A study by La Jolla, Calif.-based ARS shows that cable broadband Internet prices rose 12 percent in 2001, from an average of $39.40 per month in January to $44.22 per month in December. Consumer DSL (digital subscriber line) prices rose 10 percent during the same time frame from $47.18 in January to $51.67 in December.
A slowing economy caused service providers to shift their focus toward making money instead of gaining market share. The anemic economy also made it easier to raise prices because many Internet access providers failed, which diminished competition in the marketplace.
"The economic downturn has resulted in a tightening of the financial markets (and) led to consolidation in the broadband industry," Mark Kersey, an ARS broadband and cable industry analyst, said in a statement. "This consolidation has left broadband consumers with fewer choices and, ultimately, higher monthly prices."
The price increases happened across the industry. Kersey said that 83 percent of broadband cable Internet service providers raised prices in 2001, a proportion that reaches 100 percent if the price increases in January 2002 are included. Among DSL providers, 73 percent increased rates in 2001.
But the price increases could be detrimental in some cases. Kersey said he believes higher prices will encourage consumers to keep their slower dial-up connections instead of switching to broadband.
Recent data show slowing growth in the broadband market, which supports Kersey's assertion. The number of broadband subscribers in the United States increased 14.2 percent in the third quarter of 2001 from the second quarter of 2001. In the second quarter, the number increased 14.9 percent from the first quarter, and it grew 25.8 percent in the first quarter from the fourth quarter of 2000.
"It makes a lot more sense to me to make broadband affordable and sign a lot more people up," Kersey said. "You have to take the Wal-Mart approach and do it on volume."
Retail giant Wal-Mart makes money by moving a lot of goods off the shelves at low prices. If broadband prices stay high, fewer people use the service, leaving fewer people whom providers can squeeze extra dollars from.
Companies also can offer tiered pricing, which offers a lower price for lower speeds to get people hooked on the service, after which ISPs can charge higher prices for faster speeds and more features.
For example, Kersey said companies could charge between $25 and $30 for a basic high-speed connection that runs six times faster than a dial-up connection as an entry point, then ask for more by piling on greater speeds.
"It would be a way to target the tens of millions of dial-up subscribers out there who are paying $20 a month as it is" for a slower connection, he said.