July 7, 2003 12:45 PM PDT

Endless summer of DSL discounts

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Companies that provide high-speed Internet access over telephone lines are raising the stakes in their battle with cable rivals, turning summer into a season of discounts for many first-time broadband customers.

Verizon Communications, SBC Communications and EarthLink have been offering limited rates of $29.95 a month for first-time digital subscriber line (DSL) subscribers, while BellSouth recently dipped as low as $24.95 in a special promotion. In addition, SBC is allowing some existing DSL customers to lower its standard rates of $39.99 to $49.99 a month to the promotional $29.95 rate for a year, according to a customer service representative.

Cable companies typically charge between $40 and $45 monthly fees for customers who also subscribe to their cable TV services, but have shown no sign of matching short-term discounts from the phone companies.

Swimming against the tide of lowered rates, Cablevision Systems in New York recently raised its monthly fee by $5 to between $44.95 and $49.95. In addition, Comcast recently raised rates for former AT&T Broadband subscribers who subscribe only to its cable modem service from $42.95 a month to $56.95 a month. However, people who subscribe to Comcast's video services will maintain their broadband service at the $42.95 rate.

Briana Gowing, a spokeswoman for Verizon, said the DSL price cuts reflect a shift in the maturity of the marketplace for high-speed Internet users. "Part of the reason for lowering prices is we're going from early adopters to mass market," she said.

The cut-rate DSL prices are a clear shot at bolstering market share against cable broadband providers such as Comcast, Cox and Time Warner Cable, which claim superior performance and have so far outpaced DSL.

Underscoring the high-stakes race, Comcast bolstered its position as the U.S. broadband leader last week, when it began phasing out the last vestiges of the old AT&T Broadband Internet service it acquired in November. The deal added 1.93 million subscribers to Comcast's high-speed network, which had more than 4 million broadband customers as of the first quarter of 2003. That's nearly a third more subscribers than second-place Time Warner, which counted 2.7 million customers in the same period.

By contrast, the leading DSL service was SBC, with 2.5 million customers.

The impact of DSL price cuts is just beginning to be felt, and new subscriber tallies will be announced along with second-quarter earnings results beginning later this month, with strong growth expected. As of June, 12.45 million U.S. households subscribed to cable modem service, while 8.5 million subscribed to DSL, according to In-Stat/MDR. That's up from about 10.5 million U.S. high-speed Internet cable subscribers and about 6 million consumer DSL subscribers in March, according to subscriber numbers compiled from securities filings of major U.S. broadband providers.

Troubled times for the Bells
While consumers are reaping the rewards of this latest price war, the promotions shed light on more troubling matters for Baby Bell companies Verizon, SBC, BellSouth and Qwest Communications International. Phone companies are facing a widening subscriber gap with the cable modem providers and have turned to different marketing tactics to bridge it.

Playing high-speed catch-up DSL providers "are not cutting the lead that cable modems have established in the U.S., so they're using price as one new marketing tool to attract new subscribers," said Mike Paxton, an analyst at market research firm In-Stat/MDR.

More troubling for telephone companies is the potential for losing their coveted voice services customers to the cable giants. Major cable providers can now pipe video, Internet and phone calling into homes and serve up one bill for all functions. Telephone carriers can offer only voice and data services, leaving them stranded apart from video programming and raising questions about whether phone companies will one day deliver TV programming to households.

This long-term concern has forced DSL providers to search for new ways to market to the growing demand for broadband. Besides price cuts, DSL services are partnering with Web companies such as MSN and Yahoo as a way to differentiate themselves from their cable rivals.

The phone companies first developed technology to deliver high-speed two-way Net access. But it was the cable companies that first seized on the moneymaking potential for consumer broadband services.

During the mid- to late 1990s, cable giants spent billions of dollars improving their networks to support digital upgrades and two-way data transfer. Once the groundwork was laid, cable companies began marketing their services aggressively to their residential base, offering a first-mover advantage over DSL.

Phone companies, by contrast, struggled with the broadband transition, hampered in part by federal regulations requiring them to sell their DSL lines to third-party providers, something cable companies were not forced to do.

The regulations paid off handsomely for cable companies, whose investments allowed them to improve their high-speed service and reliability. Phone companies, on the other hand, were less enthusiastic to invest in services they had to share with outsiders.

Besides, telecom companies were sitting on a healthy business selling dial-up service over their narrowband phone lines, whether in bulk to other Internet service providers or directly to homes. And their penetration into small and medium-size businesses also offered them solid incentives to invest where the money lay.

"Phone companies could see the demand (for broadband), but the dial-up Internet business was very good for them," said Jim Penhune, an analyst at market research firm Strategy Analytics. "It drove up demand for second phone lines."

Consumer trends, however, eventually caught up with the Bells. U.S. households began upgrading to broadband and most of them turned to cable. Meanwhile, cable companies continued to invest heavily in providing voice services through their cable lines.

Dressing up DSL
While cable companies are using circuit-switched phone service over their coaxial cable, companies such as Cablevision are beginning to make available phone calls over Internet Protocol-based lines, which is a much cheaper option.

"The real game going on is as cable jumps into IP telephony, it's scaring the heck out of phone companies," said Dave Burstein, editor of industry newsletter DSL Prime.

With these realities in mind, phone companies are exploring many avenues to acquire high-speed customers, who can be tempted to buy other services and kept from choosing cable.

One method of customer acquisition being employed is partnering with Web portals. Verizon recently launched a product that bundles MSN's online service to its DSL subscribers. That comes after Yahoo and SBC launched their own service last September. Both arrangements offer a share in revenue from subscriptions and advertising.

Cable companies, however, have avoided striking deals with Internet companies, partly because of the ugly dissolution of Excite@Home, which had investments from major cable companies. But some companies such as Comcast are taking matters into their own hands by launching their own souped-up home pages.

Baby Bells in the near future will need to focus completely on growth. Despite crunching profit margins on these discounts, companies will need to grow DSL subscribers to maintain their relationships with their voice customers.

Analysts also raise the question of whether phone companies can stop the rise of cable and wireless phone services. One major weapon on cable's side is video, which phone companies do not have. The question will be whether phone companies will need to create or buy their own video programming service to remain competitive.

The Baby Bells "have to have eventually a video strategy because they're looking at their customer base losing line connections to wireless and cable telephony, and losing data to fixed wireless or cable modem," said In-Stat/MDR's Paxton.

 

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