"Cutting prices for high-speed Internet service may not be the greatest thing for cable operators. But it won't kill them, either.
That's a lesson to learn from cable operators that are already offering high-speed Internet packages at prices about one-half (or even lower) of the $50 monthly fee that has become standard among the nation's biggest cable TV companies, including Comcast and Cox Communications.
Over the past year, marketing high-speed Internet connections, or broadband, has been a boon for cable operators, enabling them to reap high-margin revenue from cable systems into which they've poured billions of dollars in capital expenditures.
But, as TheStreet.com explored in an article last month, some analysts say growth in broadband will peter out in 2003 unless operators start offering lower-priced service packages, or tiers. That scenario has led at least one sell-side analyst to cut growth estimates for cable data and, in turn, equity values.
The situation could pose a difficult question for system operators. Do they hold the line on rate cuts and risk stalled subscriber growth? Or do they introduce lower-cost tiers and risk margins shrunk by consumers who downgrade their service?
The choice is difficult, but some of the few companies already selling lower-priced cable tiers say the benefits more than offset the risks....
One small operator that says it has achieved greater penetration through a budget-price tier is Massillon Cable Communications, a privately held company serving 45,000 households in Ohio. Massillon, which launched high-speed Internet service in 1999, now has 11,000 broadband customers, mostly residential. That amounts to about 24.4% of basic cable subscribers. That's a number that puts Massillon in the same league as larger operators....
Similarly supportive of lower-priced tiers is Michael Zammit, managing director of Advanced Broadband, a subsidiary of luxury homebuilder Toll Brothers that currently markets broadband to 1,600 homes in several gated communities. In communities where 128 kbps cable modem service goes free to every household, about a third pay extra for upgraded service. Of those upgraders, one-third pay $15 a month for 768 kbps download rates and two-thirds pay $25 for 1.5-megabit-per-second downloading.
In communities with no free broadband, Zammit says, about 25% pay for the service. Advanced Broadband charges them $25 a month for entry-level 128 kbps service and $40 for 1.5 mbps service. Again, two-thirds of upgrading customers opt for the more expensive tier.
Though Zammit's customers clearly demand broadband, he says selling high-speed Internet in the mass market is harder. 'That makes it all the more important to have a more attractive and less expensive entry point for less techno-savvy users,' he says.
'The bottom-line message is, we're capturing 50% more subscribers because that tier is there,' Zammit says. 'Those people would not have taken broadband Internet if we didn't have a lower price point....'
Butt downplays the problem of lower tiers cannibalizing higher tiers, saying that the low-priced tier tempts dial-up users to try broadband. "If you offer them a price point that's comparable to dial-up, you get more people to trade up,' he says." [TheStreet.com]
