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Broadband price war brews

The nation's two largest phone companies offer more aggressive promotional pricing on DSL service as they try to compete head-to-head with cable operators.

Verizon Communications and AT&T have thrown the first blows in an impending broadband pricing war.

Last week, Verizon Communications said it will offer six months of free DSL service to new customers who sign up for a one-year contract and also use the company's traditional landline voice service. The promotion is available until the end of October.

Verizon's DSL service typically costs between $19.99 per month for 768Kbps downloads and $42.99 a month for 7.1Mbps downloads. Add traditional telephone service, and subscribers can get high-speed DSL and phone service for as little as $45 a month versus $65 a month.

AT&T has also upped the ante with a new promotion that guarantees customers its current pricing, which ranges from $20 to $55, for two years, the Wall Street Journal reported Tuesday.

The promotions come as broadband operators saw a sharp decline in new subscriber growth in the second quarter of 2008. Twenty of the largest cable operators and phone companies in the U.S. only signed up about 887,000 new subscribers during the quarter, the lowest level of growth seen in the past seven years, according to Leichtman Research Group.

Phone companies appeared to be the hardest hit by the slowdown, only adding about 23 percent of the customers they added during the same quarter a year ago. Specifically, Verizon lost 133,000 DSL subscriptions in the second quarter as its existing customers upgraded to its Fios network and new broadband users went to cable competitors.

Meanwhile, cable companies, such as Comcast and Time Warner Cable, have fared much better. In total, cable companies added about 75 percent of all new customers in the second quarter.

Comcast, the largest cable operator in the U.S., added 278,000 high-speed Internet subscribers during the second quarter. Comcast executives have said that about two-thirds of its new broadband customers had switched from DSL. And about one-fifth of these customers are signing up for the triple play bundle.

As a result, cable operators haven't felt compelled to lower prices or offer more for less. But as the broadband market gets tighter, a cable response is likely.

Today about 60 percent of U.S. households already have high-speed Internet connections. And of all people who regularly use the Internet, about 90 percent of them already subscribe to broadband service as opposed to dial-up. This means that there is a smaller pool of people using dial-up who may switch to broadband services, a fact that is also likely impacting growth in the broadband market.

Comcast is already starting to see its edge weakening. During the second quarter, the cable operator added about 18 percent fewer customers during the quarter than it did a year ago.

It will be interesting to see what kind of affect the phone companies' new pricing terms will have on the market in the third quarter. Stay tuned.

This broadband war could lead to some good deals for consumers. But bargain shopping consumers will have to read the fine print on these deals. Pesky service contracts with early termination fees that are common in the wireless industry could show up more regularly in the broadband market. Verizon's six-month free DSL promotion requires a one-year commitment. And the company is charging a $79 fee for people who cancel the service early.