Verizon Decision to Cut DSL Rates
May Put Pressure on Cable Firms

Verizon Communications Inc.'s decision to reduce the price of its high-speed Internet service by as much as 30% could spark a price war between telecommunications and cable companies as they fight for broadband customers.

Prices of cable stocks fell Friday as investors worried that Verizon Communications' move would force cable companies to cut their prices for high-speed Internet via cable modems, or take market share. The New York telecom company slashed monthly fees for its high-speed Internet service via digital subscriber lines to $34.95 a month from $49.95, and to $29.95 when ordered with a bundle of other fixed-line and wireless-phone services.

Such a move could be troubling for the cable industry because strong broadband sales have been one of the few bright spots over the past year. Cable's traditional video business has suffered from increasing competition from satellite television.

"Cable modem service is the whole enchilada [for cable companies]," says Jason Bazinet, a cable analyst with J.P. Morgan. "There's no more customer growth in the video business."

Verizon's new DSL fee is now well below current broadband offers from major cable operators, which charge $40 to $45 a month for cable-TV subscribers. Typically, cable companies charge $5 to $10 more if a household wants only a high-speed hookup.

Verizon's DSL move, announced Friday, could put pressure on AOL Time Warner Inc. as investors worry that lower DSL prices will accelerate AOL's loss of dial-up subscribers to broadband. Verizon's offer is about equal to what America Online subscribers pay for dial-up, assuming they spend about $10 a month for a second telephone line.

Verizon and SBC Communications Inc., the nation's largest local phone companies, are increasingly aggressive on DSL pricing after watching the cable companies build considerable dominance over the high-speed Internet market. At the end of last year, some 10.6 million households had cable modem hookups compared with 5.1 million with DSL connections, according to Yankee Group, a consulting firm. Verizon officials feel they also need to compete more aggressively in the high-speed Internet market as cable companies increasingly enter their domain of the local phone market.

CABLE OR DSL? Prices for broadband subscriptions vary greatly depending on special discount offers, contract durations, and bundles of other services. Some stand-alone monthly broadband prices, disregarding special offers. Service Provider (Type) Monthly Fee Cablevision Systems (Cable) $49.95 Time Warner (Cable) $44.95 Comcast (Cable)1 $52.95-$57.95 Cox Communications (Cable)2 $49.95 SBC Communications (DSL)3 $34.95-$49.95 BellSouth (DSL) $49.95 Verizon Communications (DSL) $34.95 1: Range reflects prices charged in different regions 2: Excludes purchase of modem 3: $34.95 is price with one-month contract Sources: the companies

DSL has been largely unprofitable for the Bells, even after they have invested billions of dollars in rolling out the service. Technology needed to connect customers to DSL costs the phone companies more than it costs cable operators to connect their broadband customers. There are many different phone systems in the U.S., which requires more work for phone companies to transmit data; cable systems are simpler because all the data are transmitted through the same pipe.

Verizon will advertise the new rate in selected markets beginning May 13. Officials declined to provide further details on the new pricing plan.

Merrill Lynch & Co. predicts that Verizon will add as many as one million new subscribers by the end of the year, an increase from the 600,000 the firm had originally forecast. During the first quarter of the year, Verizon added 160,000 DSL subscriptions, bringing its total at the end of the quarter to 1.83 million DSL subscribers.

Cable companies Friday scoffed at the notion that they would need to drop their prices in response to Verizon's move, and said they would wait to see what restrictions come with the lowest price.

"We're accustomed to aggressive competition and we believe we have the best customer-value proposition in the market place," says Dave Watson, an executive vice president of Comcast Corp., the country's largest cable company. With Verizon's cut, Comcast is still projecting that its cable-modem business will enjoy a 30% growth rate this year, ending the year with five million subscribers.

Cable executives argue that they benefit from the perception that DSL service suffers from more technical and service problems, such as the plethora of phone systems. "People aren't going to buy something just because it's a couple dollars cheaper," says David Pugliese, a vice president in marketing for Cox Communications Inc.

Friday at 4 p.m. on the Nasdaq Stock Market, Comcast was down $1.36 to $30.49, while Cox was down $1.35 to $32.05 in composite trading on the New York Stock Exchange.

Officials at the Bells argue that cable modems have their own technical issues, such as capacity problems when too many consumers log on at once.

Jim Whitney, an AOL spokesman, said Verizon's DSL discount is actually good news because it will increase demand for the $14.95-a-month broadband content service that AOL has been selling as an add-on to people with cable modems or DSL connections.

SBC has also been competing more aggressively on DSL pricing in recent months, though mainly through special bundled discount offers in selected markets that can offer DSL at $29.95 a month, and not with a lower overall pricing like Verizon's. In certain highly competitive markets, SBC offers broadband at an even lower rate -- $24.95 a month -- when part of a bundle of other SBC services.

The result: SBC added 270,000 new DSL customers during the first quarter of the year, bringing its total DSL subscribers to 2.5 million, the largest subscriber base among DSL operators.

Write to Almar Latour at almar.latour@wsj.com and Peter Grant at peter.grant@wsj.com

Updated May 5, 2003

	Sponsored by