Earthlink raises DSL prices, waives activation fee

(Telephony) Earthlink has raised its price for digital subscriber line (DSL) service to $49.95 per month, an increase of $10 compared to its previous monthly rate.

The company also will waive its standard $99 activation fee for any new subscribers who sign up through April 30, 2001. To qualify for the promotion, new subscribers must commit to a 12-month service plan. Those who terminate their plan early will face a $149.95 penalty.

According to John Ellis, director of broadband products for Earthlink, the company needed to raise rates to stem rising costs.

"All of our providers are making huge capital investments to bring DSL to the masses, and they have to find a way to fund this," he said.

"Consequently our costs are going up, and we felt we needed to increase our prices in order to sustain our focus on providing high-quality customer experiences."

But Earthlink also may be looking to capitalize on the shakeout that has begun in the DSL space, according to Jason Marcheck, an analyst with The Strategis Group.

“The feeling is that, with so many CLECs going out of business, competition in many areas is starting to become less intense on the DSL front,” he explained.

Marcheck adds that DSL providers are under pressure from two different fronts--profitability and provisioning. These also may be significant factors driving Earthlink’s shift in strategy.

“They’re finding that, at the $30 to $40 range, the margins are pretty thin; I’ve heard them called razor-thin,” he said. “There’s pretty strong demand right now, and they’re having trouble provisioning lines. I think the thought is to charge $50, make a little money and maybe tamp down some of the demand so that they don’t have the problems turning up lines.

“With less competition they have more flexibility in their pricing; it’s less cut-throat. The thinking amongst DSL providers now is, ‘Maybe we don’t have to serve everybody; we just have to make money off the people we serve.’”

The reason margins are so thin is that DSL equipment is expensive to procure and provision, says Kathie Hackler, vice president and chief analyst of telecommunications for Gartner Dataquest.

“This is expensive stuff for these guys, and they’re going to have to start getting some of the money back from that footprint,” she explained. “We’ll probably see the whole herd turn a little bit, and we’ll see prices inch up. They won’t change dramatically, but I think these providers will start to put their emphasis on profitability over market share.”

Though he doesn’t expect to see cable-modem providers taking a similar approach any time soon, Marcheck doesn’t think DSL providers who follow the lead of Earthlink and SBC--which announced a similar price increase last month--necessarily will be at a competitive disadvantage against their cable brethren.

“DSL still holds some inherent advantages for the telecommuter and for the customer where security is at a premium,” he said. “So, they’re going to lose some traction with the customer who simply wants a high-speed connection to the Internet, who uses it for recreational purposes. But the person working from home is probably going to be willing to pay the $50, and that’s the customer base they’re looking for anyway.”

Hackler agrees with Marcheck’s assessment, adding that cable companies have had their own problems in provisioning high-speed Internet and data service.

“There has been a lack of stunning success on the part of the cable companies,” she explained. “Even though they’re still signing up customers, they’re not as feared as they once were.”