Broadband economics: How I'll save $700

It's a simple principle of economics: competition and more customer choice results in lower prices.

And so it is true of broadband services. With about 65 percent of the U.S. population now subscribing to broadband, cable operators and telephone companies are duking it out for new customers. The companies are offering cut-throat prices and new promotions to win over new subscribers.

For consumers in areas of the country where competition is heating up, the savings can be huge. For example, Verizon Communications, which has been losing DSL customers to competitors, this week announced aggressive new promotional deals for its high-speed DSL and Fios, fiber-to-the-home Internet services, as it tries to tempt new subscribers.

New Verizon DSL customers can get six months of free Internet service if they commit to a one-year contract. The company also announced a slew of deals for Fios customers, including one that offers new Fios TV subscribers who sign up for service as part of a bundle, free multiroom DVR capability for three months.

These deals sound terrific to consumers, like me, who live in markets with at least two broadband competitors. But for millions of Americans living in rural regions of the country and for people living in some urban areas, where carriers don't find it profitable to offer service, only one choice of Internet provider exists today.

And as a general rule of thumb, these consumers aren't usually offered enticing promotional deals or discounts on service. In fact, on average they pay much more for their services than people living in more competitive markets.

A task force at the Federal Communications Commission that is developing a national broadband policy highlighted this fact as a major barrier to universal broadband access during an open meeting at the commission on Wednesday.

The group also noted that broadband service providers tend to deploy service in higher income neighborhoods where more people are likely to sign up for service over low-income areas. As a result these markets generally have only one provider. What this means is that lower-income people, who have less disposable income, are often the ones forced to pay higher prices, while people who have more money pay lower prices for service.

Big savings in the Big Apple
To test this concept and to see if I could significantly put a dent in my monthly expenses, I decided to investigate my own broadband options in New York City, where I have lived and been a cable subscriber for nearly 12 years. With a little bit of leg work, I quickly discovered, I could save nearly $700 in one year by switching broadband providers.

I currently pay about $147 a month for cable TV and broadband service from Time Warner Cable. This bill does include two DVRs, two remote controls, and HBO channels and on-demand services. But it does not include taxes or a home phone service.

I live on the Upper West Side of Manhattan and even though I have seen Verizon putting fiber underneath the street on my block and even though my inside sources at the company have told me that two central offices near my neighborhood are currently being upgraded this month to provide Fios TV service, I am still not yet eligible for Fios service.

The only option I have from Verizon right now is DSL service. With the new six-month broadband-for-free promotion, Verizon is offering a triple play package that includes 3 Mbps or 7.1 Mbps DSL, DirecTV Plus DVR package, and Verizon's unlimited local and long-distance calling plan for $70 per month for the first six months.

During the second six months of this annual plan, the bundle with up-to-3 Mbps service is $99.99 per month. And for the faster 7.1 Mbps broadband service, the price is $109.99 per month after the first six months.

Factoring in the first six months of free DSL service in this total package, my average monthly cost would be $90 per month for home phone, broadband, and subscription TV services. This is an average savings of $57 per month over my current service, and a yearly savings of about $684.

I called Time Warner Cable to see if the company could beat Verizon's price. The best price offered to me for the same exact package, which includes one set-top box with DVR service, was $119 per month before taxes. The only difference in this package is that I would not have to sign a contract, but the price would be guaranteed for a year. The representative I talked with on the phone offered to give me free Showtime service for a year to sweeten the deal. Even at this price, Verizon's offer is still $29 a month cheaper than Time Warner's revised service. In total, I would still be saving $348 for the year.

But there is one catch to Verizon's deal. Verizon guarantees the price of the bundle for a year. And if customers cancel the service during that time period there is an early termination fee. But DirecTV requires users sign a two-year contract. And pricing on the TV service is not guaranteed during the second year, which means it could go up significantly in 2011.

What's more, if Fios becomes available in my building, I can upgrade my Internet and phone services at no penalty. And I would be eligible for whatever special deal Verizon might offer me. But I would have to pay a penalty to DirecTV if I terminate my TV service early to get Fios TV.

Still, with a yearly savings of almost $400 to $700 sitting on the table, I'd be a fool not to make some kind of change now. But just imagine if there was a third or even a fourth competitor in my market? The savings could be even greater.

More competitors lead to lower prices
According to a Pew Internet and American Life Project study released in June, the more competitors there are in a market, the cheaper the price of the service for consumers. In the survey, about 21 percent of high-speed Internet users said they had only one choice in broadband provider. And on average these customers spend about $44.70 a month on high-speed Internet service. About 69 percent of respondents said they had two choices in broadband providers, and on average they spent about $38.30 on Internet per month. Average prices fell yet again for the 17 percent of respondents who said they had four or more broadband provider choices. The average amount they paid for service was about $32.10 per month.

What this tells us is that more choices matter. And when broadband service providers are forced to compete, consumers get better deals.

This basic thesis was also the conclusion of a recent study (PDF) commissioned by the FCC and conducted by Harvard University's Berkman Center for Internet & Society. This study concluded that that other countries have faster and cheaper Internet access because there is more competition. The report went on to conclude that this new competition was made possible by regulatory policy that promoted open-access rules or rules that force service providers to share their infrastructure with competitors.

"The lowest prices and highest speeds are almost all offered by firms in markets where, in addition to an incumbent telephone company and cable company, there are also competitors who entered the market, and built their presence, through use of open access facilities, " the report says.

The report has gotten plenty of criticism. AT&T and the National Cable & Telecommunications Association have filed letters warning the FCC against applying the findings to its national broadband policy. The NCTA said the FCC should be careful in accepting these results when past attempts here in the U.S. to impose open access rules have failed.

Whether open access rules really create more competition is debatable. But one thing that cannot be debated is the effect that more competitors have on prices and the quality of service in the overall market.

With this in mind, I hope that the FCC's new national broadband policy, when it's finally presented to Congress in February, will do more than simply ensure everyone in the U.S. has access to at least one broadband provider. I hope the plan also includes aggressive measures to encourage competition among two or more companies in as many markets as possible.