DSL Prime: The Right DSL Price

Here's one hypothesis: the Bells would like to charge $50 per month. They're currently charging $40 per month and are wondering where the users are. The answers are everywhere you look: other nations charge $30 per month.

by Dave Burstein DSL Prime [January 9, 2003]

SBC to $40 for consumers and business
Fear and trembling as high-price strategy fails
SBC/Yahoo reduced their basic 1.5 Mbps/128 Kbps (maximum) package to $39.95/month for a year, with free modem and setup. The folks who told Ed Whitacre that high-priced DSL would sell are undoubtedly worrying they'll be the targets of the inevitable next SBC layoff.

Just a few months ago, SBC thought they could prop up sales with a 384 Kbps tier at $43, as well as the Yahoo deal. Customers didn't agree, so SBC cut prices to make reasonable quarterly numbers, and not make the Yahoo deal look a failure. The business price (as low as $39.95 as well) is now one of the lowest in the world. ($50 setup if ordered from SBC, free if ordered from Yahoo, the kind of game that hurts consumers.)

SBC went up to $49.95 a month on February 2001, slapping the new FCC chairman in the face just as he took office. Powell replied "Anyone who has gotten DSL or even cable modems a lot of the time will tell you the same horror story about how it took forever, how it didn't work, how they had to come back and now they want 10 bucks more a month for that unbelievable quality service." This strategy, combined with the Pronto shutdown, raised earnings by four or five cents a share in 2001, but lowers profits by about two cents in 2002 and more in 2003.

SBC quickly fell from world leader in DSL (planned 350,000 for Q4 2000) to behind Deutsche Telekom, China Telecom, and, of course, South Korea. They'd be at over 3.5 million DSL customers if they hadn't stopped Pronto and raised the price. Many of those 1.5 million lost customers are gone forever to cable and VoIP telephony. About $700 million would have finished Pronto, based on actual costs of similar buildouts at BellSouth and Verizon. About $400 million of that already would have been recouped from customers.

SBC has considerably improved the DSL offering, adding spam filters, firewall and virus protection, and unlimited remote dial-up. In telco buying quantities, these are inexpensive add-ons that belong with every account at other telcos as well. Despite all that, and the massive advertising purchased as part of the Yahoo deal, they will do little better than the 250,000 customer additions of Q4 2000. Let's see how they spin that.

$30 is the right price
$40 resembles monopoly, $50 likely failure
"DSL subscriber growth is largely determined by price." I could call that Burstein's law, having backed that up with overwhelming data across the world for two years. But most of the smart people in the industry reached the same conclusion, so I've no right to naming. Besides, I don't like the idea—I wish quality, speed, support, and company policy had a larger influence.

The direct cost to a telco providing service in volume is $12 to $20 per month, including a return on the DSLAM and other capital cost. The profitable competitive price for DSL and cable is between $25 and $35. $40 may be the monopolist optimum, which is how Comcast and SBC are calculating it. My best guess is that $30 to $35 is better, even for a monopolist, because demand will grow, but that's a very hard one to prove. Gary Betty of Earthlink tells me his market research says half the U.S. dialup users would switch within the year if the price were $30.

The majority of Canadian net users are on broadband, twice the U.S. rate, because the price is $27 to $31 (U.S.). Japan is adding 900,000 DSL users per quarter, compared to 500,000 in the U.S., because the price is $26 to $33 for 5 Mbps to 12 Mbps. Germany did 2 million in 2001, when the price was $30; after wiping out competition, they raised the price to $40 and only added about 800,000 in 2002. Verizon tells me sales took off where the Veriations $35 price was promoted, although I don't think that was enough to give them a great Q4.

Incidentally, these price calculations are only slightly affected by the speed offered to the customer. The difference between 200 Kbps and 2 Mbps is under $2 per month in telco quantities, numbers roughly confirmed by two of the country's largest ISPs. Going to 7 Mbps changes that little, because rarely is anyone downloading at that speed for very long.

"Tiering" is not cost justified; it is rather a symbol of duopoly created pricing. Otherwise, someone would double customer speed for a cost that could be taken out of a marketing budget.

Nearly every cost in this chain continues to decline rapidly with Moore's law: modem, DSLAM, routers, Internet backhaul. That should mean if the market is working, prices would go down over time.

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

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