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  • yingand_yang yingand_yang Feb 20, 2008 6:16 PM Flag

    Slowing Growth For Broadband

    Providers Face Slowing Growth For Broadband

    Posted 2/19/2008

    One of the growth engines for phone and cable TV companies — selling broadband Internet services to consumers — is sputtering.

    Some analysts forecast that cable and phone companies will add 20% fewer broadband customers in 2008 than last year.

    They partly blame a slowing economy and weak housing market. The main culprit, though, is that most U.S. Internet users that want to already have upgraded from slow dial-up service to high-speed broadband.

    One logical result might, at another time, be a price war among broadband providers. Analysts don't think that will happen this time, though — despite a new price war in unlimited calling plans — because the providers equally depend a lot on this revenue source.

    "It's getting harder for service providers to convert (remaining) dial-up users," said Matt Davis, an analyst at IDC. "But a price war hasn't happened. Cable firms have resisted, and telcos are taking the opportunity to grab a little more revenue while they still can."

    AT&T, (T) in fact, this month hiked prices for speedy digital subscriber line services by $5 per month in 13 states. It raised rates for its three lowest-speed DSL services, with the new prices $20, $25 and $30 per month.

    "It's evolving into trench warfare," Davis said. "(Phone carriers) are looking at how to extract more revenue from existing customers."

    For the past five years, phone companies have aggressively targeted dial-up Internet users by selling lower-speed DSL services for as little as $15 a month. Cable TV firms have resisted offering prices that low, but they have recently begun selling more low-speed plans at discounted rates, analysts say.

    Fourth-quarter results released by Comcast, (CMCSA) the No. 1 cable TV firm, this month could be a sign of trouble ahead. For the quarter, Comcast added 331,000 broadband customers, down 32% from the year-earlier period's 490,000 and down 26% from the third quarter's 450,000. Comcast announced a new $24.95 tier of high-speed Internet service, well below the $42.95 price it has charged for several years.

    And Time Warner Cable (TWC) has unveiled a new scheme targeting low-spending customers. It plans to test a pricing system that charges consumers based on how much data they download per month.

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    • AT&T's $5 price hike signals to cable TV firms that it's not interested in a price war, says Jonathan Chaplin, an analyst at JPMorgan.

      "AT&T is going to see how the cable industry responds," Chaplin said.

      He says phone and cable companies should be able to avert a price war because together they dominate the broadband market.

      "The broadband market is a duopoly," he said. "That should be a stable pricing environment. It's in their interests to compete rationally and preserve the economics of the market."

      But a different group of providers — wireless firms — could shake up the broadband market. Sprint Nextel (S) and Clearwire (CLWR) are building wireless broadband networks.

      Chaplin, though, doesn't expect wireless broadband to compete head-on with DSL or cable. "It's not going to be a substitute," he said.

      That's because DSL and cable downloads will remain much faster than wireless broadband, he says.

      Instead of price cuts, analysts say cable and phone companies will offer users faster Internet downloads, making it easier to view movies and more.

      AT&T plans to increase speeds to 10 megabits per second from 6 mbps where it sells its U-verse data and TV services. AT&T says U-verse will be available to about 17 million homes by year-end, up from some 8 million now.

      Last month, Verizon Communications (VZ) said it's hiking its DSL speeds to 7 mbps from 3 mbps.

      U.S. broadband growth peaked in 2006, when the 20 biggest phone and cable companies added 10.4 million high-speed Internet customers, says Leichtman Research Group. Final figures will show they added 9.3 million in '07, LRG says.

      "We're not at a saturation point for broadband yet," said Bruce Leichtman, head of LRG.

      He says that 82% of U.S. households have a computer and three-quarters of them go online. But the number of online households with broadband is less than 60%, he says.

      "There's still opportunity out there," Leichtman said.

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