SBC, the second-largest phone company in the United States, announced Wednesday that it will reduce the price of its DSL service for new subscribers to $14.95. This is the deepest discount that a phone company has given for broadband services, well below the $23.90 that America Online charges for unlimited dial-up Internet access.
Analysts predict that the sharp price cut will put pressure on cable operators such as Comcast, Time Warner and Cox Communications to slash prices on their services as well.
"SBC has taken things to the point where the price differential is really stark between DSL and cable modem service," said Jim Penhune, an analyst with Strategies Analytics. "At this point, with DSL almost half the price of cable services, I think the cable companies don't have much left in their argument for speed over price."
The cable companies say they have no plans to drop prices to compete with SBC. "Our take on competition for broadband is to offer more value to our customers," said Jeanne Russo, a spokeswoman for Comcast, which competes with SBC in several states, including parts of Texas and California.
But analysts caution that the writing is already on the wall, and that cable operators will have to do something.
"I'm sure they will wait to see what the subscriber numbers look like for the next quarter or two before they react," said Penhune. "It will likely start at the local level, where cable operators may reduce prices or offer promotions to compete."The power of price
SBC and other phone companies have always used price cuts as a way to compete against the cable companies, which got a head start in the market in the mid-1990s. Since that time, the phone companies have been playing catch-up to their cable rivals, which still dominate the broadband market with roughly 59 percent of all subscribers.
Competition between the two sets of companies is heating up even more now as cable companies including Cox and Time Warner also start offering telephone service along with television and high-speed Internet service.
Making matters worse for the phone companies is the fact that their traditional telephone businesses have been in steep decline for the past several years as more and more customers cancel local phone service and instead use cell phones or new Internet-based phone services such as Vonage.
In order to fight back, the phone companies have been steadily lowering prices and offering customers different tiers of service at reduced prices. Verizon recently.
So far, the pricing strategy has helped phone companiesSBC's strategy is simple: The company wants to sign up as many new subscribers as possible. The idea is that the more DSL subscribers it has, the easier it will be to sell them . In 2004, DSL had about 41 percent of the market, up from 39 percent the year before. Experts attribute most of the recent jump in DSL subscriptions to the phone companies' more aggressive pricing strategies. This trend is expected to continue with cable and DSL splitting the market evenly in the next three to four years.