THE HARD SELL

As the early adopter market for broadband matures, the industry is forced to turn to the next generation of consumers--one more frugal and less technologically adept than its predecessors. Broadband providers will have to work harder and spend more to sell to secondary adopters, and they're only just beginning to understand how this new customer thinks.

Dean Rich is the kind of customer broadband providers know very well: bitter, indignant — and loyal as a hound. A 44-year-old train engineer who lives in Vancouver, Wash., Rich has been agitated since AT&T Broadband adopted him following its acquisition of Excite@Home late last year, capping his download speed (essentially cutting the service in half, he said), raising the price $10 per month, and… well, don't even ask about customer service.

But until another provider comes to his area, Rich will abide his frustrations. He lives too far from a DSLAM to get DSL, and going back to dial-up would mean being stuck with a $150 cable modem and — more important — having to kick the online gaming jones he developed with a high-speed connection. “I've developed a lot of relationships over the year and half playing,” he said. “We have clans and cliques and forums.” And if the price went up another $10 a month, Rich admitted that he would pay if improved service came with it. “I'm not opposed to paying more money if I can get what I want.”

Secondary adopters have less money to spend, and their less sophisticated understanding of technology will make them even harder to convince that broadband is worth the price.

People like Dean Rich are becoming increasingly harder to find, according to analysts and industry members, because most of them already have been found. The early adopter market for broadband is nearing saturation, and in the coming months broadband service providers will have to discover a new audience composed of folks who aren't nearly as impressed by high-speed connections.

Broadband is fast, sure, but the most popular use of the Internet is still e-mail, which doesn't necessitate a high-speed connection — and the monthly bills for broadband are bigger than most cable TV bills. Secondary adopters have less money to spend, and their less sophisticated understanding of technology will make them even harder to convince that broadband is worth the price. They heard all the horror stories, saw prices rise to new highs and, as the economy darkened, became especially cautious about where their money goes.

As some providers start exploring the secondary adopter market, many aren't even sure just how to communicate with this new species of consumer. “I am trying very hard to find good reasons for my dial-up users to move to my new broadband xDSL offer, and I do not find many,” read a late November post on an ISP message board. “Could you help me on that?”

Broadband providers may learn not to take Dean Rich for granted again.

Early adopters were vocal in their dissatisfaction with service providers, but where it really counted they were remarkably permissive. The ranks of broadband subscribers doubled in 2001, even as prices went up 15% to 20%. Late last year, a few news stories trumpeted a movement of “defectors” retreating to dial up in the wake of price hikes and provider bankruptcies. But in fact, broadband defectors have so far been a statistically insignificant bunch, said Dylan Brooks, senior broadband analyst for Jupiter Media Metrix. Broadband churn generally has stayed between 1% and 1.5%, and most of that represents people switching between providers.

The next group of customers won't be so forgiving of high prices and unreliable service, especially within the commercial sector. Despite sitting in the crosshairs of broadband providers for years now, small businesses are still 90% broadband-free, largely because of the horror stories they've heard from early adopters.

“Small businesses are very difficult to market to,” said Mike Apgar, founder and CEO of Speakeasy, a Seattle ISP with a customer base that is 25% commercial. “They can't be really compelled by advertising as much as they can through reputation. They won't churn on price, but they're very sensitive to reliability and customer service. You start screwing that up, man, they're out of there.”

The next wave of residential customers is more focused on price, and as recent data revealed, they don't want to pay $50 per month for broadband. A Yankee Group report released in December discovered that whereas 24% of early adopters said they would pay that much for broadband, only 15% of secondary adopters would (see figure on page 32). And a survey conducted in November by Peter D. Hart Research Associates and The Winston Group found 36% of respondents were interested in broadband, but not at the current price.

Brooks pointed out that these figures should be interpreted cautiously. In past Jupiter surveys, he said, about 6% of people cited $35 per month or higher as a fair price for broadband, but in the marketplace, more than 15% were paying that much. “There's definitely a disconnect between what people think is fair vs. what they're actually willing to pay,” he said. But The Yankee Group's numbers aren't as far off — 24% of early adopters say they would pay $50 per month for broadband, and 28% actually do.

“If we want to get into the masses, we are going to have to see those prices come down,” said Jonathan Gray, director of marketing for Qwest Communications' consumer services group. There's just one problem: Many providers already are losing money on existing broadband customers. Lower prices would just mean losing more money.

“The question really is can the price of broadband come down,” said Abhi Ingle, Covad Communication's vice president of marketing. Broadband providers can't afford to lower prices until their own costs drop, and that could take a while. Ingle said prices aren't likely to recede for the next 12 months, and even then, will decline only gradually, “maybe 5% to 10% a year at the most.”

Ingle called the notion that broadband is too expensive a “myth,” and the public's belief in that myth “a failure of marketing.” A chorus of industry experts agrees, a view supported by simple mathematics: More than 90% of the residential online population dial into the Internet, paying more than $20 per month for access. Of those, about 30% bought a second phone line so that their Internet use wouldn't tie up their voice line. (For heavy users, the number is higher — almost 65%, Ingle said.) Add $15 to $20 for the second line, and consumers are paying nearly $45 per month for a dial-up connection when they could have broadband for just $5 more.

The industry, which has focused thus far on the message of speed, is now trying to expose Ingle's “myth.” In December, MSN/Qwest print ads began to divide their message between speed and price, depicting a tortured dial-up user whose misery is compounded when he considers that DSL purchased through an MSN sales promotion might be cheaper than dial-up. The ad reads, “The wait. The cost. The wait. The cost.”

To bring that gospel to the broader congregation, however, providers must work harder and spend more. Many cable companies (including AT&T Broadband) are considering easing customers' price concerns by adopting a strategy promulgated by broadband provider Charter Communications in late 2000: offering tiered pricing for various speeds, as many of the DSL firms do. For about $35 per month, Charter customers can get between 256 and 384 kb/s downstream bandwidth. About $4 more per month gets them nearly twice that speed, and for $75 to $99 (depending on locale), they can get 1 Mb/s or more. Theoretically, this would offer easier entry for those squeamish about a $50 price point.

But TeleChoice analyst Claudia Bacco said the strategy is flawed. “Most [broadband providers] came out with gold, silver and bronze services. They lost money on bronze service, and they made money on silver and gold. Almost all the customers bought bronze,” she said.

AT&T WorldNet service discontinued its cheapest service ($4.95 per month) in January when online ad revenues could no longer support it. But if WorldNet can successfully transfer its customers to its next cheapest service ($10.95 per month for less than a third of the allotted access time) without significant churn, it will have gotten away with a roughly 600% price increase, setting a tempting precedent for all tiered broadband providers.

More than half of Charter's customers opt for the lowest tier, said Shahid Butt, the company's director of advanced services. Charter is considering adding a la carte services to the tiers, such as firewalls and gaming services, but doesn't plan to overspecialize its offerings too soon. The early adopter population is still far from spent, Butt said. “There's still opportunity to market to people who will take the product at the price it is today.”

A better model for successful tiering, Bacco said, was pioneered by Speakeasy, the Seattle ISP. Speakeasy offers packages tailored for specific user profiles: A gamer's package with static IP addresses and local game servers; a day-trader package with faster ping times and bundled security software; a system administrator's package with shell accounts and server control. Likewise, Speakeasy's business DSL comes in various flavors for telecommuters and multi-offices. With this strategy, Speakeasy's user base grew 350% in 2001, three and a half times the growth of the overall industry.

Bell company and cable reps call Speakeasy's plan “too nichey” for the broader masses, and the package descriptions — a large, dense table filled with acronyms and kilobit counts — are bound to overwhelm the layperson. For the next wave of customers, this may have to change.

“As a whole, the DSL industry has done a poor job at marketing,” Bacco said. “[Service providers] trotted out all the technical issues — what standard are you using, what type of DSL are you buying. That's going to scare the average consumer away.”

In March Speakeasy will unveil a new series of packages, tailored for the average consumer. For example, a network operations center-based security service called Neighborhood Watch will let the ISP manage its customers' safety, and content services tied to the operation support system will allow users to purchase content (of what sort Apgar won't yet disclose) that will be added to their regular bill.

To get consumers past the deterring upfront costs, some providers (DirecTV, for example) have enticed users with a dowry of discounts to reward committing to a long-term relationship. But in an uncertain economy, consumers didn't want a broadband ball and chain. An MSN/Qwest promotion that expired Feb. 9 offered customers two free months of one service package if they signed a 12-month contract. “We're finding that less than half the customers want the contract,” said Qwest's Gray.

Verizon Communications has made perhaps the boldest move toward the large-scale embrace of the secondary adopter. Faced with the possibility of missing its year-end subscriber growth goals, last fall Verizon became DSL's answer to “Crazy Eddie,” offering $29.95 for the first three months, a free modem, free installation, a free Web camera and most surprising, no long-term contract — all to meet its stated goal of numbering 1.2 million subscribers by the end of 2001. Verizon met the challenge, racking up 225,000 new customers that quarter and setting a new sales record in the process.

What remains to be seen, however, is how faithful these new customers will be after the price reverts to $50. Verizon wouldn't say how long it takes to break even on DSL customers, but Yankee Group analyst Imran Khan said he imagines Verizon's customer acquisition costs ranging between $400 and $600 each, which, with last year's promotion, would take 10 to 14 months to turn a profit. “Certainly you're going to gain some traction, but what happens at end of the three months when the promotion expires? You're going to see some people churning,” Khan said.

Verizon seems to be banking on the precept that a broadband customer is a broadband customer — that even these secondary adopters, after a few months of broadband exposure, will find the service as indispensable as Dean Rich. But as those introductory prices evaporate over the next few months, Verizon will face its first test of the stickiness of these new customers — and the industry will have its first glimpse of the new face of the broadband market.

 

WARMING UP TO BROADBAND
	Somewhat/very interested in high-speed Internet	Likely to subscribe at $50 per month	Likely to subscribe if lower speeds were available at lower prices
Average U.S. household	63%	15%	39%
Early adopter	70%	24%	36%
Secondary adopter	66%	15%	39%
Non-technical/non-adopter	53%	7%	43%
Source: The Yankee Group

 

AVERAGE BROADBAND PRICES (fourth quarter 2001)
Cable	$44.22
DSL	$51.67
Source: ARS