Can DSL handle success?

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

eventually wring more profits out of subscribers by selling them higher-speed services or other, more-advanced services such as Internet Protocol TV.

Verizon has already started selling its television service over Fios in several states, including Texas, Florida and Virginia. AT&T is testing its TV service in Texas, and it expects to offer it more widely later this year.

Incapacitated?
But it's a tricky business. The low-priced DSL services have certainly struck a chord with price-sensitive customers--but even without the price cuts, experts say, the growth in the broadband market is still healthy as people drop dial-up for broadband and more-experienced Internet surfers upgrade to faster speeds.

That seems to be borne out by the fact that cable operators, who have marketed their services by emphasizing faster download and upload speeds, have also been adding new subscribers.

Comcast, the largest high-speed Internet provider in the country, reported last week that it added 378,000 new broadband subscribers in the fourth quarter of 2005. In total, it added 1.5 million subscribers in 2005, ending the year with 8.5 million high-speed customers.

That's in spite of the fact that Comcast's services are pricier than its rivals' DSL offerings. Cerney, for example, nabbed an introductory rate of $19.99 a month--but that price lasts for only three months, after which the cost jumps to $42.95.

Comcast and other cable operators say they'd rather compete on the value of their service than strictly on the price. As a result, they tend to bundle multiple services, such as high-speed Internet access, telephony service and TV, all in one package. Plus, Comcast's 6mbps service is much faster than Verizon's 768kbps service.

The bundling strategy has worked well for Comcast. For example, it claims that 98 percent of its new digital voice customers subscribe to a second service with the company.

"What we are finding is that our customers are choosing our service and recommending it to friends and family," said Jeanne Russo, a spokeswoman for Comcast. "We offer a better service than our competition. And we're able to service everyone in our footprint and provide the speeds we promise."

All this could spell trouble for Verizon as it looks to meet demand.

A spokeswoman said the company has been forced to stop taking orders in some parts of the country. Equipment shortages from one of Verizon's key suppliers, which the company has chosen not to name, is part of the problem, she said--coupled with increased demand for Verizon DSL services.

"If we reach capacity at a central office, we have no choice but to stop selling for awhile until we get in additional equipment to serve more customers or until more lines free up," said spokeswoman Bobbi Henson. "The extreme popularity of our new 768K service, in combination with equipment shortages we've had from our vendor, have resulted in some of our offices now reaching capacity."

Henson said the equipment supply issue should be cleared up soon, and that after that, the company shouldn't have problems servicing new customers.

AT&T said it hasn't had any trouble keeping up with demand, hence the recent price cut to $12.99.

Despite any inconveniences or delays, Cerney, the disappointed prospective Verizon customer, said she still hopes to take advantage of the Verizon deal.

"I was just so tired of dial-up, and $14.95 is a great deal," she said. "I really don't want to have to pay $45 a month for Internet, so I'll probably try to switch to Verizon when the Comcast promotion ends."