Commentary: High prices for Net access

Higher prices for high-speed Internet access--via DSL (digital subscriber line) or cable--is the natural follow-up to the major industry shakeout of the last year. With much of the competition gone, and with many of the surviving major players carrying huge debt loads and desperate for profits, prices have to rise.

The market-share gold rush is over, at least for now. No one has the stomach for more price competition. Carriers will go for profits and try to be the last one standing.

The price increase is not confined to North America. We are seeing a strong trend toward higher prices in Europe as well. For instance, DSL price increases of about 30 percent were announced in Sweden two weeks ago.

The shakeout has left the entire industry to an oligopoly of large players including the telephone companies, a few large cable operators and, of course, AOL Time Warner. The question is whether this field will act like the airline market--and other markets dominated by a few large players--in which the dominant players tend to raise and lower rates together.

Are all the players so beaten up financially that when one starts raising rates, the others will follow rather than try to cut their rates to steal market share? We think they are, and we expect all of them to raise rates slowly over the next 12 to 24 months until they reach profitability. For the moment, profits and cash are back in style.

Sweetening the pot
Rates will probably go up 20 percent in most areas, although that will vary depending on the state of local competition. To make the increases more palatable to customers, both the telephone companies with DSL and cable companies will bundle additional services. The cable companies definitely will offer more cable channels--which will cost them virtually nothing extra to transport--to sweeten the deal. It's the standard model: Push up the rate for basic cable service and provide discounts for those willing to add premium services and therefore commit to a larger total monthly fee.

The news gets worse. Unless the economy picks up, the telephone companies will be putting further DSL versions on hold. So if you don't have service now, you probably won't see it anytime soon.

	See news story: Could Net cable rates be headed higher?

The irony is that the economic pressures we are seeing begin to make sense of the AOL Time-Warner merger. The normal tendency is for every content provider to seek delivery via every carrier and Internet service provider to maximize its audience, and every carrier/ISP wants access to every content provider to attract subscribers. Today, however, having exclusive content--or at least content that can be bundled at a discount--provides an advantage. AOL Time-Warner is in a good position to exploit this dynamic.

This, however, will be a cyclical phenomenon.

Eventually, something will come along to force rates back down. It may be high-speed wireless access--although that probably won't be available generally for several years--or it may be that eventually the carriers will raise their rates too high and someone will come along with a business plan to undercut them.

Broadband competition requires separate carriers using separate access technologies. The DSL market has proven that competitors can't share infrastructure owned by an incumbent carrier and still make money. Only competition with cable keeps DSL expansion going, and carriers are going to keep their pricing in sync. Broadband wireless is the great hope, but carriers have faltered with terrestrial technologies such as MMDS, and the new satellite services such as StarBand are too costly.

No white knight
The other possibility is that the Federal Communications Commission may step in. That is not likely in the present administration, however. Rates will have to get pretty high, and customers will have to start screaming, before the regulators take action.

Individuals should expect the cost of their high-speed Internet connections to rise over the next few months, probably to about $50 per month. To get a better deal, they must look to bundled services that may cost more per month but that provide greater value and a lower effective price per service component.

Companies with large numbers of telecommuters can look for geographic concentrations of home workers that overlap a single carrier's area and try to use that information to negotiate a deal with the cable or DSL carriers in that area. Overall, however, they should expect the cost of supporting those telecommuters with high-speed access to rise.

Meta Group analysts Dale Kutnick, David Cearley, David Willis, Leif-Olof Wallin, Bruce Robertson, Val Sribar and William Zachmann contributed to this article.

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