Broadband ISPs Mull Healing Power of Price Cuts

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

< Previous

1 2 3

Next >