The profitability of flat-price broadband with an over-the-top subscription content product – benefits from cooperation

Abstract

We investigate the effect on the broadband market when an over-the-top subscription content product is introduced. Does it necessarily increase or decrease profitability of the broadband product when it (a) boosts the utility of broadband but (b) imposes additional costs to deliver the broadband service? The short answer is it depends. The different scenarios that we choose to illustrate this demonstrate that in many cases, the broadband and content providers can jointly benefit from coordination on how the content product is priced. Empirical evidence confirms that coordination does take place where 'network neutrality' is not mandated. In addition to the illustrative scenarios, we run a large number of simulations with a single broadband and single content provider, restricting the firms to integer prices, for different distributions of the customer valuations. The results show that cooperation between the firms (possibly through paid peering) generally produces better outcomes (also from the consumer point of view) than when the broadband provider reacts by raising the price of broadband independently.