WILL DSL PRICE DROPS JUMP-START BROADBAND?

The price war has begun. As carriers and multiple service operators make their way to Supercomm, the first real broadband access pricing battle is stirring in their wake. DSL providers have started getting aggressive in their deployments and customer rates, and it now remains to be seen whether cable providers will take the bait.

After languishing between $45 and $60 per month for the last two years, the price of DSL is dropping, inching ever closer to the $25 charge that's standard among most premium dial-up services. For SBC Communications and Verizon Communications, the magic number appears to be $35 a month, while the RBOCs and consumer DSL providers have begun offering introductory packages and tiered pricing schemes that bring the cost of the first year's worth of access to an average of $40 per month. In comparison, cable modem service comes in at $45 to $55 a month when bundled with cable programming, and prices are often higher when high-speed service is purchased independently.

Falling prices were inevitable — as broadband access expands from the early adopters into the mass market, costs were bound to come down. More importantly, carriers are getting their first true opportunity to sell applications and services over what were until now dumb pipes.

Squeezing extra money out of an early adopter is like trying to squeeze milk from a rock; they know what content they want, and they where to get it. Not so with the mass market, which has had years of coddling from portals such as MSN, AOL and Yahoo. So even if carriers and MSOs are forced to drop their prices for the pipe itself, bundling premium video or other bandwidth-intensive offerings (similar to bundling voicemail with landline service or bundling HBO with basic cable) will help bring revenues back up.

Verizon, for example, is linking its DSL service with MSN 8.0, forming a co-branded portal with the second largest consumer ISP in the U.S. While most of the content will be free, Verizon plans to offer premium broadband services through the portal, whether it's music, video or other multimedia.“It's average users that want premium services,” said Mike Poling, Verizon Online's vice president of portal management. “My wife, my kids, my grandmother — they want content that's only two clicks away.”

Broadband has already begun to see such a transition on the enterprise side. The costs of offering a business-class DSL line or cable modem have dropped rapidly over the last two years, but to keep their revenues steady, providers are beginning to add on services from Web hosting to managed network firewalls and VPNs. Some carriers are even offering frame relay services over DSL for remote locations.

“To a degree, price will always be a factor,” said Patrick Bennett, executive vice president and general manager of Covad Broadband Solutions. “But the actual cost of the access line will matter less and less. It's the enhanced services and the content that we can give that will matter the most.”

There is little doubt, however, that price will remain the early driver behind penetration, especially for consumer broadband. And the RBOCs now appear very ready to enter the pricing fray. Telecommunications Industry Association President Matt Flanigan said the ILECs have all put in major orders for DSL equipment in recent months, demonstrating a marked commitment to building out their broadband footprints. “DSL is definitely going after cable this year,” Flanigan said.

The cable industry is unlikely to take the challenge lightly. Cable is ending its segregation from the telecom industry this year with its first major showing at Supercomm: Representatives from Cox Communications and Cable Labs are scheduled among the keynote speakers. Regardless of whether either industry will admit it, cable companies and the telcos are in the same business — and the competition is bound to a whole lot fiercer.