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Cablers Snub Broadband Price War

As Telcos Slash DSL Prices, MSOs Say Value of Speed Will Win Day

By Karen Brown -- Multichannel News, 7/20/2003 8:00:00 PM

When it comes to cheaper broadband Internet service, talk may be cheap. A series of cost-dropping volleys fired by digital subscriber line foes this spring had industry watchers chattering about the possibility of a broadband pricing war, but so far cable operators have shown no signs of scurrying to load their own discount cannons.

But while talk of an all-out pricing war remains just that, the competition itself is advancing, with plenty of promotional and marketing shots fired back and forth.

The speculation began when Verizon Communications Inc. and SBC Communications Inc. this spring said they would cut their prices for DSL to the $29.95 range. It renewed just this month, when BellSouth Corp. rolled out a new, lower-cost $35 DSL tier.

Holding fast

But thus far, the response from cable operators has been not to respond. Comcast Corp — which claims the most broadband subscribers of any provider, with north of 4 million customers — is monitoring the moves of its rivals, but it has no plans to take an ax to its cable modem subscription fees, according to Greg Butz, vice president of marketing and business development.

"Generally, we obviously pay a lot of attention tour competitors' pricing decision and pricing moves," he said. "I think we've continued to reinforce our belief that we have a superior product and a superior value proposition, and our price reflects that."

That confidence also contributed to Comcast's upward revision in its guidance on cable-modem subscriber growth, now estimated to reach 5 million customers by year-end. With a strong first quarter, the cable-modem business shows no sign of slowing in the second quarter, Butz added.

Even if the DSL competitors do start making market share gains through dropping prices, it likely won't sway Comcast to follow suit.

"I think from the research that we continue to do — prior to the price moves by competitors, as well as post — we believe our customers see value in our product and they absolutely value the quality, reliability and consistency of that speed irrespective of where they live in the neighborhood," Butz said.

Similarly, although Charter Communications Inc. is busy consolidating pricing across its tiered Pipeline service markets, it won't mean a drop in price for customers, according to Charter vice president of sales and marketing Kip Simonson.

"Right now we are not looking at dropping pricing," he said. "We are checking to make sure of the price-value relationship of our products."

Cablevision Systems Corp. also didn't take heed of the talk of a pricing war — in fact, it forged ahead with a pricing increase for existing customers. Beginning this month Cablevision raised its rates $5 for existing Optimum Online service, charging $44.95 to customers who also take cable TV service and $49.95 for those who opt for high-speed data service only. The dual pricing plan has actually been in effect since January for new customers.

Cablevision argues that Optimum Online, which offers an average throughput of 3.5 Megabits per second downstream and 1 Mbps upstream, cannot be equitably compared to Verizon's slower DSL service, at 1.5 Mbps down and 128 Kbps up, according to Gemma Toner, Cablevision's senior vice president of high-speed data products.

The price increase also hasn't slowed the flow of new customers, Toner noted, as 83,700 signed on in the first quarter.

"Our new pricing has been in the market since January, and we added more Optimum Online customers over the first three months of the year than ever before," Toner said. "High-speed Internet users in the New York metropolitan area have demonstrated that speed and quality matter. They clearly see the value in Optimum Online and continue to choose our service."

Promo Skirmishes

Industry observers also see little signs of an all-out pricing war. The broadband business is healthy, but at this point the margins aren't large enough to bear tit-for-tat pricing cuts, according to Joe Laszlo, a senior broadband analyst for Jupiter Research.

"If there is one thing [on which] everyone in the industry agrees, it is that they can't afford a price war — that it would be a very dangerous thing tactically if the cable guys come back at SBC and Verizon and undercut thei price," Laszlo said. "I think there may be efforts to match $29.95 in some way, shape or form, but I don't think the industry can survive if the cable guys come up with a loss-leader type, 'We've-got-to-beat-them-at-any-cost' $25.99 price point."

But there does seem to be plenty of room for promotional firefights over new customers. SBC's $29.95 price actually falls into that category, since it is valid for only one year of service.

Comcast this spring hit several markets with a $19.99-per-month charge for the first three or six months of cable-modem service. But Butz downplayed the low-cost play, noting that it's a normal part of Comcast's marketing.

"I wouldn't read too much into the promotions that you see," Butz said. "They vary obviously by market, and we were in a select group of markets running some 'Grads and Dads' specials from Memorial Day through June."

Such promotional rates do have an impact on the cable business's bottom line, so the strategy is an important factor, he acknowledged.

"We really think about the total value of the proposition we put on the street," he said. "Obviously we generally adjust that as to what we may put into an equipment promotion versus a service promotion versus a value-add. We may accelerate a little bit more aggressively or pull it back or restructure it.

"Obviously, we think about that activity in light of where we think our competitors are with their 12-month promotions and so forth."

But there is a risk in flooding the market with too many promotional offers. It could lead to the kind of "bouncing" phenomenon seen in the credit-card industry. Customers who bounce ride out low promotional rates, only to switch to another carrier offering a low rate at the end of the promotional period, Laszlo said.

That threat has become more acute because cable-modem and DSL footprints now cover most of the same major markets — and, in some cases, there are other broadband offerings from the likes of RCN Corp. and EarthLink Inc.

"You can certainly try tying them to your service for a year or something like that, but whether they stick around at the end of the year, if they can easily change to another service that is promoted down into the $20-per-month level becomes a tough problem for the industry," Laszlo said. "That inevitably increases churn."

Another competitive weapon that will likely surface is the addition of content and service features such as home networking and beefed up security and firewall services. On the cable side, Comcast rolled its new content portal July 1, emphasizing splashier multimedia content and revamped gaming fare.

"Clearly, you see us investing in our product — clearly, you see the portal as indicative of investing in the quality and the experience, the ease and intuitiveness," Butz said.

So far, the cable-operator strategy has been to field many of these new content additions for a premium fee. But Laszlo said that may change if competition heats up.

"The cable operators have been thinking about those in terms of getting more revenue out of a customer," he said. "I think what they may be forced to do by this pricing move if it starts to really look like it is working for SBC and Verizon is to respond by giving away some of those premium value added services."

The increased competition also may speed cablers' rollout of new service tiers, Laszlo said.

"I still think that this may force them to rethink that strategy and roll out a value tier at the same time they roll out a premium tier," Laszlo said.

That seems to be the case with competitive cabler RCN Corp.'s rollout last week of a Value Modem cable modem service in Queens, N.Y.

Value Menu offers a 256 kbps down, 128 kpbs up connection for $29.95 when purchased with RCN's cable and telephone bundle and $39.95 when purchased alone. Customers who buy their own modem get an additional $5 monthly discount.

While Comcast so far has avoided a lower-priced tier, it has rolled out its higher-speed Comcast Pro service and is trialing a home-networking tier. In nine markets, Comcast offers a $65.95 home-networking package, at connection speeds of 2.5 Mbps downstream and 256 Kbps upstream.

Plans are to roll the networking tier out to the remainder of the territory.

"You see us investing in the product as we launch home networking and move up market with Comcast Pro and some of the business services," Butz said. "It's probably premature for us to speak about any product and road-map decisions that are in the works at this point, but we continue to do our development work, very focused on what our customers are saying to us and being cognizant of the brand recognition and value recognition they have given to us."

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