Blog Post

When It comes to DSL, Speed Sells

As the parade of earnings of phone companies continues, interesting trends emerge. And some proof, that Bells don’t need to muck around with the net much to make money.

BellSouth and SBC/AT&T reported weaker than expected DSL additions. BellSouth added 204,000 DSL connections, much lower than Wall Street expectations. BellSouth was able to make more money on their DSL business, despite the fewer than expected DSL additions. After falling for two consecutive quarters, DSL average revenue per user went-up 7.2% in the fourth quarter of 2005. Why did this happen?

In the conference call, BellSouth executives explained that this was due to customer migration to higher speed and yes, more expensive plans. In face nearly 50% of the new DSL sign-up are for the higher priced 3 Mbps and 6 Mbps service tiers. All this means, that “despite slowing customer growth, this drove DSL revenues growth of 28.4% after just 16.4% growth in 3Q and 22.9% in 2Q,” writes UBS telecom guru John Hodulik in his research report.

Look at Verizon, which has been pushing higher speeds, including FIOS and it saw a sharp increased in the number of its broadband subscribers – amazing 613,000. “Overall the increasing use of broadband connections is redefining the use of the traditional wireline business and creating new opportunities,” Doreen Toben, Verizon’s chief financial officer, said on a conference call.

Now compare this with the fourth quarter 2005 performance of SBC. The largest phone company in the US added 425,000 DSL lines, a sharp decline from 528,000 additions in the the 3Q. Mind you this is despite the cheaper (and slower) $14.95 plans, and what not.

I feel, the market is saying that customers will pay for higher speed. Not for tiers. I think if Bells are brave enough to offer 25 mbps for $75 a month, they will find demand and profits. I am not sure if you agree with me, but I clearly see a direct correlation between the demand and speeds.

18 Responses to “When It comes to DSL, Speed Sells”

  1. Some of the comments indicate muddled economics. [grin].

    Price and cost are related. But what a service provider charges is on;y partly influnced by their (one time) capital expense and the (ongoing) operational expense.

    The people who think very fast broadband access shoudl be cheap ar ewelcome to start a service provider (telco, cable, other) and evaluat ewhat it cost svs. their desired ROI.

    Having said that, the caosyt of VERY fast (dedicated fiber, symetric gigabit Ethernet) is about the same a sthe low cost spread (PON) used by Verizon and others.

    The fast-and-cheap access revolution IS coming Witness Korea, Japan, and even China.

  2. cyncial, no one is saying that the dial up guys are going to transition to the higher priced plans, since they seem to be happy with it.

    but if you read the piece, both the CFOs of BellSouth and Verizon are saying that higher speed tiers are adding to their ARPU, which points to the whole argument that the bells can charge premium prices for higher capacity connections. its the same argument as low cost PCs and tricked out Powerbooks. which makes more money.

  3. I understand that Verizon’s 613,000 subs mostly came from the 1.5Mbps and lower speeds for the $14.95 price.

    I also see two other matters having an impact. 1) Verizon seeing the first real quarter with Yahoo! as their co-branded portal partner; and 2) apparently they did some deal with AOL late last year that allows AOL to sell Verizon’s DSL to their customer base and add their portal on to the service.

    Now that $14.95 AOL fee plus $14.95 DSl fee looks pretty attractive to those who are just dying to keep AOL as their primary email. Begs one to wonder if AOL is cooking up deals with the other Bells.

  4. Another simplistic analysis without accounting for DSL penetration, size of the market etc. Businesses would be in trouble if they made decision on as flimsy analysis as this. I repeat there are at least 15-20 mm Americans who are using dial and will not pay more than $30 for access + not all the people are using high bandwidth applications as you are. They are using the net for email or chats. You need to get into some call centers and hear DSl sale calls.

  5. look i think there is a demand for somewhere between 10-25 megabits per second. that is market speaking.

    karl to your point, 768 kbps tier, good numbers for VZ, but money is being made at the upper end. still that speed band compares favorably to the 384 kbps connections being pushed for same $15.

    i think there is a good balance somewhere – where profits and bandwidth speeds come in sync. i am not suggesting the french market style madness, but a good connection 10 mbps is worth $60 to me evey month.

  6. The prices for internet access in France today just don’t make economic sense in my opinion.
    The ultra liberalist approach of the regulatory board in France is getting out of hand.
    Those companies that are selling 24 Megs of internet access + 50 channels of television + unlimited phone service for 30 euros(36$US) a month are just trying to boost their customer base in order to put their company on the market at a better price.
    I agree that speed does boost ARPU but so do the added features such as antivirus, antispan and parental control.

  7. malapraxis

    I thought the whole tiered service was based on the expectation of providing greater speeds to the end user. Can optimal speed be guaranteed if the network must remain nuetral to every bandwidth hogging porn site in America hawking their wares. Why not charge the “excess” content providers a bit more to ride in the upper tier, rather than alternatively whacking the consumer for the need for speed.

  8. While I don’t doubt they will find SOME demand and profits at that $75/25mbps level, I think they will find LOTS of demand at the $40 sweet spot of FIOS.

    I actually think Verizon finally gets it with this relatively “low” pricing structure, just as they finally seem to have gotten it by introducing the barebones $14.95 DSL service to the masses. It’s what they should have done ages ago, start off cheap, and then try to upgrade service/increase pricing. Anybody remember their first DSL pricing structure for less than 1 mb connections, painful!!!

  9. To me it is amazing that people try to compare prices of products in countries with different structures. In France the price may be low but what is their tax rate? Is the govt. providing the service or paying the providers? Also, health benefits don’t need to be provided by the company, so of course they can charge different prices.

    Compare apples to apples. There can be many reasons why some products are cheaper in countries, but a lot of times, it has nothing to do with the actual product.

  10. I still don’t understand why broadband is so expensive in the US ? In France we pay about $30 for 24 MBS with a triple play offer (about 50 TV station, free phone calls).

    The cheapest you can get now on the market is about €10 per month for 8MBS. Actually I think it is now nearly impossible to buy anything less than 8mbs…