April 1999

Increasing Internet Usage: Bandwidth and Costs Determine your Competitive Online Advantage

By Marc Phillips 

Reports from the US indicate that as many as 55% of all American adults used the Internet at least once in the past year. Meanwhile, a March 1999 Australian Bureau of Statistics (www.abs.gov.au) report estimates that 31% of Australians used the Internet last year. Both numbers show a considerable rise on the previous year. s figures. The ABS figures also show that during 1998, the number of Australian households with Internet access climbed 49% to 19% of all households.

These numbers reflect the maturity of the Internet. In the US, the technology is now well and truly entrenched the mainstream. In fact, some researchers believe the US market is approaching saturation. British-based researcher Ovum (www.ovum.com) expects the US market to be saturated by 2002, with future growth coming from the rest of the world.

It s worth looking at why the rest of the world lags behind America, particularly when many Australian companies look to the Internet as the mechanism for international expansion and exports of their goods and services. The explanation is that there are far fewer barriers between Americans and the Internet than exist elsewhere.

Take, for example, the cost of using the Net. In metropolitan Australia, you need a decent computer, a modem and a phone line to get online. An Internet-ready computer will cost a minimum of A$2000. Add another $200 for a modem. We re not talking about state of the Art hardware; we're talking about enough gear to have a decent Internet experience. For the average Australian home user, this costs almost one month s salary.

American s can buy Internet ready computers for under US$1000. Generally that price would include a 56K modem. Americans earn more than Australians and pay less tax. The bottom line is that for a typical US worker, an Internet ready system represents about seven or eight day s income. So in relative terms, to an American worker the cost of buying computer hardware is about one third of the cost to an Australian worker. No wonder fewer Australian s are online.

When we look at other factors, our relative situation looks worse. Most large Internet providers sell an  all-you-can-eat package, which provides unlimited access for a fixed monthly fee. The biggest provider is AOL (www.aol.com). American AOL subscribers pay US$21.95 for unlimited access. Australian AOL (www.aol.com.au) subscribers pay around $45. The monthly smorgasbord offering is similar for Australia s largest ISP s, Telstra and OzEmail. At current exchange rates that means US subscribers pay only two-thirds Australian rates, but don t forget US after tax incomes are higher than ours.

Then there s the cost of dial-up access. Most people find a second telephone line is essential for access. This will typically cost around $12 a month for rental plus 25 cents for each call (that s not the same as each successful log-on). Someone who logs on daily might need to make as many as 72 calls a month at a cost of a further $18. Few American. s will pay similar charges. Per call charges are not common in the US.

Other US services such as WebTV not only bring the cost of Internet access down further, these services are also designed to appeal to non-technical users. Surfing with WebTV is about as difficult as switching TV channels and you don t need an expensive computer to use the service. There is a similar service in Australia, but it hasn t made the same breakthrough here that WebTV has in the US.

So far we ve looked at the city. In the bush it s worse. While some ISPs now serve rural Australia, the cost of access from remote areas is significantly higher than in the US. Australia s big ISPs typically cover 70% of the population. With one or two regional exceptions (particularly in Alaska) most rural Americans have Internet access at costs only slightly above city dwellers.

When you take all these costs into account, the absolute cost of Internet access in Australia is around twice the US cost. But the slice it takes out of an Australian s after tax income is higher again. Given this, it isn t hard to understand why we lag behind the US.

On the positive side, our relative costs are considerably lower than in Europe. There, consumers generally have to pay for timed local calls. For example, in the UK British Telecom charges 4 pence per minute for a local call during the daytime. That s around 11 cents. Off peak calls are 1.5 pence and weekends are 1 pence per minute. So, a one-hour Internet session during the day will cost a British user around $7.50 for the call charge alone.

This explains why Australia Internet use is so much higher than in European countries. It also has an interesting effect on the way people use Internet services. Typically, they will log on, surf around collecting material to store on their hard discs and then log-off to view the pages off-line. So don t expect to see too many Poms in online chat groups. A side effect of this is that British ISPs don. t tend to impose time limits on their customers.

Most significantly, the European practice of imposing local call charges makes nonsense of e-commerce. While Europeans do buy online from international sites, they are far less inclined to buy online than Americans or Australians; mainly because they count the minutes spent on e-commerce transactions as part of the final purchase price. This is an area where we have a national competitive advantage over Europeans.  Another point about the cost of access is that it makes consumers less willing to pay for value-added online services like electronic publication subscriptions or game playing services.

We could also make comparisons between Australian and American prices for higher-bandwidth access. We could, but theres not a lot of point. Australian providers charge so much for higher bandwidth access that hardly any domestic Internet users bother to use these services. Some American s surf the web using cable modems and ADSL technology for considerably less than we pay for dial-up access.

Technically this bandwidth gap isn t a barrier to entry. But because Americans have higher bandwidth, they can use more sophisticated Internet applications such as video conferencing or high quality streamed audio. Their higher bandwidth means they enjoy a better Internet experience and are more likely to make better use of the Internet. You might be more inclined to use services such as online Yellow Pages if you could find what you want in seconds rather than minutes. With 28k modem access, using the old fashioned books can be much quicker.

Other barriers to entry are less obvious. Take, for instance, the way ISPs charge for their services. Most Australian ISPs will only take on customers who pay by credit card. From their point of view it makes sense. ISPs don t have to worry about the credit worthiness of credit card customers; collecting money is safe, easy and relatively cheap.

That's fine for people who are happy to use credit cards, but they are not appropriate for everyone. Many people prefer not to use credit cards because they find them too much of a temptation. Others are not allowed to own cards because they are too young or don t earn enough.

Many senior citizens choose not to own credit cards because they can be expensive. Yet in many parts of the world, senior citizens are among the most enthusiastic Internet users. By insisting on charging by credit card only, many ISPs are creating barriers for Internet access.

Internationally the barriers to Internet access are coming down. In the UK, most Internet users have free ISP accounts sponsored by supermarkets (Tesco), electrical appliance retailers (Dixons) and other organisations such as Vigin Net. Support is provided using a 50 pence per minute phone service. Some US companies are drawing eyeballs to their clients advertising by giving away computers. Internet kiosks in shopping malls provide pay-by-the-minute access for those who don t have home access. Libraries and other public institutions are installing basic access services for poorer people.

Satellite communications can now deliver high bandwidth communications to rural users for costs that compare favourably with those in major cities. Innovative technologies are being used to bypass telephone companies control over data links to residential areas. If we re going to live in a wired society, the next few years will need to see many more innovative ways of providing access to an ever-wider group of people.

For further information contact APT Strategies at info@aptstrategies.com.au