• by Ross Fadner , March 23, 2004

Many consumers are struggling to distinguish between the high-speed Internet options available to them, according to a Yankee Group report released Tuesday. The report suggests that many consumers are discouraged from upgrading to broadband service because pricing remains too high, while others are unsure about the differences between high-speed service via cable modem versus digital subscriber line (DSL) technology.

The Yankee Group Study, "2003 TAF Survey Findings Highlight the Consumer Market's Competitive Challenges," reveals that consumer interest in high-speed Internet is high, but the vast majority of consumers are unwilling to shell out the $45 per month, on average, for broadband via cable modem. Only 17 percent of survey respondents expressed interest in upgrading their Internet service if they had to spend $45 per month.

Furthermore, 71 percent of Internet consumers claim they would make the switch if broadband service was available at a lower price, according to Patrick Mahoney, Yankee Group analyst. However, "The price game is pretty much done," he says, referring to DSL providers like SBC Communications and Verizon Communications. These companies substantially lowered their prices in 2003 in an effort to be more competitive with broadband cable companies like Comcast Corp. and Time Warner, but the cable companies didn't budge, and they still generated more subscribers. Although DSL subscriptions were up in 2003--SBC had two consecutive quarters of record growth--the change simply didn't result in enough return, and the gap between DSL and cable didn't narrow either.

Mahoney says that the controversy now has shifted from pricing models to faster speeds and service bundles. Comcast, for example, didn't lower its pricing in 2003, but it increased speeds from 1.5 to 3.0 megabits/second, in addition to offering price reductions on bundled cable TV and cable Internet service packages.

Mahoney says that DSL providers hit the right price point in 2003, but most Americans use cable, which is at least $10-$15 more expensive. "Right now," says Mahoney, "given what's available, I think the $30-$35 price range is the optimal number to penetrate the mass market." But he doesn't count on that happening anytime soon. At the moment, Mahoney notes that there is no incentive for the major cable companies to lower their prices. "They're seeing growth rates that are still positive," he says.

The only thing they may do, he adds, is expand their offerings to include a lower-tier, lower-speed product for consumers who don't want to pay $45 a month. Mahoney says that this is a likely next step for most major cable operators this year, and the Yankee Group data supports this. Forty-three percent of survey respondents claimed they would be more likely to upgrade their service if they could choose a lower-speed, lower-cost package.