• by Ross Fadner , January 30, 2004

Broadband Internet service providers had a great year in 2003. U.S. broadband usage surged more than 25% in 2003 to 21.5 million, or about one-fifth of all households, according to a new Jupiter Research report, "The DSL Market Opportunity: Closing the Gap with Cable Modem Providers." Jupiter believes that greater competition in the broadband landscape could result in increased DSL adoption and lower monthly prices for the high-speed, always-on, cable and phone line services.

"Telcos and cable operators halfheartedly competed for broadband customers in the past; 2003 was the first year we saw coherent, competitive messages in the market," said Joe Laszlo, Senior Analyst, Jupiter Research. "DSL's story was about low cost, while cable modem services were about faster connection speeds," he added.

At the end of last year, broadband penetration reached critical mass within the online community for the first time, but while the market has certainly grown more competitive, broadband cable modem connections still dominate. According to new data from the Yankee Group, 14 million U.S. households accessed the Web via cable modem in 2003, seven million via DSL, and 400,000 via other forms such as satellite and wireless.

"As far as cable beating DSL," says Michael Kelleher, analyst for the Yankee Group, "I think that's likely to continue, given the strength and breadth of cable connections in the U.S."

Jupiter believes that in order for demand to reach critical mass, broadband providers must lower their prices, as the growth of online video, music, and gaming features will not be enough to lure the mass of dial-up consumers who remain on-the-fence about upgrading their service. Says Laszlo, "Although the price of broadband moved closer to right in 2003, all service providers must re-evaluate the economics of low-cost broadband offerings to maintain the pace of consumer demand in 2004."

Yankee Group Analyst Kelleher concurs. He believes that the price of broadband will go down in the coming years. "As with any consumer offering, once you move past the early adopter stage, the price always goes down. If you look at the price of dial-up now, it practically costs the same as a McDonald's value meal." Lower broadband prices should also fuel revenue growth for online publishers and portals as traditional advertisers look to the Web to connect with consumers.

The Yankee Group forecasts that U.S. broadband household usage will surpass dial-up by 2006, but the market for Internet access is pretty saturated: Only four million more Americans will have online access by 2006. "The significant shift in broadband usage will come from narrowband users switching to broadband," Kelleher claims, and therefore a price cut is "critical."

The Yankee Group claims that 70 percent of narrowband users don't subscribe to broadband because of the price. "It's the major impediment to widespread broadband adoption," Kelleher says, adding that the price should be $20-$30 per month for the service to really become synonymous with Internet access.

According to the Jupiter report, 47 percent of dial-up consumers said they would be somewhat or very likely to get broadband in the next year. However, at $44.99 per month, only 22 percent of dial-up consumers expressed interest.

As far as the analysts from Jupiter and the Yankee Group are concerned, content, including enhanced audio, video, and gaming features, is not a compelling enough consumer value proposition to lead the switch from dial-up to broadband. "For most consumers, TV is still the dominant medium for content. People still go to the Internet primarily for information and communication," Kelleher says. "The Internet is not yet the entertainment medium broadband service providers would like to market it as."