High-speed Internet excess

As the telecom industry maelstrom continues to rage, drowning some independent DSL providers and leaving others on life support, heavyweights SBC Communications and EarthLink recently raised DSL rates by $10 to $49.95 per month.

Operating under a wholesale business model — and at a distinct competitive disadvantage — competitive local exchange carriers relying on RBOCs to provide data services have struggled to compete with the larger providers that sell DSL service directly or have non-DSL revenues. As a result, many independent resellers have been squeezed out, and competition in the market has floundered, according to analysts.

“It smacks of monopolistic behavior, doesn't it?” said Rob Carlson, senior analyst of network services at Current Analysis. “Drive out the competition, provide the other DSL providers with lousy local access service and raise your prices.”

Despite rate increases, there is still pent-up demand for high-speed broadband service by those who can afford it. But analysts say there are limits to what people will pay unless add-on services are bundled around DSL.

Research has shown that consumers are willing to pay more as line speed increases and consumer demand does not depreciate with increased DSL costs, according to Mercer Management Consulting.

But consumers are not entirely price insensitive to broadband access rates. Analysts say the increases are close to exceeding a predisposed price customers are willing to pay. SBC's recent mark-up bumps its head on a suggested price ceiling of $50, which can be a psychological watershed.

“We're still dealing with an ‘I want my DSL’ mentality, and there's not a lot of reasons to be price competitive,” said Jay Pultz, vice president and research director at Gartner. “But above $49.95 a month, you're into a price point where consumers start to round up and say it's close to $100.”

Although RBOCs hold the lion's share of DSL subscribers — 1.5 million compared with 184,000 data CLEC subscribers, according to The Yankee Group — the dominant carriers' coverage area remains territorial, and no company has moved to dominate the market.

Part of the reason is the installation problems that plague DSL. As it stands, customers now can expect six to eight weeks to pass between signing up for DSL and receiving service.

Rather than attacking the DSL market by enrolling more subscribers and risk increasing the already lengthy lag time, analysts say DSL providers must concentrate on provisioning current customers.

“If they overload themselves, all they're going to do is alienate potential customers and create more bad press for themselves, which, in turn, will lower demand for DSL,” said Michael Goodman, an analyst with The Yankee Group.

Laws designed to encourage competition also might influence less-than-aggressive network expansion by RBOCs.

In Illinois, Ameritech and its parent company, SBC, are jousting with state regulators about granting DSL competitors use of an expanded network the company plans to build as part of “Project Pronto.” SBC executives argue the company should not have to give competitors a free ride on its investment in expanding DSL service. Critics claim the RBOC is stalling its plans, hoping that more competitors fold during debate.

But arresting network expansion is not an option for DSL providers, considering the head-to-head competition with cable modem services. Although competition between DSL providers is waning, cable Internet providers continue to extend their footprints. If DSL expansion plans are postponed, even RBOCs run the risk of falling further behind cable in the race for high-speed Internet customers, analysts say.

“Maybe you don't want Rhythms and Covad on your network, but if you're not there and cable is, then it's a moot point — you've lost a potential subscriber to cable,” Goodman said.

In addition to the sluggish buildout process — whether intentional or due to the time needed to construct a network — analysts say larger DSL providers are also short on staff to provision higher subscriber numbers. Like other service providers, RBOCs are under capital expenditure constraints.

“They'll continue to build it out, but there will be nearer-term focus on trying to maximize the revenue where DSL is already in place, and the buildout will be slower” Pultz said. “[Neither] the ILECs nor anyone else in the industry is really geared in terms of support personnel to take care of DSL. It's kind of like turning around a battleship — it just takes time.”

Despite DSL rate hikes, it's unlikely cable modems would respond with rate increases of their own. Analysts say cable providers have remained steadfastly committed to a price point selected years ago. Now, cable companies happily find themselves in unfamiliar, yet favorable, price territory.

“It's rare when you see cable as the low-price alternative,” Goodman said. “This allows them to further differentiate, and, for once, they're on the plus side of pricing.”