Can DSL handle success?

Low-cost DSL services not only are popular, at least one provider is oversubscribed in some areas.

After getting piles of mail from Verizon Communications about its new $14.95 DSL service, Barbara Cerney finally decided to ditch dial-up. But when she called Verizon to sign on, she got an unpleasant surprise.

Though her neighbors were using Verizon DSL, the company said the service was oversubscribed and she'd have to wait at least a month. Her only immediate broadband option was to subscribe to Comcast's more-expensive cable modem service. And the Annapolis, Md., resident, having made up her mind about slow Internet speeds, did just that.

The situation illustrates a potential catch-22 for Verizon as it looks to prevail over cable competitors in the broadband market. The company, and fellow DSL provider AT&T, have enjoyed significant success over the past year in using price cuts to convince customers that it's time to make the jump to broadband. But those same promotions could backfire if the companies can't accommodate the increased volume of speed-hungry customers.

"They may end up being a victim of their own success," said Jim Penhune, an analyst with Strategies Analytics. "It may be a good short-term problem to have too many people interested in your service, but it's not something you want as a sustained problem."

Last June, AT&T (then SBC Communications) was the first of the two large phone companies to dramatically reduce its DSL pricing--to $14.95 for the first year of service. In August, Verizon followed suit, offering its new tier of service, which includes 768kbps downloads, for $14.95 per month. And last week, AT&T answered back, with a $12.99 price tag for the first year. Since AT&'s prices are promotional, after the first year the price of the service jumps to the company's regular pricing model, which is $29.99 per month.

Since Verizon floated its $14.95 offer, the company has quickly grabbed new broadband subscribers. Last week it reported that the fourth quarter of 2005 had been its best ever for broadband, with 613,000 new subscribers signing on, a 14 percent quarter-over-quarter increase.

The company now has a total of 5.1 million broadband subscribers, a figure that includes all tiers of DSL customers, as well as subscribers to its fiber-to-the-home service, Fios, an ultra-high-speed package.

AT&T has also seen subscriber numbers jump. In the third quarter of 2005--the quarter immediately following its initial $14.95 promotion--the company increased broadband subscribers by 528,000. That number tailed off a bit in the fourth quarter, when AT&T added 425,000 new DSL subscribers. The company has a total of 6.9 million broadband subscribers.

"The price cuts on DSL by the phone companies have definitely helped them add new subscribers," Penhune said. "I doubt AT&T and Verizon would be reporting the quarter-on-quarter subscriber growth they have the last two quarters if they hadn't cut prices the way they did."

The phone companies' strategy is simple: They hope that by giving customers a taste of broadband at a low price, they'll

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