Phone companies cut prices on fast Internet service

Jace Curtis is the kind of customer who could help phone companies catch up to cable operators in the high-speed Internet market.

By David Koenig, Assoicated Press USA Today

Curtis, a marketing manager for a high-tech company in Austin, already had broadband from his cable company but jumped to a digital-subscriber line service, or DSL, for one reason: price.

To Curtis, there wasn’t much difference between getting fast Internet access over a phone line or a cable line.

"I saw broadband as a commodity," Curtis said. "Price is very important to me."

The offer that snagged Curtis — $26.95 a month for download speeds better than six times as fast as a dial-up modem — came from SBC Communications, which cut its lowest broadband price 10% this fall, far below the average of about $45 a month charged by cable companies.

SBC and other phone companies are still playing catch-up with the cable guys, who control about two-thirds of the rapidly growing market for high-speed Internet service.

Phone companies are turning to price cutting to close the gap. BellSouth and others are trotting out slower broadband at cheaper rates to entice price-driven consumers. Verizon, SBC and others offer discounted DSL to customers who also order local or long-distance phone service.

"Pretty much everybody has some type of offer out there," said Bruce Leichtman, whose Durham, N.C., firm conducts research on broadband products and services.

"The question that remains is, will we have a price war?" Leichtman said. "The challenge is once you start this, it’s very hard to extract yourself from it."

For now, cable companies are mostly holding prices steady and instead are competing by offering ever-faster service. That could lead to a two-tiered consumer broadband market.

Phone companies could wind up charging lower rates to people who use the Internet mostly for browsing and e-mail, while cable companies take the high-end customers who will pay more for quicker downloading of streaming video and other bandwidth-intensive applications.

Cable companies have toyed with lower prices, too, however.

The nation’s broadband leader, Comcast, briefly offered a $19.95 monthly rate in a few markets but decided not to extend the deal this week.

Patrick Mahoney, an analyst with The Yankee Group, said telephone companies, or telcos, are willing to cut broadband prices if it helps them keep local and long-distance phone customers when cheap DSL is packaged with phone service.

"Telcos are using DSL to protect their flagship product, which is voice," he said. "They make good margins on voice."

SBC, Verizon and other phone companies, however, have been experiencing sharp declines in the number of local-service lines because of the rise of e-mail and cell phones. That has weighed heavily on their stock prices.

Mahoney estimates that SBC is just about breaking even by offering DSL for $26.95 a month (the price is locked in with a one-year commitment, and installation costs $200 if you don’t want to do it yourself).

Discounts helped broadband companies post strong increases in subscribers in the June-September period, a trend that analysts expect to slow only slightly in the fourth quarter.

Americans have been signing up for high-speed service in big numbers. The major cable and phone companies added more than 2 million new subscribers in the third quarter, raising the total number of broadband households to more than 22 million.

Meanwhile, The Yankee Group estimates there will be 51.5 million dial-up households at the end of December, down from 54.5 million a year ago.

Denice Hasty, assistant vice president of consumer marketing at San Antonio-based SBC, said about 70% of DSL subscribers have moved up from slow dial-up service.

AT&T is promoting a $19.95 deal, although it jumps to $39.95 after three months.

BellSouth has crafted a steppingstone strategy to lure dial-up customers, knocking $10 off — as low as $24.95 — for a slower "DSL Lite" that has a download speed of 256 kilobits per second — still about five times faster than dial-up — and upload of 128 kbps.

By comparison, the $26.95 offer from SBC promises download speeds as fast 1.5 megabits per second — one megabit is 1,000 kilobits — with the same upload rate as BellSouth’s DSL Lite.

Cable-modem service can be as fast for downloads as several megabits per second, though the speed can suffer if several users in one neighborhood log on at once.

Dave Watson, executive vice president of Comcast cable, said the faster speed makes cable "a different product, and we don’t need to discount it."

Comcast expects that new applications such as video chat and video e-mail will drive more customers to faster cable systems, not lower-priced DSL. Phone company executives believe the cable operators misjudge the market.

"The cable guys say, ‘We have 3 megabits and it’s all about speed,’ but the people who were sitting on the sidelines were dial-up customers," said Michael Bowling, vice president of broadband at Atlanta-based BellSouth. "They need a lower-priced product even if it has a different speed."

Kathy Hackler, a telecommunications analyst for research firm Gartner, said the discounts have put broadband service "in the ballpark for a lot of users." But, she added, companies must overcome the perception that installing high-speed Internet is a chore involving long delays.

Leichtman predicted that lower prices will create more churn — customers who will jump from one provider to another based on the latest, greatest offer.

"Deals are nice to attract customers," he said. "But it’s a whole different game to retain them."
Copyright 2003 The Associated Press.

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