major providers are cable TV and telephone companies. The cable companies see broadband as a threat to their core TV programming. The phone companies see broadband as a threat to their long distance and directory services. Both lose money if their customers get high speed broadband at a reasonable price. Both cling to their profitable monopolies, and seek to limit instead of improve broadband service.
But wait, that's not all ! Now they are seeking to cripple what service we do have, and eliminate network neutrality. They want to charge even more for even less service.
The US will not have a competitive broadband market until a majority of the nation has access to a broadband provider that does not also sell TV or phone services.
American businesses use the "baby step" business model to keep the $ rolling in. Each small step in speed, quality, ease of use, etc. comes with a price increase. Comcast and Microsoft are masters of this strategy. You say you want a better operating system? That will be $120 please. You say you want faster broadband? That will be another $20 a month for the next level of service. The fact is that we will never get technologies best product at the best price when the suppliers can "baby step" the customer all the way to the bank.
384Kbps for uploads?
Count yourself lucky.
I have Time-Warner Cable for an ISP. While the do deliver their promised 10 Mbps download, they only offer about 40 Kbps upload.
In other words, dial-up speed uploads. So much for the "Road Runner" speed image they wish to portray.
Worse, I live in one of the markets where they wanted to "test" usage caps earlier this year.
(I forgot. CNN is part of T-W. Shall see if this gets posted.)
Countries with higher population densities have faster and cheap speeds as do countries with much lower densities. Canada and Australia are a great example of that.
It's the same story in wireless data services. Not only are our carriers a rip-off but their services are way slower than that of other industrialized countries. The commonality in both examples is the lack of competition and a board whose sole purpose is to maximize profit. The customer in the States is usually forced to choose between one or two providers, as they usually have no other choice. There is no logical explanation for densely populated cities like NYC to not have at least 5 or 10 broadband providers.
It's embarrassing to hear people from France and so on talking about their 24mb ADSL 2+ speeds for $25 a month. I thought the free-market (let companies do as they please model) was supposed to deliver the best and greatest service. The reality is that all this model delivers is dividends for shareholders; at the expense of the American consumer of course.
i live in nyc and we have limited Broadband in some areas but it will cost you alot ,so im stuck with DSL $30 a month ,still more than twice the price as Hong Kong and like 2% of the speed (are we a 3rd world country?)
@Jesse: There are other factors that affect broadband pricing apart from population density, however, the density of your potential market is a primary factor. You were probably using hyperbole to make a point but there is no way that there are 24 US cities (if any at all) that have a higher population density than Hong Kong. I had to look this up: HK ~16k per sq km; NY ~10k per sq km and SF ~7k per sq km. The fact still remains that population density drives broadband pricing in the US and is largely responsible for the higher prices we pay.
I was also baffled by the closing statement in the article as the story provides no support for the conclusion.
Simple. The US broadband companies charge what they do because they can. Americans are willing to pay ridiculous prices for it because that's how it has always been. We know nothing else.
The broadband industry in the US holds off on upgrading infrastructure and instead throttles everyone down to low(er) speeds to save on costs. Upgrading infrastructure is very expensive. The problem is capitalism with a side of oligarchy. These are for-profit organizations and they exist to make profit, not make their consumers happy. Besides, your average computer user in the US wouldn't even know the difference anyway, because broadband has always been relatively slow in the US.
It is easy to misread this post regarding the details of the money-back guarantee. See the link below for the details. (I doubt I would chance calling them out for an on site inspection. If the problem is resolved right before their on site test I would owe them HK$150. The maximum I could get back is prorated for days out of service, not fully two times one full months fee.)
Steven has been listening to telecom talking points for far too long. You think density is the only thing that holds back the US? Then what about the 24 US cities with a population density that exceeds Hong Kong? Why do New York City and San Francisco both lack that kind of broadband? Density is a very small part of the picture.
What a difference this could make to those of us who work from home; especially those of us who are disabled and on a fixed income. Employers like J.Lodge http://www.jlodge.com who are very specific about the broadband connections for those they hire might have more options and more of us would have opportunities!
If only some US Telecom executives felt likewise????
I don't believe it's possible to "feel" your way towards a population density of over 16,000 per square mile as exists in Hong Kong vs. the 80 per square mile in the U.S.
This article is fairly interesting from a geographic perspective and its affect on what is happening relative to Telecom and broadband in major cities outside of the US. However, the author's conclusion is directly in conflict with the facts as presented throughout the article.
I am not agree that cheap BB does not give good service. I got most expensive to least expensive services. I never got that he advatige for.
II end of with cheap service RCN. I happy with it.
I am stuck with EVDO…59.00 for less than
one meg in actual average usage from verizon.
Even a TW hookup would be a blessing and the
DSL in town blows chunks. The US user is getting ripped off. Limits and low speeds.