Internet service prices have been increasing at an annualized rate of about 0.6% in the three years to 2017, but prices largely depend on the location of the customer. In areas where competition has been increasing, such as large urban areas, prices have actually been increasing or remaining steady. Namely, to attract and retain customers in these areas, ISPs have offered lower prices, higher speeds and discounts when bundling phone and TV services. However, in less competitive rural areas and smaller cities, prices have increased.
Higher costs for suppliers to provide services have been contributing to price growth in the three years to 2017. The prices of essential operating equipment, such as servers, routers and data storage devices, have been increasing during the period, promoting growth in internet service prices. Despite rising equipment costs, suppliers have been focusing on making subscribers’ needs fit on existing infrastructure through data caps and lower bandwidth. Consumers, which generate the most revenue and account for most bandwidth usage, have increasingly received less bandwidth with data caps on their internet plans. As a result, ISP costs per subscription have decreased, while prices per Mbps have increased.
Low price volatility indicates that prices have not fluctuated significantly from year to year. Although prices have risen slightly, business buyers have not been subjected to asynchronous (faster downstream speed than upstream) speeds, data caps and other limitations on internet usage. Some ISPs, though, are increasingly passing off asynchronous internet services as business class. Buyers should lock in prices for long-term contracts to avoid both price increases and service limitations. Furthermore, buyers should avoid, if possible, moving to or staying in an area where ISPs are consolidating because that usually results in higher prices.
Prices are expected to grow marginally at an annualized rate of 0.6% from 2017 to 2020. However, the rate of price growth will depend on the geographic area of the buyer. Buyers with internet-based businesses should locate their business in an area of significant competition to obtain competitive pricing.
ISPs are facing rising customer demand for faster internet speeds and an end to data caps. Increases in online downloads, streaming and file transfers are expected to contribute to the increase in demand and price in the coming years. Although some ISPs have started to offer services with greater bandwidth at better prices in an attempt to penetrate new markets or prevent a loss of customers, better speed and price offerings are limited to areas with several ISPs competing for business.
The competition stemming from some ISPs entering geographic areas that were traditionally not theirs has pushed established ISPs to better their service as well. Although this phenomenon has occurred in few areas so far, it has proved effective and is expected to continue. For example, when Google Fiber announced plans to expand its network to Austin, AT&T began to offer one Gigabit per second (Gbps) service to the area. Additionally, some ISPs, including Verizon, have intensified their fiber network deployment in response to competition and customer pressures. Buyers should, therefore, inquire about the ISPs in the area and their potential future services before locking in prices with long-term contracts. Competition is expected to prevent prices from increasing at a high rate across the entire United States.
Although the price growth for internet services is projected to exhibit a low level of volatility, buyers should be wary of entering long-term contracts due to the rising emergence of competitors such as Google Fiber.