Where are the broadband price wars?

Jupiter analyst Joseph Laszlo uses broadband subscription numbers to make the point that broadband growth has been steady but never explosive in the US. Laszlo's graph shows only linear growth in broadband over the last six years, not the "hockey-stick" model some have suggested. He also point out that the market is now mature, with some 60 percent of Internet users having a broadband connection. In such a well-developed marketplace, competition must be thriving and prices dropping, right?

Not necessarily. Industry analyst Dave Burstein argues that rates are actually going up, due in large part to the unwillingness of cable companies to lower prices. DSL operators then realize that they aren't in a price war, and subsequently raise their own prices. He cites the examples of both AT&T and Verizon, and says that AT&T's basic DSL rate now starts at $39.95 unless you're a new subscriber.

This is at odds with the DSL price drop we reported in October, where AT&T eliminated most contracts and offered a basic rate of $14.95. Being a long-time AT&T subscriber myself, I had no trouble getting a slightly faster rate for only $19.95, so it's not clear where Burstein gets his numbers.

What is clear is that US broadband isn't so hot when compared to what's available in other countries. In Japan, symmetrical 100Mbps connections can be had for under $35 per month, while South Koreans can get fast fiber optic connections for $32. Burstein notes that in France, "twice the speed, 60 channels of TV, and free international calls have settled at about €30, or $40. The French package was closer to $30 when introduced—half the American price without TV, and less than a third of the U.S. 'triple play' price."

But DSL and cable often overlap in urban areas, so why hasn't competition driven prices lower and innovation higher? A study released this summer finds that the services do compete on features but not on price.

That's attributable to the fact that neither service is a drop-in replacement for the other. Switching from DSL to cable, for instance, takes more than a simple phone call. Depending on the house, it may require the installation of a cable line, a new modem, and a cable package (without cable TV service, rates are usually much higher).

The hassle of switching services means that customers don't do it much. Barry Orton, a UW-Madison professor, put it well in an interview about impending rate hikes in Madison. "A lot of people now have cable modems (for high-speed Internet) and if you switch to satellite you have to go back to dial-up if you can't get DSL and you have to go through hassle of switching," he said. "So they can investigate it and bitch about it, but are they going to switch? I don't think that many will. And certainly that's what Charter is gambling on."

:source: Source: http://arstechnica.com/news.ars/post/20061212-8407.html