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Commentary: In broadband game, price beats speed

New subscribers to high-speed Internet access care more about a low price than fast connection speeds, which is exactly what DSL providers want to hear.

Commentary: In broadband game, price beats speed
By Forrester Research
Special to CNET
MARCH 11, 2004, 10:13 AM PT

By Jed Kolko, Principal Analyst

Consumers signing up for broadband today care more about price and less about speed than earlier broadband adopters--exactly what digital subscriber line providers like SBC Communications and Verizon Communications are counting on.

Broadband adoption continues to forge ahead in the United States, with major providers reporting 32 percent growth in subscribers during the first three quarters of 2003. That percentage implies a little more than 20 million broadband households. Behind the numbers, we find that cable and digital subscriber line (DSL) compete using different messages, each trying to appeal to a new type of broadband subscriber.

Even back in early 2003, DSL and cable were pushing price and speed, respectively, and consumers felt it. DSL subscribers were more satisfied than their cable peers with value for money but less satisfied with connection speed. Throughout 2003, DSL and cable providers successfully pushed themselves further out along the price versus speed spectrum:

• DSL providers lowered the price floor to $27. The two largest DSL providers--Verizon and SBC/Yahoo--offer broadband for less than $30 per month. SBC recently dropped its $29.95 monthly price to $26.95 for a one-year contract. This low price, combined with the bundling of premium Yahoo services, helped boost its subscriber count by 43 percent this year, the highest of all the major providers.

Similarly, Verizon announced a $29.95 price and a partnership with MSN in May, which has lifted Verizon from being the slowest-growing broadband provider during the first half of the year to matching the national growth rate in the third quarter. Overall, the top three providers have grown their DSL subscription base 35 percent this year.

• Cable providers raised the speed ceiling to 3 megabits per second. This summer and fall, cable providers increased the advertised downstream maximum speed from 1.5mbps to 2mbps or 3mbps. Cablevision's Optimum Online touts 3.5mbps downstream and 1mbps upstream--more than double the typical 768 kilobits per second to 1.5mbps downstream and 384kbps upstream that DSL providers offer. But speed isn't free: Cable hasn't lowered its prices in step with DSL, so cable broadband costs anywhere from $40 to $50 per month. Speed has its takers; cable's 31 percent growth this year is just behind DSL's.

Cheap trumps fast
Price or speed? Which appeals more to new broadband subscribers? While cable's speed-focused strategy was right for earlier adopters, DSL's low prices lure today's customer.

• Early broadband adopters wanted speed. Speed for getting information and communication have long been the top motivators for adopting broadband. Veteran broadband users are more motivated by speed than are newbies, across all the reasons for wanting speed that we ask about. And for

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those who've just signed up for broadband, speed for multimedia applications like music, video and gaming rank near the bottom of the list of motivations.

• Today's broadband adopters are more price-sensitive. Two factors motivate new subscribers the most: Being offered a discount package of broadband and other services, and the loss of free dial-up service. With 43 percent of new subscribers motivated by a discount package, that motivation now exceeds the promise of greater speed for multimedia.

• Tomorrow's adopters will be even more mainstream. Recent broadband subscribers are lower-income and less technology-optimistic than more tenured ones--exactly the types of consumers who are more price-sensitive and need less speed. This trend will continue: Consumers who plan to sign up for broadband in the next year will be even lower-income and no more technology-optimistic than today's new subscribers and will continue to prioritize price over speed.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.