Broadband ISPs Mull Healing Power of Price Cuts

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.

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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.