Battle of the Broadbands

SBC's price cut on DSL may pressure cable to follow

Phone giant SBC Communications' plan to slash the price of its SBC Yahoo! Express DSL (digital subscriber line) service to $14.95 a month could signal new price wars for cable operators and other providers of high-speed Internet service, giving consumers limitless options on price and speed.

“This definitely puts pressure on the cable operators to lower their prices,” says Patrick Mahoney, senior analyst for Yankee Group Research Inc. He estimates that more than 52 million homes will be using high-speed access by 2008.

San Antonio-based SBC believes the lower price will help it snag cable broadband subscribers who are paying higher fees for faster access speeds. Moreover, it hopes to draw in some of the 77 million Internet users that rely on the slower dial-up services that can cost more. “Based on our experience,” says Becky De La Cruz, SBC executive director for retail DSL, “lowering the price is the single most effective way to drive broadband adoption.”

High speed

Already the leading national DSL provider, with more than 5.6 million subscribers, SBC will deliver 1.5 megabits per second (Mbps) of data for $14.95 a month and 3.0 Mbps for $24.99 a month. SBC Yahoo! Express currently passes 39 million homes, a major reason De La Cruz thinks the new pricing structure has potential.

Threat to cable revenue

It could also whack data revenue for cable operators. Cable's average revenue per high-speed customer runs about $41 monthly, approximately 11% higher than telcos' average. UBS media analyst Aryeh Bourkoff expects cable's price to drop modestly over the next year, to a $40 average. But DSL is expected to drop dramatically to $33.50. SBC's recent announcement could accelerate that price competition.

Heavy discounting has helped telcos add high-speed-data subscribers faster than cable. During first quarter 2005, telcos secured 1.4 million new DSL customers, while cable added just 1.2 million. But the overall market is still growing so fast that cable's high prices indicate operators are seeing much stronger profits than telcos are.

But the heavy discounting offered by SBC doesn't come without some catches. Subscribers need to commit to the service for one year, as well as subscribing to SBC phone service and buying the modem. (SBC offers a $99 rebate on the $99 modem.)

After the first year, the monthly rate rises to the normal fee: $49.95 per month for 1.5 Mbps or $59.99 per month for 3.0 Mbps. Customers will be able to sign up for longer-term service contracts at cheaper rates, according to SBC spokesman Andy Shaw.

By taking cable's data subscribers, SBC hopes to offset some of the voice-sub losses (Time Warner Cable continues to sign up 15,000 new voice subscribers a week) in the dial-up market. Companies that, like NetZero Inc., have a fee of $14.95 a month for high-speed service or that, like AOL, charge $23.95 a month for dial-up access are seen as vulnerable to SBC Yahoo!. AOL, which refused to comment on SBC's plans, currently has 21.7 million dial-up subscribers in the U.S. About 16.8 million pay more than $15 per month, and another 4.8 million pay less than $15 a month.

De La Cruz also thinks many dial-up users will find DSL's 1.5 Mbps of bandwidth to be plenty. The 3.0-Mbps service will be attractive to those who download a lot of content or play online games.

Cable operators, so far, are unconcerned. “You always have to read the fine print of [SBC's] offers,” says Time Warner Cable spokesman Keith Cocozza. He points to a number of hidden fees and taxes, plus the need to be an SBC phone customer, as just some of the ways the $14.95 price point quickly climbs out of the teens.

“When customers do the math,” he says, “they'll realize they're paying more than they think they are and getting far less capacity than we offer for a little bit more money.” Time Warner Cable's Roadrunner service offers 4.5 Mbps at $44.95 per month and 9 Mbps for $80 as stand-alone service (both are cheaper when bundled with video and/or voice service).

Cable watching price

Comcast Corp. spokeswoman Jeanne Russo sees little similarity between telco DSL and cable broadband. With 7.4 million broadband subscribers, her company isn't concerned, especially because the telcos cut their rates in 2003 and Comcast continued to see year-over-year growth; last year, it added 1.7 million subscribers.

Cable operators are watching the pricing strategy closely. “This is definitely a direct attack on the cable operators,” says Yankee Group's Mahoney. “In about four years, the market will still be dominated by cable broadband, but DSL and telcos will have about 50% of the market.”

SBC, it appears, will do what it can to make Mahoney's prediction come true. “We're going to get DSL into as many homes as we can,” says De La Cruz. “And by doing things like making this only available online, we can be more aggressive and lower the cost because we don't need sales reps.”