Price War Erupts for High-Speed Internet Service

The battle between cable and phone companies to sign up new customers for high-speed Internet service is heating up, creating fresh opportunities for consumers to cut their bills.

Verizon Communications Inc., which last quarter became the first company ever to see a drop in DSL subscribers -- some of whom went to its faster FiOS service -- is now offering customers six months of DSL service free if they sign up for the company's phone and Internet package. That makes the bundled package $45 a month, vs. $65 prior to the offer. AT&T Inc., meanwhile, is now guaranteeing its current prices, ranging from $20 to $55 a month, for two years.

While the most generous offers are coming from the phone companies, some analysts expect cable companies will also become more aggressive in their own promotions as they compete to retain customers.

Cable and phone companies have competed for broadband customers for more than a decade, but discounts have been relatively modest, mainly because the companies continued to add new customers at a healthy clip. Now the market is maturing quickly; some 60% of U.S. households currently have a high-speed Internet connection.

Cable and phone companies added 887,000 new broadband customers during the second quarter -- half the number they added a year earlier, according to research from Leichtman Research Group.

And while the new additions were long split roughly evenly between the two camps, the tide turned dramatically in cable's favor for the first time during the last quarter. Cable companies picked up 75% of the new customers, sending the phone companies into a scramble. As bandwidth-hungry applications like video downloads grow, customers prefer the generally faster speeds cable offers. Cable companies have also been marketing more aggressively in recent months, analysts say.

"Phone companies can't just sit back and let cable companies take that much of the broadband market, or they will eventually cede everything," says John Hodulik, an analyst at UBS.

Winning broadband customers has enormous strategic consequences for both cable and phone companies. It gives them a foot in the door to sell other services, such as pay-TV and phone service. Mr. Hodulik says customers are most apt to get phone and TV services from the same company that provides them with their broadband connection. And broadband services are also the most profitable of the bundled services.

For now, the new deals being offered are with the phone companies' garden-variety broadband services. But the heightened anxiety over the state of the market could force the phone companies to cut prices on their higher-end products, too, said Thomas Eagan, an analyst at Collins Stewart.

In the case of Verizon, that would be its FiOS service, a connection that is almost three times as fast as its fastest DSL option. FiOS is currently available in only about 10% of U.S. households, most of them in the Northeast.

AT&T's U-Verse, the company's fastest Internet service, is available in about 10% households, mainly in the West, Midwest and Southwest.

Write to Vishesh Kumar at vishesh.kumar@wsj.com