PHILADELPHIA, May 24: The Baby Bells sacrificed profits by cutting prices for high-speed Internet services in hopes of sparking customer-growth and thwarting competition, but cable television companies are expected to maintain their lead in the residential Internet market without rate cuts.
"Although telecom operators turned in their strongest quarter of sequential and annual growth, cable operators did even better," UBS Warburg analyst John Hodulik said in a recent research report.
"Over the long-term, we believe that selected cable companies are well-positioned to compete versus the telcos and satellite operators, given the superior bundled product offering -- including video, data, and telephone services -- that cable is capable of offering," Hodulik said.
There were about 1.7 million new high-speed Internet customers added in the first quarter, putting the total market at about 17.3 million subscribers.
Cable TV companies currently control 65 percent of the high-speed Internet market, compared with 35 percent for the telephone companies' DSL (digital subscriber line service).
DSL's share of the high-speed market slipped in the first quarter, marking the third straight quarter of declining share. Price cuts could help telephone carriers close the market-share gap, but cable companies are expected to maintain their lead.
"Price has moved ahead of quality" as the detemining factor in customer growth and retention, BellSouth Corp.'s Chief Financial Officer Ron Dykes said this week at a Banc of America Securities conference in New York.
Price cuts would likely "stimulate the market further in selected geographic markets," but it could delay BellSouth's goal of reaching profitability in the high-speed market in 2004, Dykes said.
Verizon Communications Inc., the largest U.S. telephone company, recently slashed the rate of its high-speed Internet service by more than 20 percent in an assault on cable television companies and AOL Time Warner Inc.'s America Online.
SBC Communications Inc., which is the only Baby Bell to increase its DSL net additions in every quarter since the end of 2001, cut rates earlier this year.
Analysts doubts cable TV companies will follow with price cuts in the near term since they currently have a comfortable lead over DSL, and historically have favored fat margins, cash flow, and price stability over customer growth.
By cutting prices, the Baby Bells have made a strategic decision to focus on market share over financials. The cuts will dampen revenue growth and increasingly squeeze telephone carriers' margins, analysts said.
Also, any growth in DSL also will accelerate the carriers' decline in telephone access lines, analysts said.
Unlike slower dial-up Internet access, DSL allows high-speed services to be transmitted over traditional copper telephone wires and eliminates the need for separate telephone lines.
Still, although DSL represents a small part of the Baby Bells' overall business, it is a key component of their "bundles" or packages of services and their strategy to fight against cable companies, analysts said.
Customers who buy more than one service from a company tend to stick with that carrier longer rather than enduring the hassle of switching multiple services to a new company, analysts said. Customer loyalty will play an important role as more cable companies roll out telephone services, they said. Bureau Report