Commentary: Three tiers for broadband

By Jed Kolko, Senior Analyst

Conventional wisdom holds that broadband is just one more victim of the technology recession. Wrong.

Despite the recession, weak PC sales and telecom industry woes, residential broadband adoption is booming. At midyear 2002, 14.4 percent of U.S. households had broadband at home, up from 10.1 percent at the end of 2001--acceptance that's on track to meet or exceed Forrester's projection of 17.8 percent by year's end. roadband is entering U.S. homes at the same rapid pace enjoyed by previous technologies deemed successful such as digital cameras and writeable CD drives.

Why are consumers getting broadband? Two-thirds of broadband users say that they added the service to download information faster and nearly as many did so to speed up e-mail and other communication tools. Furthermore, a reliable, always-on connection is more alluring to them than being able to download music or movies faster, or to play games at the speed of light.

So what's changing? The broadband adopter is becoming more mainstream, which means a larger market opportunity. But mainstream consumers are more reluctant to pay today's broadband prices, and they're less likely to do the bandwidth-hogging multimedia activities that early adopters do. At the same time, early adopters are spreading the bandwidth across networked computers and even their game consoles, pushing the limits of their broadband service today. To satisfy this diversifying market, providers need to move from one-speed-fits-all to tiered broadband services.

Forrester believes that providers need to offer consumers three tiers: starter (128 kilobits per second to 256kbps for $20 to $30 per month), standard (500kbps to 1.5mbps for $40 to $50 per month) and premium (2mbps or more for $60 to $80 per month). Starter broadband will draw in the mainstream that wants the always-on connection and the chance to free up the phone line, standard broadband will keep today's subscribers happy, and premium broadband will satisfy the heavy gamers, music downloaders and videophiles.

Providers worry that starter broadband will hurt the bottom line by drawing consumers down from today's more expensive services, but our consumer research shows that most standard-tier subscribers are accustomed to the speed they get today. Only 14 percent of today's broadband subscribers would downgrade to starter service at half the price. And starter broadband, even with tight margins, gives providers a long-term revenue stream: Because churn is lower for broadband than it is for dial-up, starter-tier subscribers will look to their current providers when they're ready to upgrade to a higher-tier service.

For providers to pull this off, they'll need to change their focus from grabbing dial-up subscribers and refocus on upgrading broadband subscribers. They'll change their focus in 2004, when the number of residential broadband

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Providers can convince consumers to upgrade by letting them try faster speed on weekends, standing ready to upgrade them instantaneously, and subsidizing home networks so that consumers spread the bandwidth to more devices and realize they need more speed. Providers will realize they need to tier applications, such as music download subscriptions, or no-wait customer service, along with the speed tiers, giving the premium broadband customers the content and services that they'll want to use with their extra speed.

The new provider-portal partnerships like SBC-Yahoo and Verizon-MSN are a foundation for packaging tiers combining content and services, but the success of broadband providers will depend on how effectively these and other partnerships can deliver broadband experiences that bundle bandwidth, applications and content.

© 2002, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.