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SBC ups the ante in broadband war

Analysts say that SBC's new $14.95 per month DSL offer could spark a price war among cable competitors.

SBC Communications' move to slash prices on its DSL service could spur a pricing war between phone companies and their rivals in the cable industry, say analysts. But cable companies say they're competing on value rather than price.

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."
--Jim Penhune, analyst, Strategies Analytics

"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.

SBC's strategy is simple: The company wants to sign up as many new subscribers as possible.

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 increased speeds and kept its price of $29.95.

So far, the pricing strategy has helped phone companies gain some market share. 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.

SBC'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 other services such as telephony and, eventually, television. SBC is already in the process of upgrading its network to carry television service over its existing DSL lines.

While Project Lightspeed, which will extend fiber deeper into the network to support higher bandwidth for Internet-routed TV, is SBC's answer to the cable company's "triple play" service offering, the reality is that SBC's service won't be ready for more than a year. What's more, rollout of the television service could take even longer since SBC could be required to go city to city to negotiate franchise agreements.

"It's not in our plan right now to lower our rates, but we allow each market to do whatever it needs to do to react to changing market conditions."
--Bobby Amirshahi, spokesman, Cox Communications

SBC and Verizon Communications, which also has plans to offer television services over a new network it's building, suffered a serious blow over the weekend in Texas, when the legislature failed to act on a bill that would have allowed new entrants to the television market to get a statewide franchise. Similar laws are being considered in other states.

As SBC stares this reality in the face, signing up subscribers no matter what seems to be a top priority.

"It's all about driving DSL growth," said Wes Warnock, a spokesman for SBC. "Broadband is a sticky product, and it helps us compete against the cable companies. It also offsets the access line loss, so it's strategically significant."

Reading the fine print
While the list price for SBC's new service is far below that of competitors' offerings, it is not without conditions. First, the $14.95 price is a promotion, and it's good for only one year. After that, subscribers pay whatever regular rate SBC is charging at the time.

Customers must also agree to a one-year contract for the service. If they decide to terminate the service before the contract expires, there's a $200 cancellation fee. And finally, the $14.95 rate is only available for customers who also subscribe to SBC telephone service, which most can get for about $20 a month.

Some cable competitors argue that customers get a better value from their services. For example, Time Warner is offering a promotional rate for its high-speed service--$29.99 a month for the first six months. Once the promotion period ends, the price jumps to $39.95.

Unlike SBC, which requires subscribers to also get a phone line, Time Warner customers can sign up for high-speed access without subscribing to any other cable service. What's more, the Time Warner service offers connection rates of 5mbps, whereas the $14.95 offer from SBC provides only up to 1.5mbps.

Cox offers a 256kbps broadband connection for $24.95 a month. The service is not a promotion and is offered throughout its service region. It also doesn't require subscribers to sign up for any other Cox services and it doesn't require a contract.

But if push comes to shove in a particular market, the company could respond on a local level, said Bobby Amirshahi, a spokesman for Cox.

"It's not in our plan right now to lower our rates," he said. "But we allow each market to do whatever it needs to do to react to changing market conditions."

As for the other Baby Bells, which do not compete head-to-head against SBC for DSL customers, Verizon and BellSouth both say they have no immediate plans to lower pricing on their DSL service.