Fierce price competition and rising traffic levels undermining ISP profitability, says report

October 14, 2008 - A new report from research firm Screen Digest predicts that some Internet service providers are unlikely to survive in business through 2012 using their existing business models, due to fierce price competition and rising traffic levels.

Price rivalry has gradually eroded average revenue per user (ARPU) from broadband subscription, the report finds, with monthly user revenues in Western Europe falling by over 30% in the past five years. Screen Digest predicts that ARPU in Western Europe will continue to decrease from €21 in 2007 to €17 by 2012, a sharper drop than expected in the US, which is predicted to see a 'marginal' fall from €27 in 2007 to €26 in 2012. The decline is believed to be particularly acute in Western Europe as the regulatory environment in the region has fostered strong rivalry, especially in the local loop unbundling (LLU) sector.

Rising data costs are named as a second factor straining ISP's margins, following the explosion in usage of online content services, and this is predicted to intensify with the mass consumption of online video delivered to the television. The research firm states that confronted with a flood in traffic, the key to survival will become ownership of the network, however only those operators with the deepest pockets will be able to bud out their own infrastructure close to end-users.

“The Internet as a whole is unlikely to break," said James Garlick, an analyst at Screen Digest. "What is being challenged, however, is the sustainability of many ISPs’ current business models where competition has led to unfeasibly low retail prices and the cost of traffic is booming. In addition, ISPs face the prospect of continuing price rivalry in the emerging next-generation broadband market, particularly in Western Europe, which is unlikely to dramatically alleviate pressurised margins. To help bolster revenues, providers are likely to look more to bundled services, a re-think of user payment models and new ways of monetizing the content running through their pipes.”