Let the Price Wars Begin

Telecom & Wireless Report Business 2.0: This is my latest column incase you were interested.

Cablevision has just fired the first salvo in what is likely to be the next great telecom battle. Earlier this week the New York regional cable operator announced a $90-a-month package that includes high-speed Internet, digital cable, and unlimited local and long-distance phone service for consumers in its region. That means Cablevision is throwing in phone services for free.

Observers have been buzzing for months about phone companies squaring off against cable operators. Now Cablevision is making the first lunge for a phone company’s customers, and in all likelihood, Verizon (VZ) will be left on its knees, hemorrhaging customers.

Cablevision may be first with such a package, but it won’t be alone for long. Other cable companies, including Comcast (CMCSK) and Time Warner Cable, are also planning a frontal attack on the phone companies’ profitable customer base. The phone companies are likely to respond with their own desperation price cuts.

That’s great for the customer, but bad for the industry. A price war will lead to telecom-industry stagnation as the revenue growth rate slows to an underwhelming 1 percent annually, according to brokerage firm Friedman Billings Ramsey. Analysts there estimate that total communications-related revenues will grow from $270 billion in 2004 to $274 billion in 2006. That’s a far cry from the historical growth rate of more than 5 percent.

Why should we care? Because when revenues dry up, so does R&D. As a result, the telecoms will be hard-pressed to come up with new products and services to lure new customers. What will Verizon be able to offer customers that Cablevision won’t offer for less? The answer is nothing, and that’s very bad news indeed for the entire industry.


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