Prices Rise Before the Connection's Made

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I am one of the victims of a new type of digital divide. I'm one of many Americans who would like to get high-speed Internet access, but can't.

And now the price is going up before many people can even get connected.

I can't get cable-modem service, although Cablevision Systems Corp. truck crews have been busily upgrading our neighborhood in New York's Westchester County to prepare it for the MSO's Optimum Online service, as well as for digital cable.

I can't get digital-subscriber line service from my local phone company, Verizon Communications, because I live further than a golf shot away from a telephone central office. (Maybe I could actually get it, but I've heard so many horror stories about DSL installation that I haven't pursued it aggressively.)

Once broadband service is available, we'll have to make a tough choice: whether to jump on the high-speed bandwagon and face the possibility of heftier rates, or live with slower dial-up service that — even with America Online's new $2 increase — is about half the price.

Essentially, the standard residential high-speed rate of $39.95 per month appears to be rising to a new level of $45 for cable-modem service and $50 for DSL. The $39.95 rate had seemed arbitrary (does anyone really know how it was derived?) but became a benchmark on which consumers could rely.

Recently, AT&T Broadband and Charter Communications Inc. announced cable-modem increases of about $5 to $6 per month in many markets, while Verizon Communications and SBC Communications increased their basic DSL packages by $10 a month. Other providers are expected to follow suit.

The rate hikes are causing a stir in the cable industry. The most common sentiment I've heard is that higher prices are threatening to curtail growth just as DSL is faltering and cable modems have become consumers' preferred access choice.

FCC chairman Michael Powell has also said the hikes could hurt growth. He noted that cable and telephone providers are carrying a lot of baggage, due to complaints over installation problems and poor service quality.

Access providers obviously are aware of the risks and bet that the increases will offset high operational costs and have a minimal negative effect on growth.

I think they'll win that bet. Unlike the critics, I think the high-speed folks are sitting on enough pent-up demand that the rate hikes will have virtually no effect on growth, at least in the short term.

Besides, companies can't roll out service quickly enough to meet the current demand, so what difference does it make if they get a few less phone calls from potential customers?

That said, a $45 monthly fee — $540 per year — is a price that would make even me think twice about getting a cable modem.

I recently bought a new laptop computer and found that a modest increase in computer processing (to 600 MHz) makes dial-up Internet service seem quicker. So it's tougher to pay twice as much for a service that can slow down as more subscribers join it.

Those who understand the intricacies of the access business say that the price increases are a function of offsetting costs, rather than exploiting market demand.

"Costs were dramatically underestimated," said Dan O'Brien, CEO of High Speed Access Corp., which is helping operators to establish access, primarily in smaller markets.

Those costs include the expense of backbone connectivity, which, despite declining somewhat, can vary widely between large and small markets, O'Brien explained. Also, customer-care costs for Internet access have been much higher than for traditional cable service, he said.

When I asked O'Brien, a former cable and satellite executive, if he thought higher prices would curtail penetration, he said: "In the short term, no. But I think it really depends on what's the end goal now. Do we want 30-percent penetration or do we want a mass market of 50- or 60-percent penetration?"

To me, a bigger issue is whether the increases perpetuate the image that cable likes to raise rates — any kind of rates — at will.

If criticism of cable's video and high-speed rates were to combine into an exponential outcry, then some members of Congress might start thinking that it's been too long since they last kicked the industry in the shins.

My cable provider, Cablevision, charges $39.95 for Optimum Online ($29.95 with digital cable). The MSO says it won't speculate on future pricing.

Cablevision offers cable modems at retail through its The Wiz electronics stores and says more than 85 percent of subscribers choose self-installation.

In one of those ironic confluences of media consolidation, The Wiz ran TV commercials for its cable-modem self- installation kits, which left my neighbors scratching their heads, since they couldn't get cable-modem service.

Cablevision says Optimum Online has a penetration rate of 20 percent in Connecticut and Long Island, so it expects about the same in Westchester.

That's another good bet. So bring it on. Just don't raise the price.


Until he becomes a high-speed Internet addict, Craig Leddy can be reached via dial-up modem at LeddyColumn@aol.com.

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