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Can price cuts boost broadband?

Despite a 50 percent jump in the number of U.S. homes signing on for broadband over the last year, the high-speed market is slowing, according to a new survey.
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Despite a 50 percent jump in the number of U.S. homes signing on for broadband over the last year, the high-speed market is showing signs of slowing, according to a new survey from Pew Internet & American Life. That could change with the price wars started by Verizon and other local telephone companies.

OF AMERICANS WHO go online at home, 31 percent are using high-speed connections, Pew found in a survey on broadband adoption released Sunday. About 30 million people — or 16 percent of all Americans — log on at home with a broadband connections, a healthy 50 percent increase in the past year. That growth rate puts broadband Internet in roughly the same league as DVD usage, which are in an estimated 19 percent of all U.S. households.

Furthermore, about 13 percent of people who go online via regular dial-up connections — people who have been online for 6 years or more — are ripe for upgrading to high-speed Internet access.

While overall Internet penetration has stalled in the last couple of years at 58 percent of U.S. households (computers are in just over 60 percent of U.S. homes), high-speed adoption is still growing at a healthy pace, the Pew research indicates.

People with high-speed access not only are more likely to log on everyday, but they’re more active users of multimedia features, industry analysts say. Getting people to switch to broadband, which can be roughly 50 times faster than a regular dial-up connection, is crucial for the major Internet portals such as AOL and Microsoft’s MSN as they try to grow advertising revenues and persuade users to pay for multimedia content such as streaming video, online games and music. (MSNBC is a Microsoft-NBC joint venture.)

However, the Pew survey notes that the rate of broadband penetration is slowing — 57 percent of people who use dial-up connections don’t feel the need for speed. Other who express interest in high-speed say it isn’t available, particularly those in rural areas, the Pew survey found.

“There’s still work to do for [broadband] marketers to get at dial-up users,” said John Horrigan, senior researcher with Pew Internet in Washington.


Beyond availability, price has been one roadblock to mass acceptance. Paying $50 a month for a high-speed connection to the Internet is too much for the majority of Americans, analysts say.

But what about $30?

The cost of DSL (which stands for digital subscriber line, a service offered by local phone companies) has hovered between $45 and $60 for the last 2 years. But now it’s inching closer down to the $25 range charged by premium dial-up services like AOL, a trend that could persuade more Internet users to make the switch to high-speed.

A move by Verizon, the No. 1 U.S. local phone company, to slash the price of its high-speed Internet services to $34.95—a $10 cut—could force other phone and cable companies to lower their rates. Lower prices could rekindle the broadband market, experts say. For people who subscribe to other Verizon services, broadband will cost $29.95.

Earlier this year California phone carrier SBC Communications began a promotion in several markets offering high-speed DSL Internet access for $24.95 a month for subscribers who also sign up for local phone service with special features that cost $31.95 a month.

Although the SBC offer comes with strings attached, analysts say lower costs are the way of the future and that phone companies like Verizon can cut prices without ruining their profits.

Because phone and cable companies spent billions upgrading their systems to handle high-speed Internet services they kept monthly prices in the $50 range in order to recoup their investments more quickly. But once people have signed on, it costs relatively little money to maintain them, said John Malone of Eastern Management Group, a telecommunications consulting firm in Bedminster, N.J.

A lower cost will bring in new customers and also reduce “churn.” Churn is the number of people who drop a service each month.

“Broadband has traditionally been an expensive service,” said Jim Otterbeck, Verizon’s senior vice president of emerging markets. “Early adopters would pay anything for it. Our goal is to open it up to the mass market.”

In addition to lowering the price, Verizon is adding 10 million DSL-enabled lines, making the service available to 80 percent of its subscriber households, up from 68 percent.

As yet, cable operators, which boast two-thirds of the U.S. high-speed Internet market, maintain they won’t lower their modem subscriber fees, although Comcast, for example, has an introductory offer of $29 per month for three months.

“We do not expect cable operators to significantly discount their data product offerings to drive unit growth,” UBS Warburg analyst Aryeh B. Bourkoff, UBS Warburg wrote about Comcast’s first-quarter earnings.

Lower prices alone won’t make broadband ubiquitous in American households if all people are doing is using e-mail and instant messaging.

“Newer applications will be developed such as video-on-demand that will push the adoption curve higher,” said analyst Malone.