Most people you’d ask hate their home broadband provider with a passion, but unfortunately couldn’t switch providers even if they had a burning desire to do so! In the United States, FCC data indicates that ~68% of US census blocks have 0-1 providers offering proper broadband service with 25Mbps down.
Yes, that means a significant percentage of the population either has no broadband option (satellite, yikes), or has to settle for DSL.
The situation with business internet (particularly products like dedicated internet, dark fiber, and wavelengths) is markedly different however. Lit buildings and data centers often have a plethora of providers chomping at the bit to compete for a corporate buyer’s attention.
Why is the situation so different between business and residential?
Some simple cost calculations tell the story.
Why does home broadband suck?
The answer lies in the cost to construct wired broadband. It’s high.
At a standard broadband price of $60 / month, and assuming an 85% take rate of broadband services at homes, this means that a broadband provider who gets 100% of potential subscribers will break-even on build costs in 2.5 years in a best case (or 6 years in a worst case). Of course, this is on purely revenue, so inclusive of maintenance costs and support, breakeven is a good deal further out. These are solid breakevens timelines for the broadband provider, but they’re not earth shatteringly good.
Of course, this assumes you have a single provider in a neighborhood and that no one else is there competing for subscribers. If you add a second provider into the mix, the cost for each provider to connect a home is about the same, but the take rate is cut in half (each provider gets ~half of the subscribers), and as a result breakevens are doubled! In a two-provider situation, best-case breakevens are ~5 years and can go as far out as 12 years. Also, when multiple providers exist, both providers must spend on marketing to ensure they pick up proper market share.
It’s easy to see why once a provider is in a neighborhood another provider would be dramatically less motivated to build into the neighborhood and compete. Further, it’s easy to see why scale matters in this space. The ability to scale regional or national customer service and construction operations helps providers better stomach the capex required to build broadband.
There are exceptions and nuances here of course. Dense regions are cheaper to construct (sometimes) and see more competition. Also, new forms of connectivity (high speed wireless for example, maybe 5G) are creating some much-needed broadband competition on the margins. However, for the most part, the narrative above rings true for most of America.
Is the business internet market different?
Thankfully yes! Office buildings and data centers have much more ISP competition than home broadband does.
Before I get into the “why” of this, I’d like to show you how stark the difference is. Data on average connectivity options in office buildings is hard to come by, but we can illustrate the difference with a few examples.
The colored lines around the address above are fiber routes in and near the address. This address is an office building with three providers on-net and several more near-net who could easily get in (able to get in and connect at reasonable cost). If you were a buyer at this address, you could gather bids from 7-8 providers if your heart desired! This is Miami, a major metro market, but not a top 5 major metro market.
Yes, the above address has many more colored lines. It’s one of the most well-connected data centers in the US. It has >15 different providers on-net. You read that right.
Final example here. The above address is an office building in Columbia, SC (tier ~4 market) that still has four different fiber providers to pick from.
It’s fair to say that if you’re in a top 150 market of the US, which covers most office real estate, you will have your pick of internet options.
Why is business internet different?
The same economic model we used to understand residential broadband can help us understand why business internet is much more competitive.
When building internet into an office building, the same costs exist that would exist for residential connectivity and then some, as dense metro areas may be more costly to build in and buildings can be complicated to enter. However, two factors make this prospect more attractive for ISPs.
For one, an individual office building will likely have many tenants who need your services, so even if you pick up 20% of the building, that could still mean 10 valuable subscribers spread across your capex to get into the building. Second, businesses are more likely to buy bigger-ticket, high bandwidth services (dedicated internet, dark fiber, wavelengths) over longer contract terms (typically 3 years, sometimes more). This means much higher monthly revenue guaranteed for a longer period of time, at lower churn. The exact same logic applies to data centers, where there are often several businesses who need high-bandwidth, long-term connectivity for mission-critical applications.
For the reasons outlined above, there are many ISPs who operate purely for commercial customers and don’t touch residential at all (Zayo is a good example of this).
Of course, there are exceptions to the above. Rural areas often still have a lack of business options due to low density, and single-tenant retail storefronts outside of major metro areas have options more similar to residential subscribers often.
I’m a business buyer. How do I use this to my advantage?
Unfortunately, just because you have options doesn’t mean ISPs make your life easy. Even as a business buyer, there are no easy ways to determine who is on / near-net at a building, and running a competitive bidding process for high-bandwidth services requires a ton of leg work, waiting, and phone calls.
Two recommendations from our side. One, consider using an agent. See what we’ve written on the topic here. Telecom agents will run bidding processes on your behalf and can be helpful when they do their job well. However, often, agents let conflicts of interest muddy their recommendation quality. Also, finding a good agent can be tough. Second, consider using Lightyear (yes, I had to put in a shameless plug). Our objective is to make buying connectivity as easy as buying goods on Amazon. If you fill out our questionnaire with specific needs (takes 2 mins), our system will gather vendor quotes on your behalf and give you all the information needed to make a decision. We’ll even project manage your implementation and be around to rebid your contract once expiration nears.
Regardless, don’t let ISPs make you think they don’t have competition!