Top-Dollar DSL

The only show in town, Bells hike copper prices

After vanquishing most of their competitors, the coast is clear for regional Bells to raise rates for broadband services over Digital Subscriber Lines.

SBC Communications is first out of the chute, quietly boosting standard residential Digital Subscriber Line (DSL) packages that sold for $40 per month last fall to $50.

Market experts predicted others will follow and prices will keep rising, forcing some hard choices for telecommuters who rely on connections to the home office via the turbocharged copper phone lines.

At the end of 2000, there were 2,429,189 DSLs in service, according to telecommunications research firm TeleChoice. By the end of 2004, there will be more than 17 million, the firm predicted.

Over the past few years, the Federal Communications Commission has promised consumers choice and competition in broadband services, but nothing that it did was enough for many DSL competitors to survive against dominant regional Bell telecommunications powerhouses.

"The strategy for telcos in DSL has been to destroy the competition," said Alan Tumolillo, senior vice president at Probe Research. "That may seem bad in terms of regulations, but the people in Washington dont care."

The surviving regional Bells — BellSouth, Qwest Communications International, SBC and Verizon Communications — convinced regulators that their chief competitors for high-speed Internet access are the cable companies. Cable-modem access costs about $40 per month.

In the last six months, many competitive residential DSL providers have gone bankrupt, sold out or ended the DSL portion of their businesses, leaving consumers in many U.S. regions a single choice for DSL service: the local phone company. The competitive fallout has opened the door for price hikes.

TeleChoice analyst Eric Rasmussen said the law of supply and demand is at work. "There will always be some competition, but a year ago, you had a lot of different DSL providers in every market," he said. "Now Flashcom is out, Jato [Communications] is out and HarvardNet is out. Those are a couple of pretty big providers that are no longer out there, so why not raise prices a little?"

Rising prices may force customers to back off their bandwidth spending.

"If they raised the price, would I still continue?" asked David Lechler, western U.S. manager at Canadian video-over-DSL company iMagicTV. "I would probably drop some bandwidth to save a bit on price." In his Denver-area home, Lechler uses residential DSL service from Qwest for e-mail, Web access and connection to his corporate network in St. John, New Brunswick.

The Bells and smaller DSL providers are facing up to the need — or the opportunity — to make money on the service, which has been offered in promotional packages for as little as $20 per month.

"I can only tell you that the margins are very, very small in DSL," said Russ Saito, a product manager at Verizon. "If you want to provide the service, youd want to provide it at a higher cost, but the market isnt there for it."

Carriers arent necessarily interested in selling everyone DSL. When customers order a second phone line for dial-up Internet service, the Bell can collect $20 per month from the line, plus possibly $20 per month as an Internet service provider. The phone company can also sell add-on services, such as call waiting, call forwarding, and local and long-distance charges. This could all add up to more than $40 per month for the Bell, with much less overhead than it incurs for DSL.

Eric Moyer, director of marketing at competitive DSL provider Covad Communications, said regional Bells, as well as competitive providers, created immense demand for DSL by keeping the prices so low. Once they realized they couldnt satisfy those demands and create any meaningful revenue, it was time to raise the prices and only serve those customers willing to pay a premium.

"Theyre probably realizing its a little more expensive than they once thought," Moyer said. "They realized those price levels were not something they could sustain."

Probes Tumolillo said the Bells saw DSL as a way to get bandwidth hogs who wanted to download fat images and files off of the telephone network. But they didnt anticipate the demand. Hiking prices may be a way to get the $40 monkeys off their backs. "For most carriers, each DSL subscriber that comes on is cash-flow-negative for three years."

The Bells used low introductory rates to lure a critical mass of customers. That allowed their suppliers to ramp up production and pass on volume discounts on equipment.

Qwest still advertises a $20-per-month introductory package, but customers have to pay another $18 for Internet service, and they dont get an always-on connection. "We are interested in increasing our footprint — in increasing the number of subscribers," spokesman David Goldberg said.

Some carriers may continue to shoulder discounted services because they can see revenue-generating potential in future add-ons. "There are going to be a lot of value-added services that providers can offer if they have a lot of DSL customers out there," Rasmussen said.

IMagicTVs Lechler predicted that eventually there will be enough DSL-based services to warrant the increased prices. "It will be able to use a part for the Web and a part for television and a part for voice," he said.

The cable industry stands to benefit from DSL price hikes. "DSL is available in many more places than any other competitor to cable service," said Mike Luftman, vice president of corporate communications at Time Warner Cable. "If raising their prices makes our service look more attractive to customers by comparison, then thats good for us."