Deceptive DSL Pricing

DSL prices, as advertised by the RBOCs, are deceptive. For now, DSL Prime is putting a question mark next to any advertised DSL price. The U.S. telcos are so accustomed to padding costs to get better rates from regulators that they don't know how profitable DSL really is.

by Dave Burstein DSL Prime [June 11, 2003]

SBC to ?$29.95; ?$99.95 for 6 Mbps nominal
New one year subscribers only
SBC's churn is highest in the first 90 days, Bill Daley told the BofA conference, so their current pricing policy is a gamble that a customer won't switch when rates go up 60 percent after a year. They may lower the "regular" rate soon, as the CFO hinted, or may simply give a better price to those who threaten to shift their account. Switching e-mails is a pain for consumers, and there's no system of e-mail forwarding that matches the local number portability. My guess is that churn will be substantial at 13 to 15 months, but SBC doesn't release that figure.

"Sign-up" deals move costs into "customer acquisition", which a telco hopes to recover over time if the customer sticks. SBC does not release their actual churn rates or customer acquisition costs, unfortunately, which makes it hard to assess whether they get practical benefits sufficient to make up for the anger of customers at the system. One side effect of the pricing structure is to expand the squeeze on ISPs like Earthlink, since these price cuts are not factored in to the wholesale price. That makes the wholesale price impossibly close to the general retail price, reinforced by what's probably a cross-subsidy.

Mark Kersey of Current Analysis pointed me to the SBC website for this information: 384 Kbps to 1.5 Mbps/128 Kbps $29.95 with the choice of a free modem or a wireless setup for $150—a $99 rebate. I had to chase through fine print to discover the price increase after a year, a deceptive practice becoming increasingly common.

Verizon instead choose an "everyday low price" of ?$35, with only modest incentives to sign up, such as a free month if you order online. That's certainly a more customer-friendly choice. On deadline, I couldn't check with SBC what the actual price of the service is. The question marks (?$29.95; ?$99.95) are there because many companies have been tacking on charges, and I've made a decision to check them on consumer price reporting. Earthlink has just announced a price rise, in the form of fees they are tacking on. Reporters owe it to readers to find the "fees" and include them in all articles.

Canada to 1.5 Mbps/320 Kbps, more VDSL
Matching cable speeds, adding 40 buildings in Toronto
Jean Huppe told the SUPERCOMM audience that VDSL was a necessary part of their deployment, which includes the ExpressVU satellite video service as well. Most telco execs live in large suburban homes, and often forget how many of us live in apartments and can't install dishes. Verizon can't afford to lose New York —especially with New York City actively looking for deals to create a competitor.If you believe that "video is an essential part of the bundle", you need a VDSL or FTTH offering. Bell Canada is using Next Level QAM equipment that works well, they tell me, although Motorola will have to give them a very attractive price as competition matures.

320 Kbps upstream is twice what Verizon or SBC include in their basic service, a bad mistake when cable is typically 200 Kbps to 500 Kbps. There is close to zero cost adding the upstream bandwidth, since the interoffice network is typically symmetric anyway. One piece I'm working on is "Verizon's next step," because while the Wi-Fi and price cut announcements will help, they won't prove enough to beat cable. I'm under non-disclosure on some of Bell Canada's future plans, and they may not get funded. But I believe they won't mind my saying their tech staff has many interesting ideas—and the pastry in Montreal is excellent.

Wireless prices plummet in UK
Is this how DSL operators should fill their network?
Wireless networks, like DSL networks, face high fixed costs and relatively low variable costs. John Hodulik, one of the most thoughtful Wall Street analysts, reports their new strategy, "Hutchison UK (through its brand '3') surprised the market on Thursday by launching two US-style bucket plans in the UK, pricing at a significant (50 percent) discount to current rates." 3 faces the same problem many DSL operators face, "It has a network, but hardly any subscribers. Filling it is the best strategy for making money and the faster it can fill it the better." They made the same decision Yahoo BB made in Japan, to cut prices dramatically and build market share quickly. Hodulik believes T-Mobile in the U.S. is considerably improving their (difficult) position in the U.S. similarly. It's a tough and risky strategy, especially if you don't have the resources of Masa Son, but the economics are possible.

The direct cost of providing DSL service in volume is between $10 and $15 per customer. That includes amortizing the DSLAM and other equipment, backbone Internet transit, and a portion of overhead, but not customer acquisition, line sharing charges, or network building. If you have volume and your numbers are significantly different, check whether your customer support or other costs are out of line, then look at the assumptions in the accounting.

I've done that with two telcos, both of whom were, for example, charging to DSL far more than the direct cost of interoffice backhaul. That just moves the value add from one part of the company to another, distorting the cost picture. Even more egregious from the cost accounting point of view, SBC's CFO mentioned a major impact on DSL accounting of general corporate pension adjustments. Costs like that, which would be incurred anyway, don't belong in this context.

Copyright 2003 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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