Bells slash prices to lure broadband customers

The fight for dial-up customers in the broadband market is heating up.

On Tuesday, Verizon Communications upped the ante with a new low-cost tier of service. For $14.95, Verizon customers can get a broadband service with a download speed of 768kbps and an upload speed of 128kbps. The new service is currently being offered throughout Verizon's territory and requires customers to sign up for a one-year contract.

Fellow Bell SBC Communications was the first phone company to hit the sub-$15 price point with a broadband service. In June it announced an introductory offering for its 1.5mbps service that costs $14.95.

While Verizon's service offers much slower upload and download speeds than other broadband services, it is still at least 10 times faster than dial-up. What's more, it costs the same, if not less, than what most dial-up customers pay for 56kbps access. And because it is broadband, the connection is always on--something even supercharged dial-up services can't offer.

The phone companies hope that by giving customers a taste of broadband, they will eventually wring more profits out of them by selling them higher-speed services or other more advanced services such as IP TV.

"We're hoping people will upgrade their service to higher speeds," said Bob Ingalls, president of Verizon's retail markets group. "The applications they use will be better enabled by speed, and we just want to give people a taste of it."

With roughly half the Net-surfing population in the United States still connecting via dial-up, a large untapped market still remains, analysts say. At the end of 2004, about 42.7 million households were using dial-up technology to connect to the Internet, according to JupiterResearch. By the end of 2005, that number is expected to shrink to 34.7 million.

Meanwhile, cable businesses and phone companies have been adding new broadband subscribers. There are currently about 13 million residential DSL (digital subscriber line) customers and roughly 22 million cable modem, according to Jupiter.

While cable still dominates the market, phone companies are closing the gap. In 2004, DSL had about 41 percent of the market, up from 39 percent the year before. Analysts 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.

So far, cable companies have resisted national pricing cuts to compete with phone companies' new offers. Instead, they say they have focused on providing the best value.

"Dial-up customers are switching to broadband in large numbers," said Jeanne Russo, a spokeswoman for Comcast. "And we hope they will view our service as easier to use with faster and more reliable connections. We think customers will look at all those things when deciding on a provider."

A large component of this value proposition has to do with service bundling. Cablevision has used this quite effectively, said Jim Penhune, an analyst with Strategies Analytics. Cablevision offers high-speed Internet access, cable television service and telephony for a total package of $90 per month for the first year of service. After that the price jumps to $115 for all three.

Today, SBC and Verizon can only compete using bundles that incorporate local and long-distance phone service and high-speed Internet access. But both companies already have a strategy in place to offer video service on their networks. When these networks are built, they will then compete head-to-head with the cable companies' so-called triple play bundles. Until then, it's key that they sign up as many subscribers as they can.

Cable companies have also traditionally competed on the speed of their service rather than price. And for certain customers, speed is an important differentiator. But most of the early adopters who are concerned about download and upload speeds have already made the switch from dial-up to broadband. Dial-up users today are likely to be less technically savvy than the ones who signed up for broadband service even a year ago, said Joe Laszlo, research director for broadband at Jupiter Research.

"For the last several years broadband growth has been fueled by tech savvy and professional consumers," he said. "But the market is hitting the mainstream population now. These consumers are definitely seeing price as a big differentiator. And many don't have any use for the ultra-high speeds cable companies are offering."

The new crop of customers is much more cost-sensitive. Laszlo believes that the cable companies are missing an important opportunity to expand their market by offering additional tiers of service.

"The cable companies say they're afraid of cannibalizing their customer base with slower and cheaper services," he said. "But I think that most customers who already have high-speed service won't necessarily give it up for a cheaper service."