multichannel connect
careers
all access

News

Assessing New DSL Price Upticks

3/28/2004 7:00 PM Eastern

BellSouth Corp. and SBC Communications Corp. — two of the most aggressive telephone companies in the high-speed data arena — have begun inserting regulatory fees in their monthly charges for service, a practice that essentially amounts to price increases of between 7% and 13% per month.

Telephone-company digital subscriber line service is still priced lower than high-speed Internet service delivered via cable modem, which averages around $49.95 per month for speeds of 3 Megabits per second.

But raising the price for DSL could mean that the regional Bell operating companies — once expected to keep DSL low to capture market share from cable — are becoming more concerned with making the service profitable.

'STEALTH INCREASE’

According to a research report by Banc of America Securities cable analyst Doug Shapiro, BellSouth began sending letters out to customers earlier this month informing them of a new $2.97 monthly surcharge to recover regulatory costs.

In February, SBC started to implement a Federal Universal Services Fund recovery fee, ranging from $1.84 to $5.83 per month. Neither company includes the fee in its advertised prices for DSL service, but both disclose it in fine print.

According to Shapiro’s report, there are no new regulatory rules that require the RBOCs to impose the fees at present. The analyst also believes that in the past, the surcharges were embedded in the advertised price.

He characterized the new surcharges as a “stealth price increase.”

According to Shapiro’s estimates, the BellSouth surcharge represents a 7% increase over its FastAccess DSL product (1.5 Mbps downstream and 256 Kilobits per second upstream), from $39.95 per month to $42.92 per month. BellSouth’s FastAccess DSL Lite offering (256 Kbps downstream and 128 Kbps upstream) effectively increased 10% to $32.92 from $29.95.

For SBC, which in early February raised the price of its basic package to $29.95 from $26.95, the FUSF surcharge of $1.84 per month raises the price of that tier to $31.79, a 6% increase.

For SBC’s high-end Expert Plus Package (1.5Mbps to 3 Mbps downstream and 384 Kbps upstream), the $5.83 monthly FUSF charge raises the price of service 13% from $49.95 per month to $50.82 per month.

Shapiro wrote that the price increases indicate that broadband pricing is stabilizing and that the RBOCs actually care about making the DSL service profitable.

But perhaps more importantly, Shapiro indicated, the RBOCs’ willingness to effectively raise prices as they’re making inroads into capturing cable’s market share implies that the RBOCs believe price elasticity is low, possibly setting the stage for further price increases.

“Big picture, we think these effective increases support our belief that Bell-cable competition will not be destructive as feared,” Shapiro wrote.

SBC spokesman Joe Izbrand said the decision to recover the FUSF charges does not mean a change in strategy.

“From our point of view, in the course of a couple of years the FUSF charge has more than doubled,” Izbrand said. “While we are required to pay into the universal-service fund, our competitors do not. The reality is for us to try to remain competitive and to deal with both the competition that is out there and maintain our leadership position as a DSL provider, we have to look at making these kinds of decisions.”

FUSF fees are federally mandated charges to regulated telephone carriers to help fund telecom projects in rural areas.

“Historically, we’ve had a lesser FUSF fee to deal with on the transport and the prices for broadband Internet were at a level higher than they are today,” Izbrand said. “In that kind of environment it allowed us to simply include the cost in the service we provided.

“The marketplace today is very aggressive, there are all types of low-priced term commitments, it’s a very competitive environment. You match that up against the increase in charges like FUSF contributions, it becomes significant on a DSL provider that has to pay into it, versus its competitor that doesn’t have to.”

Customers currently under long-term service commitments are not being charged the FUSF fee, Izbrand added. When those contracts expire, they will be required to pay the charge.

NO PRICE WAR?

Fears of a DSL price war rocked cable stocks last year, as many analysts and investors believed that the RBOCs, intent on retaining customers for the more lucrative local telephone service, would continue to drop DSL prices to gain market share.

Although cable companies are beginning to roll out voice-over-Internet protocol phone service — at lower prices than many RBOCs — the evidence so far suggests that the Baby Bells are far from panicking.

Part of the reason for that, Shapiro wrote, is that the RBOCs have been quietly gaining market share on high-speed data products. While the overall DSL additions are still lower than cable-modem additions, the fourth quarter of 2003 was the first time that cable’s market share of net additions fell to 60%.

“In light of their [RBOCs] desire to increase market share, we believe their willingness to raise prices at this point indicates that they believe the demand is sufficiently inelastic that raising prices won’t derail recent momentum,” Shapiro wrote. “And if that elasticity is really low, it may set the stage for further price increases, eventually.”

New Fees Levied
BellSouth Corp.
PACKAGE SPEED* MONTHLY PRICE REGULATORY FEE TOTAL INCREASE
* Upstream/Downstream
Source: Banc of America Securities
FastAccess DSL Lite 256Kbps/128Kbps $29.95 $2.97 $32.92 10%
FastAccess DSL 1.5Mbps/256Kbps $39.95 $2.97 $42.92 7%
SBC Communications Inc.
PACKAGE SPEED* MONTHLY PRICE REGULATORY FEE TOTAL INCREASE
Basic 384Kbps/128Kbps $29.95 $1.84 $31.79 6%
Expert Plus 1.5Mbps-3Mbps/384Kbps $44.99 $5.83 $50.82 13%
Net Data Adds
Total quarterly figures for cable modems vs. DSL:
DSL CABLE
Source: Banc of America Securities
1Q01 406,000 675,000
2Q01 245,000 869,000
3Q01 359,000 890,000
4Q01 457,000 1,020,000
1Q02 459,000 823,000
2Q02 471,000 1,068,000
3Q02 569,000 1,224,000
4Q02 354,000 1,363,000
1Q03 630,000 1,418,000
2Q03 526,000 1,032,000
3Q03 694,000 1,373,000
4Q03 763,000 1,161,000

September