Backhaul Costs Really Matter

Every part of the Internet access ecosystem matters, where it comes to constructing a complete value chain. Networks have to be built affordably. Spectrum has to be made available. Marketing and operating costs must be reasonable.

Consumers have to see value in Internet apps. Devices must be affordably priced. LIcensing, taxes and other fees cannot be too high.

And backhaul prices matter. Assume backhaul prices are about three cents a megabyte, implying wholesale costs of about $15 for usage of 500 megabytes.

Compare that to retail costs for a fixed telephone service of perhaps $2 a month, or a prepaid mobile service costing about $4 a month.

A reasonable observer might argue that most consumers accustomed to retail prices of $2 for voice line, or $4 a month for a prepaid mobile account, might not so readily buy a retail Internet access service incorporating backhaul costs of $15 a month for 500 megabytes, or $6 a month for 200 megabytes of wholesale monthly usage.

Assume wholesale access is a cost of goods issue, and that all other network and operating costs add 100 percent of COG costs, implying a retail cost of about $12 a month to supply 200 megabytes of Internet access.

From a consumer perspective, using the Internet would have to be deemed so valuable that a consumer is willing to spend six times as much as for a voice line, or three times as much as prepaid mobile service, to get access to the Internet.

The issue here is “price anchoring,” where the price of one product is evaluated in relationship to the cost of another product the consumer buys. In this example, the anchoring will be against the cost of a voice line or use of prepaid mobile service.

How many of you would willingly pay 600 percent more for your Internet access than the cost of a telephone line, whatever you believe that cost is, or 300 percent of the cost of your mobile phone usage (in this example, a prepaid plan)?

Everything matters when the objective is to provide Internet access, affordably, to everyone, in regions where people cannot afford to spend very much. Like everything else, backhaul costs do really matter.