Broadband ISPs Mull Healing Power of Price Cuts
George Mannes
01/08/03 - 07:09 AM EST
Cutting prices for high-speed Internet service may not be the greatest thing for cable operators. But it won't kill them, either.
That's a lesson to learn from cable operators that are already offering high-speed Internet packages at prices about one-half (or even lower) of the $50 monthly fee that has become standard among the nation's biggest cable TV companies, including
Comcast (CMCSA Quote) and
Cox Communications (COX Quote).
Over the past year, marketing high-speed Internet connections, or broadband, has been a boon for cable operators, enabling them to reap high-margin revenue from cable systems into which they've poured billions of dollars in capital expenditures.
But, as
TheStreet.com explored in an article last month, some analysts say
growth in broadband will peter out in 2003 unless operators start offering lower-priced service packages, or tiers. That scenario has led at least one sell-side analyst to cut growth estimates for cable data and, in turn, equity values.
The situation could pose a difficult question for system operators. Do they hold the line on rate cuts and risk stalled subscriber growth? Or do they introduce lower-cost tiers and risk margins shrunk by consumers who downgrade their service?
The choice is difficult, but some of the few companies already selling lower-priced cable tiers say the benefits more than offset the risks.
Pricing Pressure?
Lower-priced tiers aren't a certainty. In recent months, most cable operators have insisted they're more likely to raise prices for Internet access than lower them. (In fact, New York-area Cablevision just raised monthly Internet prices $5 to $44.95, an increase
Newsday said was its third in a year.) Among the majors, only
Charter Communications (CHTR Quote) offers tiered Internet service.
But there's price pressure nonetheless. In part, says J.P. Morgan in recent research, it comes from telephone companies cutting their own prices for high-speed digital subscriber line service. Telcos that market DSL in a bundle of services charge at least $6 less per month for broadband than do cable operators with their own package deals, says the firm.
One small operator that says it has achieved greater penetration through a budget-price tier is Massillon Cable Communications, a privately held company serving 45,000 households in Ohio. Massillon, which launched high-speed Internet service in 1999, now has 11,000 broadband customers, mostly residential. That amounts to about 24.4% of basic cable subscribers. That's a number that puts Massillon in the same league as larger operators.
Commanding Data
Penetration of cable modem service
among cable operators |
 |
| Source: Cablevision and Cox financial releases for quarters ended Sept. 30; Massillon Cable Communications |
Massillon General Manager David Hoffer says pricing is one of the keys to its success with broadband. About 69% of households that have cable modem service take the $25-a-month package, enabling them to receive data at the rate of 256 kilobits per second. That's only $1.10 more than the standard 56k dial-up monthly fee for America Online, the
AOL Time Warner (AOL Quote) service. Some 31% of Massillon's customers pay $40 a month for 500 kbps reception.
Hoffer guesses that if he only offered the $40-per-month service, his penetration would be 20% lower -- implying that many of those $25-per-month subscribers would pay $40 if pressed. But Hoffer says the $25 package is still good for Massillon, since the reduced data rates hold down certain technology costs.
Upgrade Watch
Similarly supportive of lower-priced tiers is Michael Zammit, managing director of Advanced Broadband, a subsidiary of luxury homebuilder
Toll Brothers (TOL Quote) that currently markets broadband to 1,600 homes in several gated communities. In communities where 128 kbps cable modem service goes free to every household, about a third pay extra for upgraded service. Of those upgraders, one-third pay $15 a month for 768 kbps download rates and two-thirds pay $25 for 1.5-megabit-per-second downloading.
In communities with no free broadband, Zammit says, about 25% pay for the service. Advanced Broadband charges them $25 a month for entry-level 128 kbps service and $40 for 1.5 mbps service. Again, two-thirds of upgrading customers opt for the more expensive tier.
Though Zammit's customers clearly demand broadband, he says selling high-speed Internet in the mass market is harder. "That makes it all the more important to have a more attractive and less expensive entry point for less techno-savvy users," he says.
"The bottom-line message is, we're capturing 50% more subscribers because that tier is there," Zammit says. "Those people would not have taken broadband Internet if we didn't have a lower price point."
That being said, Advanced Broadband's current pricing package doesn't appear to be set in stone. Since most of the bandwidth in any neighborhood is used by a small fraction of customers, Zammit speculates it would make sense to convert eventually to utilization tiers, similar to wireless phone services that market usage plans based on fixed allotments of calling minutes.
Charter Communications, which first started tiering cable modem service in 2001, offers three standard packages nationwide, ranging from $35 a month for 256 kbps downloading to roughly $55 for 1.5 mbps. Cable modem rental adds $5 a month to those prices, while bundling service with certain cable TV packages can cut $5 or $10 from the monthly fee.
About half of Charter's 1 million Internet customers choose the lowest-priced package, says Shahid Butt, vice president of marketing for new products and channels. Of the remaining customers, slightly more than half take a 768 kbps service priced at $43 a month; the rest take the top-level service.
Butt downplays the problem of lower tiers cannibalizing higher tiers, saying that the low-priced tier tempts dial-up users to try broadband. "If you offer them a price point that's comparable to dial-up, you get more people to trade up," he says.
