SBC, Verizon Betting Speed Kills in DSL Race

Another price war is about to ensue in telecom, but there's a twist: This time Wall Street views it as a positive development.

Baby Bells Verizon ( VZ) and SBC ( SBC) are preparing new low-priced digital subscriber line, or DSL, services aimed squarely at broadband offerings from cable rivals. The new offerings from the telcos mark the first time the industry has moved to beat cable prices on a large scale.

Though DSL has been a deeply unprofitable, cash-intensive business for the phone companies, Wall Street has long worried that in failing to aggressively pursue the broadband market the Bells have been missing a rare growth opportunity. And in contrast to the dwindling long-distance market, broadband looks like a robust business where price competition could hold the key to winning what is expected to become lucrative market share.

"This is the opening salvo to what will be a furious price war," says one New York hedge fund manager who is long SBC.

Rolling Out

Through a partnership with Microsoft's ( MSFT) MSN Internet service, Verizon is offering a $35 DSL plan, which will reportedly replace the $50 to $60 rates customers are currently paying when the product is officially launched sometime in the next few weeks.

Meanwhile, San Antonio local phone giant SBC, with its Net partner Yahoo! ( YHOO), is planning to introduce a $25 "semi-fast" DSL service in several markets over the coming weeks, according to analysts. SBC's offer provides a speed of 384 kilobits per second -- five times faster than dial-up service, but only a fraction of the speed of conventional cable modem services.

Cable companies charge between $40 and $50 per month for broadband services.

Historically, cable companies have been winning more than two broadband customers for every DSL customer added by the Bells. To make matters worse, nearly all the cable companies have plans to introduce phone services, which observers fear will dramatically siphon off the Bells' core residential phone customers.

Striking Back

"The Bells have to fight back, they have no choice," says the New York money manager. "This will be a negative for the cable companies, but that doesn't really matter going into next week's cable earnings." The threat of a broadband price war will seem minor, at least for the near term, if cable companies report the expected strong financial results beginning next week, says the would-be cable short.

Verizon declined to comment on the terms it struck with Microsoft to offer the new DSL plan.

But according to a research report Friday from J.P. Morgan Chase cable analyst Jason Bazinet, Verizon is not only pushing a price edge, it plans to compete on speed also. The new offering boasts speeds of 1.5 megabit-per-second, roughly equal to that of cable.

Bethpage, N.Y.-based Cablevision ( CVC) is the most vulnerable of all the cable companies as Verizon rolls out its pricing offer, says Bazinet, since the two companies share the same territory.

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