Verizon won't officially confirm a rate change, but its Website clearly states a new offer of $34.95 per month for DSL as part of the RBOC's high-speed Internet access package with Microsoft Corp. (Nasdaq: MSFT). That price is down from the previous price of $49.95 per month. What's more, further discounts are likely for customers opting to bundle long distance and local service with DSL.
Analysts say the cut is significant on two counts. First, it's an aggressive bid by Verizon to keep customers from the temptation of cable modem Internet service. Second, it highlights the role of bundled services in carrier strategies.
"It takes some fear to have a reduction like this," says Judy Reed Smith, founder and CEO of Atlantic-ACM, a telecom research and consulting firm. "Verizon saw the numbers coming from cable modems."
Research underscores this point. Over the past four years, the number of cable modem subscribers has outnumbered DSL ones by a significant margin, according to New Paradigm Resources Group Inc. (see Report: Cable Still Beats DSL). What's more, by tacking cheap Internet access onto cable TV in bargain packages, MSOs are not just selling higher volumes, they are cultivating a sizeable installed base from which to build so-called "triple play" services that include voice, data, and video bundled together.
This has been a pain to Verizon and other incumbents, which haven't been happy with their returns on DSL and hate losing customers to an alternative technology. "This [DSL price cut] is really an attempt by Verizon to lower churn," says Rick Black, senior telecom analyst at investment bank Blaylock & Partners LP. Losing 2 percent of customers annually to other providers may not seem like much, but it can have a debilitating impact on relatively small DSL volumes, he says.
Table 1: RBOC DSL Progress Report
|DSL subscribers added in latest fiscal quarter||Total DSL subscribers to date|
|Source: Company Websites, earnings reports|
Others agree. "Verizon sees lower margins on certain services like DSL. If it can lower churn rates... it will make money if it continues to grow its business," says Tavis McCourt of Morgan Keegan & Company Inc.
Verizon hopes to combat customer losses through bundled offers of its own. Indeed, carriers of all stripes -- RBOC, IXC, and MSO -- are building their futures on bundles of different services offered with "more the merrier" discounts. There's evidence of this in recent earnings announcements (see US Incumbents Go the Distance, Verizon Earnings Don't Disappoint, SBC's Quarter: Growth in Key Areas, and US Incumbents Go the Distance).
Verizon will get takers for its cheaper DSL, according to analysts. But what will be the longer-term, bigger-picture impact of this move? Will it drive down prices for other telecom services?
Not really, says Judy Reed Smith. Voice services already have been pounded by price wars, she says. Business and wholesales services also have been battered and are just stabilizing now. Much depends on what happens when carriers such as MCI (Nasdaq: MCIT) (formerly WorldCom) and Global Crossing Holdings Ltd. get back in the race. If they engage in price cuts, things could be sticky for other carriers, even though demand may go up.
Blaylock's Black says other price reductions in telecom will be selective by region and market. Verizon and SBC Communications Inc. (NYSE: SBC), for instance, are likely to cut rates on services in highly competitive regions such as California or the former Ameritech states of Illinois, Indiana, Michigan, Ohio, and Wisconsin.
Bottom line? The growth of bundles and increased competition, albeit isolated to specific locales, could have a positive impact on the market. But given the wild cards of carriers emerging from bankruptcy, ongoing regulatory battles in the U.S., and the huge uncertainties of telecom economics, analysts aren't going out on a limb to predict it.
— Mary Jander, Senior Editor, Light Reading