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The battle for broadband
Can the cable companies extend their lead? Or will the Baby Bells' lower-priced DSL overtake them?
July 29, 2003: 7:15 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - If you like having a super-fast Internet connection in the home, then odds are you ditched your dial-up service a long time ago.

But what makes more sense, a high-speed connection from the phone company or from the cable company?

Most are calling up the cable guy. According to the Federal Communications Commission, there were 19.9 million broadband subscribers at the end of 2002. Nearly 57 percent had cable access and 39 percent had DSL. The remaining 4 percent had either fiber or satellite connections.

Welcome to the DSL price wars

But the Baby Bell phone companies aren't conceding the fight.

Verizon announced in May that it was dropping the monthly subscription price of its DSL service from $44.95 to $34.95. SBC quickly followed suit, lowering the price of its DSL service, which it offers in conjunction with Yahoo!, from $34.95 to $29.95.

High-speed race
The Bells are adding DSL customers at a decent clip but still trail cable in broadband.
Company1Q DSL adds2Q DSL addsTotal DSL subscribers
BellSouth101,000103,0001.2 million
SBC Communications270,000304,0002.8 million
Verizon Communications160,000101,0001.9 million
Source:Company reports

Not to be outdone, BellSouth in July unveiled Fast Access DSL Lite, which is slower than its premium DSL service but costs $10 a month less. (No word on whether DSL Lite also tastes great and is less filling.)

But are the Bells fighting a losing battle? Cable companies have the upper hand since their high-speed services tend to be slightly faster and more robust than DSL.

None of the cable companies have matched the Baby Bell price cuts.

In fact, Cablevision, which operates in the same markets as Verizon, announced earlier this month that it was raising the price of its Optimum Online high-speed service by $5 a month, to $44.95. "To come back and say not only are they not concerned about a price cut in their market but that they're so convinced their product is superior that they would raise prices -- that's pretty significant," said David Mantell, an analyst with Loop Capital Markets

Mantell said he expects two other large cable companies, Comcast and Cox Communications, to show relatively strong broadband subscriber growth when they report earnings later this week.

Making money from DSL is a problem

But even if the Bells start to gain more ground, the cable companies are in a better position to counter the price cuts since they are actually making money from broadband.

The Bells still are losing money on DSL, according to Drake Johnstone, an analyst with Davenport & Co., (BellSouth's DSL business generates an operating profit, though not a net profit).

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Dial M for miserable

Cable companies have already upgraded their networks so it is cheaper for them to offer Internet access. The Baby Bells, on the other hand, are still working on readying their networks.

Verizon, for example, said that DSL is only available on 67 percent of its lines currently and it hopes to boost that level to 80 percent by the end of the year. According to Lynda Starr, an analyst with independent telecom and cable research firm Probe Group, Verizon would probably need to charge in excess of $60 a month for DSL in order to make it profitable. Oops.

So Verizon and other Bells will have to make it up on volume, right? That's not going to be easy either. Johnstone said that at current prices, Verizon would likely need to have about 3 million DSL subscribers to make the business profitable. It has a ways to go, having ended the second quarter with 1.9 million DSL subscribers.

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DSL probably isn't going to die (disclosure time: I am a happy Verizon DSL customer -- for now at least) but cable will likely stay in the lead.

And that's one more reason why the Baby Bell stocks, which are down an average of 6.7 percent this year compared to an average 21.8 percent gain for Comcast, Cox and Cablevision, will probably continue to be left behind.

Analysts quoted in this story do not own any of the stocks mentioned and their firms have no investment banking relationships with them.

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