Broadband Market Is About to Heat Up
This may be the summer of broadband.
As phone companies scuffle with cable providers to push high-speed Internet service, former dial-up customers like Bill Rowe are getting online faster and for less. The corporate buyer from Manchester, N.H., has his pick of three providers of so-called broadband access -- at a price that is half what it was five years ago.
“If you are going to be online at all, it really doesn’t make any sense to do dial-up at these prices,” said Rowe, comparing his monthly $29.95 bill for digital subscriber lines, or DSL, service with the $23.90 America Online charges for dial-up Internet access.
After years of trailing the cable industry in offering broadband, regional telephone companies led by Verizon Communications Inc. and SBC Communications Inc. are gearing up for a summer showdown with cable giants like Time Warner Inc., Comcast Corp. and Cox Communications Inc. The regional phone companies are aggressively pitching their DSL services by boosting speeds, adding services and dropping prices.
“All this new stuff is going to be coming over the summer, and consumers are going to be the beneficiaries,” said Judy Bersus, senior vice president of marketing for Verizon, which plans to double the fastest Internet access speeds available to its residential customers.
“When you think about broadband migration, it’s going to be a long battle. But I want to be winning more [of the market] than cable every single day.”
The regional phone companies seem to be off to a strong start.
In the first quarter, they added slightly more than 1 million broadband lines, outpacing cable companies for the first time. In California, DSL lines outnumber cable. Nationwide, though, DSL and the phone companies offering it are a distant second, accounting for just more than one-third of the 30 million broadband lines.
High-speed Internet access remains a relatively small piece of revenue for phone and cable companies. But it’s growing while traditional cable and local phone services are flattening out -- and even shrinking.
Broadband “is not providing great revenues for companies now, but it is a good way to hold on to customers and upgrade them to other applications that could become huge new revenue sources,” said Patrick Mahoney, an analyst at Yankee Group.
Historically, the phone companies did little to push DSL, a decade-old technology that transmits data over regular copper telephone wires. The service initially rivaled the cost of the dedicated lines big corporations used to move massive amounts of electronic data quickly. As recently as 2002, DSL was difficult to install, requiring most customers to take a day off from work to wait for a phone company technician.
The phone companies’ enthusiasm for the service grew in recent years as they lost lines in their traditional local phone business to competitors such as AT&T; Corp. and MCI Corp. -- and even cable companies. The cable industry provides local phone service to nearly 3 million households, according to the National Cable & Telecommunications Assn.
Meanwhile, satellite television’s growing popularity in the 1990s forced the cable industry to sharpen its broadband focus. Cable TV operators began to offer high-speed Internet access to make their video service more attractive as a package deal. They also were spurred by relaxed government regulations, which allowed cable operators to pour an estimated $75 billion into upgrading their equipment to support digital signals.
“We definitely take our regional [phone company] competition seriously,” said Winston Warrior, director of marketing for Cox’s high-speed Internet service division.
“The early adopters are already in the [broadband] category,” he said. The battle now “is over getting customers to upgrade from dial-up.”
About 80% of the nation’s Internet users still connect through dial-up.
To gain an edge in winning converts, the phone companies are forging stronger ties with independent Internet service providers such as Microsoft Corp. The phone companies essentially act as wholesalers in such deals, an arrangement called provisioning.
Jim Murphy, president of Los Angeles-based DSL Extreme, one of the fastest-growing DSL providers in California, said provisioning had become “a real bright spot” in his firm’s relationship with the regional phone companies.
He noted that it had helped “eat away at cable’s market share.”
The big subscriber increases reported by the phone companies include wholesale DSL lines sold to independents such as DSL Extreme, as well as DSL lines the phone companies sell directly to business and residential customers.
To be sure, some contend that the phone companies are not so much competing directly against cable as they are try- ing to use DSL to defend their lucrative local telephone monopolies.
For example, SBC, California’s dominant local phone company, prices DSL as low as $26.95 a month for subscribers who get local phone service from SBC. SBC gained 447,000 DSL customers in the first quarter of this year but lost 427,000 traditional voice-line customers during the period.
“The market isn’t as competitive as the [phone companies] are pretending,” said Yale M. Braunstein, an economics professor at UC Berkeley. “I have real doubts about whether you will really see them really compete by deploying [fiber-optic cable] to the home” along with other technology that would vastly increase broadband speeds.
Although most cable companies have so far maintained their $40-to-$50-a month broadband rates, the phone companies’ DSL package discounts may prove to be a winning strategy in the long run.
In a study released this spring, 71% of those surveyed by Yankee Group said they would switch to a faster broadband service if it were priced at the level of dial-up service -- about $10 to $25 a month. By contrast, only 17% said they would pay $45 or more for broadband.
“We are continuing to look at how we integrate our products together,” said Warrior, who noted that Cox was bundling broadband and local phone service with cable TV in some markets. “We are trying to stay away from that naked DSL” kind of offering.
“We believe our triple-play bundle is the sweet spot.”
