Cable firms bet on broadband speed, not price

Comcast broadband subscriber Ron Beman said he couldn't care less about Comcast's plan to double Internet download speeds for customers at no extra charge.

Bottom line:
It remains to be seen if consumers care whether speed is more important than price. Cable companies want to avoid a price war against the Baby Bells' DSL promotions.

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The Issaquah, Wash., customer-service representative considers himself a mainstream, e-mail- and Web-type Internet user and said the extra bandwidth, slated to jump from 1.5mbps to 3mbps, won't change his habits significantly.

"There comes a certain point where speed does matter," Beman said, "but then it gets to a certain threshold where I have enough."

Cable companies are betting raw speed will help them win the broadband race, but they may be backing the wrong horse. Slower services from rival DSL (digital subscriber line) providers are showing signs of popularity thanks to aggressive discounts. Although cable currently leads DSL by a wide margin in the United States, that gap is set to close if enough new customers vote for price over speed.

At the end of 2002, there were 5 million DSL subscribers in the United States, compared with more than twice as many--10.5 million--cable broadband subscribers, according to market-research company In-Stat/MDR. By the end of 2003, the gap is expected to remain, with 7.5 million DSL subscribers compared with 13.3 million for cable, In-Stat/MDR estimates. However, the researcher said its projections don't take into account the latest round of DSL price cuts and warned that it may revise its numbers.

Faster connections have been a major factor in convincing Americans to upgrade to broadband from dial-up Internet services, a switch that can boost download rates from 56kbps to 256kbps on the low end. That's enough to take most of the frustration out of Web surfing and much of the wait out of downloading files over the Internet, but not enough to allow for easy fetching and viewing of video or for turbocharged online gaming.

Still untested is how much demand there is for services promising top speeds well above the 1.5mbps currently offered by most cable companies.

Cable companies offer temporary discounts to first-time broadband subscribers that can cut monthly fees by more than half for the first six months or so of service. Ultimately, though, they don't want a price war. Instead, they hope customers will pay a normal price of between $45 and $55 a month for speeds up to 40 times faster than those available with standard dial-up connections.

In contrast, $26.95 a month gets subscribers to SBC Communications' industry-low promotional DSL plan speeds that are about five times those available through America Online's $23.90 a month dial-up service. The SBC price applies for the first year of service, then rises to the normal rate of $39.95.

Money talks
Although there is substantial demand for dial-up upgrades, analysts said cable companies face a hard sell peddling superfast speeds.

"There aren't a multitude of consumers waiting to buy broadband until their cable company increases speed," said Michael Harris, president of market research company Kinetic Strategies. "Speed isn't the factor for purchase, it's price. People don't use enough of the Internet to mentally justify spending $45 a month" for cable modem service.

Cable companies aren't waiting around to see if DSL price cuts will significantly eat away at their market share. In the span of a week, national cable networks such as Comcast, Time Warner Cable, Charter Communications and Adelphia all announced plans to at least double their maximum speeds to 2mbps to 3mbps.

"Customers want more speed," said Greg Butz, vice president of marketing and business development for Comcast's high-speed Internet group. "Doubling down on 3mbps is one element of what you would anticipate to be a sustained series of innovation to demonstrate our superiority against the alternatives."

In fact, cable companies have long had the ability to turn up the speed dial, but have resisted it because of their skepticism over the business potential. Other initiatives, such as digital video upgrades, the burgeoning market for video-on-demand, and selling phone services, put bandwidth upgrades on the back burner.

Leo Hindery, AT&T's former cable chief, said the cable industry's current emphasis on high speeds could make it vulnerable to cheaper offerings.

"It turns out that people are just as accepting of 'faster at relatively cheaper prices' as they are of 'very fast at expensive prices,'" Hindery said.

Banking on the triple threat
Broadband is one critical piece of cable's campaign to bundle high-speed data into its core video-programming business. Adding phone calling to the package, cable companies are equipped with a triple threat against their nemeses: the Bells and satellite TV.

Competitive fears over satellite's growing popularity in the early 1990s drove cable to enter the broadband game in the first place. Cable's core video business was under pressure from satellite services, such as Hughes Electronics' DirecTV, that offered hundreds of more channels and a clearer signal. Satellite was also expected to become a major player in delivering high-speed data services, but that plan eventually foundered.

Throughout the mid- to late '90s, relaxed government regulations allowed cable companies to pour an estimated $75 billion into upgrading their equipment to support digital signals. In the process, companies transformed their analog coaxial cable lines to support digital, in turn opening bandwidth to support services such as phone, video-on-demand, high-definition TV and broadband.

"That's why we have broadband in this country and why cable guys didn't get trumped by satellite guys," said Blair Levin, the chief of staff for former Federal Communications Commission chairman Reed Hundt and now an analyst at Legg Mason.

According to Levin, these upgrades can be seen as indicative of cable's behavior during periods of competitive uncertainty. Instead of entering into a price war, cable companies invested heavily to improve their product. Much to the chagrin of satellite, cable now offers hundreds of channels; and to the dismay of the Bells, cable can sell phone service and distance its lead in broadband.

A 20-lane highway
Cable companies can jack up speeds to levels much greater than 3mbps, but that won't happen until there is a sound reason to do so.

In fact, the recent round of speed increases are in some cases nothing more than a return to previous levels. Excite@Home, the failed cable broadband service that used to operate many providers' high-speed networks, offered base speeds of more than 3mbps in certain markets.

Despite the fact that high-speed services are a significantly profitable business for cable, increasing Internet bandwidth means sacrificing space reserved for businesses such as video-on-demand that are more immediately appealing to consumers.

Theoretically all of them have the ability to significantly increase bandwidth, said Mike Paxton, an analyst at In-Stat/MDR. "But do you want to offer HD channels or cable modem channels? It's a bandwidth allocation choice that you're making."

Another issue is how to generate more revenue by opening up more bandwidth. Heavy-bandwidth applications like online gaming or media streaming are either limited to a select group of users or unproven businesses.

During the Goldman Sachs Communicopia conference in September, Comcast CEO Brian Roberts praised the broadband business but cautioned that its true potential has yet to be realized.

"In the last six months, more people are coming up to us and suggesting broadband applications for high-speed Internet," Roberts said, "whether that's ESPN for broadband or Xbox Live or voice-over-IP or video chat or a variety of broadband-only applications."

"We could do 50 megabits if there's a market for that, or 100 megabits," Roberts added.

The problem is there isn't a clear revenue opportunity for cable by opening up its bandwidth floodgates. The recording industry is suing consumers for downloading songs illegally through services such as Kazaa, while legal downloading businesses such as Apple Computer's iTunes are in their initial phases. Entertainment and content outlets are still figuring out how to make money off of video streaming without compromising their television assets, which leaves a limited amount of content available for Web users.

"The one thing that was forecasted to happen was a lot of streaming video," said cable veteran Hindery, recalling Wall Street's expectations. "But if you stream too much video, you destroy the core traditional video business."

The hard part for cable and DSL providers alike is figuring out the balance between speed, price and demand.

This is especially true for SureWest Communications, a Roseville, Calif., company that serves video, phone and broadband to a market limited to the Sacramento region. As a starting point, subscribers can get 10mbps broadband for $49 a month, both downstream and upstream.

Executives at SureWest say speed is by far a determining factor for its consumers, especially those who operate their own home businesses and Web sites. But for people with less-sophisticated needs, all that bandwidth is just a leading edge for what still has yet to come.

"Content is going to drive the bandwidth requirements," said Bill DeMuth, SureWest's chief technology officer. "We want to be in the position to have the bandwidth now."