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Cutting a Broadband Swath for Cheaper Access

Consumers have been slow to purchase pricey high-speed Internet access, clinging to their inexpensive yet sluggish dial-up connections. But after years of keeping prices high, an increasing number of high-speed providers are considering new pricing models that would make broadband access cheaper.

Instead of charging a monthly rate for the fastest speed, broadband providers are considering multitiered pricing models that base price on connection speed. The faster connection, of course, will cost more.

The change is largely due to saturation in the dial-up market, which grew less than 1% in 2001, according to Dave Burstein, editor of DSL Prime, a Web site covering the broadband industry.

Indeed, dial-up saturation forces companies seeking growth opportunities to convert existing users into new broadband customers by attracting them with lower price points.

"If companies want to continue to realize growth, they're going to have to reach the midlevel customer that is waiting for price to improve," says Imran Khan, senior analyst with Yankee Group, a market research firm.

In April, a pair of rival Canadian broadband providers, Rogers Communications (RG) and Shaw Communications (SJR - Get Report), began offering multitiered pricing.

In July 2001, cable company Cox Communications (COX), launched a low-priced, slower-speed broadband service in Las Vegas called Cox Interact, which charges existing cable subscribers $26.95 a month for download speeds of 256 kilobits per second (kbps), five times faster than dial-up connections.

Compare that with Cox's standard, full-speed broadband, which costs existing cable subscribers $34.95 a month for 1.5 megabits per second (mbps), more than 30 times faster than dial-up. If you're not an existing subscriber, each service will cost $10 more.

Seven months ago, Cox launched a second multitier trial in New England, to gauge whether lower prices would entice consumers. "We wanted to see if having a lower price product would result in a greater increase in demand. But it's very early to make any firm conclusions," says David Pugliese, vice president of sales and new product management at Cox.

Other companies are following suit. A spokesman from Comcast said the company also was considering a multitiered model but had not announced any plans yet.

"All of the major companies are looking into this," says Joe Laszlo, an analyst for Jupiter Media Metrix.

Multitiered pricing is an old idea that is gaining in popularity. Some broadband providers have been offering a variety of pricing models for years. Two years ago, for example, Charter Communications (CHTR - Get Report), a cable company serving suburban markets in 40 states, began offering three different products, charging as low as $24.95 a month for 256 kbps, $34.95 for 512 kbps and $49.95 for 1.5 mbps.

And Qwest (Q - Get Report), which serves 14 states, primarily on the West Coast, has been offering two products since it began providing broadband in 1998. The company charges $39.95 a month for 256 kbps access and $49.95 a month for 640 kbps access.

According to the company, 60% of its 484,000 subscribers have signed up for the slower-speed service, while the remainder chose the higher speed.

Steve Starliper, Qwest's vice president of consumer product management, says, "Consumers like the ability to say, 'This is the bandwidth I need. I'm not doing heavy surfing, and I enjoy saving the $10."

We're Not Gonna Take It

The popularity of Qwest's slower-speed service is not surprising. Most customers don't want to pay $45 a month for high-speed access, the average price charged last year, according to researcher Jupiter Media Metrix. Only 11% of all consumers said they were "very likely" to sign up for broadband if the price was between $40 and $50 a month, according to a January 2002 Jupiter study.

"Well over half of all consumers feel broadband is too expensive at $40 a month," Laszlo said.

One reason broadband is so expensive is that competition is weak and companies are unwilling to lower prices, says Burstein. Because a good number of broadband providers folded during the economic downturn, pricing pressure never developed. "Consolidation wiped out the competition that would have otherwise driven the price down to $30," he says.

As a result, companies are offering broadband at $45 a month, in an attempt to maximize profits with high prices despite the low volume of customers, says Burstein.

But such a strategy hasn't panned out in the way many companies had planned. While Jupiter estimates that more than 10 million homes have broadband access, acceptance rates haven't lived up to early expectations. Such a disappointment will force companies to consider new pricing models.

"The Field of Dreams 'if you build it, they will come' model has not panned out. People have got to try different things," says Harris Miller, president of the Information Technology Association of America, a trade association representing the information technology industry. "If you look at the numbers, up to 80% of people can get some form of broadband, and yet only about 10% to 11% are using it."

Something Under the Tree

But don't hold your breath waiting for broadband prices to drop anytime soon. Many companies still aren't willing to risk losing their customers who are paying $45 a month for high-speed access to slower speeds at lower prices. Plus, broadband providers can only upgrade one region at a time. "It takes a lot of resources to upgrade a network," says Khan. "This is not like installing a light bulb and flipping a switch."

It may take some time, but change could come by Christmas. "It's a no-brainer to offer slower services at a more affordable price," says Laszlo. "For some consumers across the U.S., tiered services should be available by the end of the year."

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