by Jim Thompson [March 2, 2001]

For ISPs, this market equation means continued turbulence ahead—and a formula for even higher customer churn rates as DSL users head for the revolving door between rival providers. But are price hikes part of a long-term solution or just a quick fix for investors?

DSL has been one of the best deals for consumer broadband access for more than a year. For just $40 a month consumers could secure high-speed asymmetrical digital subscriber line (ADSL) services from ISPs. For about $140 a month, businesses could tap into symmetrical digital subscriber line (SDSL) access, which often included additional IP addresses for e-commerce applications and corporate e-mail systems. But all these great deals for the end user may soon be a thing of the past, as the DSL market continues to feel the financial squeeze.

Hard times
The biggest problem—and the issue that is putting the most pressure on potential DSL price hikes—is the recent financial misfortunes of ISPs and CLECs. Reports of an ISP closing its doors or a CLEC filing for Chapter 11 bankruptcy protections are occurring nearly every day.

Covad Communications, NorthPoint and Rhythms have each been a victim of diminished profits due to uncollectable debts from defunct ISP channel partners and higher costs of deploying services. ISPs, including Flashcom, RelayPoint, Zyan Communications and PSINet have all found themselves working closer with bankruptcy attorneys than with their DSL customers.

Financial pressure on DSL resellers has dramatically thinned the ranks of wholesale providers. And it has also opened a window of opportunity for the Baby Bells to dominate the U.S. DSL market segment.

"Almost everybody has relinquished the consumer DSL market to the Baby Bells, entirely," said Crosby Haffner, President of Zyan Communications. "It's very difficult to make a profit at the consumer price points set by the Bells."

Scarce selection
For DSL consumers, this means that they will have fewer providers to choose from—which generally means higher prices for the same service. Over the years, the Baby Bells have been accused of many things, but they have never publicly recriminated for being cheap.

The trend toward DSL rate increases has already started. Among the first to introduce higher DSL pricing was SBC Communications, which recently raised its rates for consumer DSL service from $40 to $50 a month. Although users are no longer required to sign a one-year service commitment, it doesn't change the fact that the cost of DSL service just increased by $120 a year.

Consumers can also expect free DSL modem deals and free installation offers disappear. The wholesale DSL providers that remain in business will likely adopt new methods of marketing that do not include giving everything away.

Modem me-too
But DSL access isn't the only rate increase at play in the market. On Jan 31, Bloomberg analyst Amiee Picchi asked AOL Time Warner Co-Chief Operating Officers Gerald Levin and Robert Pittman if the dialup market leader would boost monthly access fees.

Pittman responded to the query by noting that as a content provider, AOL Time Warner has added a great deal of value to its services since the last price increase in April 1998.

"Well, we have not made any announcement like that, but I think we've all been taught that one of the great things about the AOL service is that the consumer values it like they do their telephone and their cable in the home," Pittman said. "And we know that both of those are priced substantially higher than AOL. Se we think we've always got additional value there."

Pittman said that AOL has also added new features to its service year, after year.

"Year-in and year-out, we continue to add value to the AOL service," Pittman said. "Compared to two years ago, the service has grown quite substantially in terms of features, functionality and each of use all very important to the consumer."

Increasing rates for dial-up access may not sound like a big money maker. But with 27 million subscribers worldwide, even a modest price increase would result in a significant amount of cash. The additional revenue would be a big step toward the AOL Time Warner's ability to attain its stated earnings goal of $11 billion this year.

Logic dictates that if dial-up fees increase, DSL rates would naturally follow, since the value of high-speed access is far greater than dial-up connectivity.

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