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Verizon plays hardball on pricing

Telecommunications giant slashes pricing on its traditional phone packages to compete with cable companies.

Verizon Communications has reduced rates on its traditional telephony service to new lows as it tries to compete with cable companies who are now offering telephony as part of their own packages.

The telecommunications giant announced late on Tuesday that it will be reducing the price on packages for its voice, high-speed Internet access and satellite TV services in several Northeast states. The news comes one day after Cablevision Systems, which competes in parts of the region, announced that it would be increasing speeds of its cable modem service.

Verizon's new Freedom Essentials voice service includes unlimited local, regional and domestic long-distance calling, along with home voice mail, call waiting and caller ID services, for about $34.95 a month. The Freedom Value plan offers any-distance domestic calling, but no calling features, and starts at $29.95 in some markets.

The value plan is the lowest ever for Verizon. And the $29.95 price matches Cablevision's introductory price for all three of its Optimum Online voice, video and Internet access services.

Verizon is combining the value calling plan with its low-end DSL service, which provides download speeds of 768 kilobits per second and costs $14.95 per month. This means that customers can get telephone and high-speed Internet service for $44.90, a new low for the company.

Verizon's move to reduce prices is another strategy in the ongoing war with cable operators. Cablevision, as well as several other cable companies that compete with Verizon throughout the Northeast U.S. region, has added telephony to packages that also include broadband access and television service. A group of four cable providers recently announced a deal with Sprint Nextel to add wireless service to their offerings, creating "quadruple play" bundles.

Verizon has fought back by first slashing prices on its broadband service, and now it is cutting prices on its traditional phone service. While cutting prices is just one strategy the company is using to help retain customers, it's not the only one.

Verizon has poured billions of dollars into building its new Fios fiber-to-the-home network. This ultra-high-speed network brings fiber-optic cable directly into people's homes and can theoretically scale to provide 100 megabits per second of capacity.

Fios is clearly the future for Verizon, but it could be years before the new services on this network really help the company's bottom line. For one, deployments are limited. Verizon plans to pass 3 million homes by the end of this year and another 3 million next year with fiber, but that's a drop in the bucket compared to the tens of millions of customers who have access to its traditional telephony network.

In the third quarter of this year, Verizon had a total of 49.7 million phone lines. This was a decline of 6.2 percent compared with the end of the third quarter in 2004. But Verizon's situation isn't desperate. This decline in telephony lines has been offset by a 42.3 percent increase in broadband connections and a 17 percent jump in total wireless customers over the same period.