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DSL strikes a chord with frugal shoppers

Middle-income households and price-sensitive Internet users have been signing up for DSL service.

A new kind of digital divide is emerging in the U.S. broadband market.

On one side are middle-income and price-sensitive households, which tend to favor DSL service offered by phone companies. On the other are more affluent families, which gravitate toward higher-speed cable modem services.

According to a recent report published by Leichtman Research Group, about 21 percent of households earning an annual income of between $30,000 and $75,000 a year subscribe to DSL. About 18 percent of these households subscribe to cable. By contrast, 37 percent of all households with annual household incomes over $75,000 subscribe to cable broadband and 27 percent subscribe to DSL.

"Clearly price is much more important at this point in the game," said Bruce Leichtman, president and principal analyst for Leichtman Research Group. "Middle-income families making the jump from dial-up to broadband are much more price-sensitive, and clearly the phone companies' messaging on low-priced DSL has gotten through loud and clear."

A year-and-a-half ago, pricing of DSL and cable modem service was roughly the same. But over the past year, the phone companies have launched an aggressive assault by dropping prices. At the end of 2005, the average price of DSL service was about $32 per month, roughly $9 less than cable, according to research firm IDC.

AT&T has twice lowered the price of its DSL service and now offers its 1.5Mbps service for $12.99 for the first year. Since AT&T'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. Verizon created a new tier of service, which includes 768Kbps downloads, for $14.95 per month.

Price pressure
Regardless of household income, the promise of lower prices has also convinced some cable subscribers to switch to DSL. Dan Spencer, 38, of Norristown, Pa., had been a Comcast broadband subscriber for over three years. But after he realized his family was paying over $100 per month for high-speed Internet access and TV service, he decided to abandon Comcast for EchoStar's satellite TV and Verizon's DSL service.

"My wife usually pays our bills," he said. "But one day, when I saw how much we were paying Comcast for our cable TV and broadband, I was shocked. It was outrageous."

Spencer said he now pays about $75 per month for TV and Internet access, and he estimates he is saving roughly $45 per month over what he was paying for the Comcast service.

The low cost of DSL has kick-started DSL subscription rates, helping DSL providers increase their total customer base by 39 percent in 2005, according to Forrester Research. Verizon alone signed up 613,000 new high-speed Internet subscribers in the fourth quarter of 2005, a record for the company. It continued the strong growth in 2006, having signed up 541,000 new subscribers in the first quarter.

But the phone companies' success hasn't meant the demise of cable, which in total saw broadband subscriptions grow 21 percent in 2005. In fact, cable companies have also set new records in recent quarters for the number of subscribers they've acquired.

Comcast, the largest cable operator in the U.S., added 436,000 new subscribers in the first quarter of 2006, the largest number of new subscribers the company has ever signed up in a first quarter. And Time Warner, the second-biggest cable company in the nation, had its best quarter ever for broadband subscriptions, winning 343,000 new subscribers in the first quarter.

"Our competitors attempted to start a price war last year," said Keith Cocozza, a spokesman for Time Warner Cable. "While some broadband providers lowered prices, we didn't, outside our standard promotional pricing. And over the last few quarters, we've seen some of the strongest growth in new subscribers."

Mining dial-up users
Growth in broadband for cable and DSL isn't expected to slow anytime soon, as dial-up users and people who have never subscribed to a broadband service come online. Nearly 30 percent of all Americans don't have any Internet access, according to the Leichtman Research Group. And of the 69 percent or so who do have access to the Internet, about 40 percent are still using dial-up. Cable and phone providers see these untapped markets as ripe for new business.

"Everyone wants to make it a horse race between cable and DSL," said Leichtman. "The truth is, there is plenty of opportunity for both sides to win."

But he added that he sees a growing division between consumers subscribing to cable and those choosing DSL. Cable is perceived as the leader in speed and performance, whereas DSL is seen as the economical choice, he said.

Not surprisingly, neither the cable operators nor the phone companies like being pigeonholed into these categories. John Wimsatt, senior vice president of broadband solutions for Verizon, downplayed the impact of price on the company's strong subscriber growth. Instead, he said consumers are drawn to the carrier because they are looking for more choices, which he said cable doesn't offer.

"We've learned that one size doesn't fit all," he said. "Even with our 768Kbps product for $14.95, we still see strong demand for our 3Mbps service and even our Fios fiber-to-the-home service, where it's available."

Cable operators, who tout their faster speeds any chance they get, also say they haven't given up on price-sensitive consumers. They plan to address the cost issue by pushing packages of service, which include high-speed Internet access, TV and phone service. For example, Comcast offers a triple-play package for $99 for the first year.

"This is a bundle that is about value," said Jeanne Russo, a spokeswoman for Comcast. "And we think it appeals very much to middle-income households. You can see from our sales numbers that consumers are responding. We are seeing are greatest penetration in places where we offer the triple-play package."