In Internet Access Markets, Scale Really Does Matter

As a rule, in competitive markets, low-cost providers tend to win. Also, as a rule, in scale businesses, scale providers tend to win. All that bears on prospects for new platforms for fixed internet access such as Starry, which claims (rightly) to have cost advantages over 5G-based fixed wireless as proposed by Verizon.

Cost also tends to become more important in any mature market, as growth ends. And, as always, access to capital matters.  Scale means volume, means large amounts of capital. By definition, small companies cannot raise as much capital as large firms.

Business models also matter. In some ways, focused specialists have advantages. They are able to focus and optimize their businesses for one product.

In other ways, firms with diversified revenue streams have advantages. They can leverage customer relationships and multiple products to get higher degrees of customer lock-in, and have advantages in the marketing realm. Consumer services tend to be marketed using mass media, and that is costly. Firms with scale have larger marketing budgets and can leverage mass media marketing better than small firms.

Also, in technology businesses, the “best” technology does not always win. The “good enough” technology with scale tends to win.

In many ways, scale is why independent internet service providers, despite lower operating costs, can be successful in selected smaller markets, but rarely have the ability to directly compete with tier-one competitors head to head, in larger markets.

That is not to say niche providers will fail in their efforts to get some amount of market share. They already do have some amount of share. Still, in a scale business, size matters. In the end, that will limit gains by independent and smaller ISPs, especially as the market begins to contract.

Price competition in a declining industry can be brutal. The point is that business models built on “similar product, lower price” have a harder time working when profit margin is squeezed out of any particular market. Without price or performance advantages, brand names can be fierce competition for smaller firms.

Scale matters. Brand names matter. Volume matters. Cash flow and borrowing ability matter. So what remains to be seen is the ability of independent ISPs to reshape national market share. So far, all third party ISPs together are not enough to move the needle.

In the U.S. fixed network internet access market, 14 firms have 95 percent of the market share. More importantly, just three firms--Comcast, Charter and AT&T--have 69 percent of the total market share, according to Leichtman Research estimates.

It is not that upstarts cannot take share: they can. What remains to be seen is whether they can take much market share overall. So far, even most of the best-placed competitors do not have much scale.