Cable rates could fly sky-high

Summary:Millions of cable-based Internet customers have grown accustomed to paying about $40 monthly for access. That fee could soon become just a fond memory.

After remaining virtually unchanged for the past several years, the cost of monthly Internet access via high-speed cable modems could be headed higher.

Millions of cable-based Internet customers have grown accustomed to paying about $40 monthly for access. But that fee could become just a fond memory for two recent developments: Leading provider Excite@Home is under extreme pressure to raise cash, and the competition from the DSL (digital subscriber line) industry has already started to raise prices.

There's also one old development to factor in--the cable industry's long history of boosting the monthly cost of cable TV bills each year.

Excite@Home--the largest provider of cable Net access with more than 3 million subscribers--doesn't set the retail price for its service, instead leaving that to its cable operator partners such as AT&T Broadband and Comcast. But Excite@Home Chief Executive George Bell said at least one cable operator has recently considered raising rates.

"When they see DSL competitors raising their prices, that's a pretty good bet," Bell said. Of course, it could be a case of wishful thinking on Bell's part: Under a revenue-splitting program, Excite@Home would reap 35 percent of any rate hikes.

Others in the industry, however, maintain that price hikes are not imminent because the providers remain focused on retaining existing customers and attracting new ones.

"It wouldn't surprise me if they did it, but at the same time I haven't felt any rumblings from the operators that they're considering it," said Mike Paxton, a cable industry analyst at Cahners In-Stat Group. "Raising prices by five or 10 bucks would probably curtail their subscriber growth."

Nevertheless, recent developments could make a rate adjustment a more pressing topic in corporate boardrooms.

For example, Excite@Home announced on Tuesday that the company is facing a cash crunch and will look for new ways to save money and raise financing and revenue as a result.

Major DSL providers such as SBC Communications and EarthLink have raised their rates to roughly $50 per month from about $40 as they struggle to reach profitability. Some smaller DSL providers have gone out of business and many more are on financially uncertain footing.

DSL is the primary competing high-speed Internet technology to cable modems. Some analysts speculate that competition between the two technologies led to artificially low prices, particularly for DSL. As more DSL companies falter, cable companies could see an opening for raising rates.

In addition, America Online is said to be mulling over the possibility of boosting its monthly dial-up fee of $22 in the wake of its mega-merger with Time Warner. Considering that it is the largest access provider with some 28 million subscribers, a move by AOL Time Warner could spark a series of price hikes among all other providers, dial-up and broadband.

Rate hike conundrum
One former cable industry executive, who declined to be named, expects cable Internet rates to climb associated with installing it and maintaining large customer support staffs.

"They'll have to raise rates. The 'care cost' on the product is so high," the executive said. "But they'll never be able to raise it to more than 80 percent of the price of DSL because the perception is that cable modems are inferior to DSL."

For their part, the cable operators say they're watching the market closely and constantly consider the appropriate price for a cable modem Net connection.

"As with any part of our business we continuously look at what we're charging customers and what the value of the product is in the market," said Sarah Duisik, a spokeswoman for AT&T Broadband, the nation's largest cable company. "Right now we're priced at $39.95. I don't have anything to say about changes to that. But we always are looking at prices."

Similarly, Steve Gorman, director of marketing for residential broadband services at Cox Communications, another major cable operator, said: "We're always evaluating our business and what makes the most sense for the company."

The cable guy
Other broadband industry executives point out that the cultural nature of the cable industry is one of ever-higher rates.

"We came to the market with the idea that prices come down, but the cable guys came to the market with the idea that prices go up," said Tom Andrus, vice president of emerging technology at EarthLink, a large ISP that resells cable modem service.

Analysts say the industry is notorious for cable TV rate hikes, but it faces different economic factors in that business.

"They've never hesitated to raise their video rates. But they've blamed that in the past on higher programming costs," said Paxton of Cahners In-Stat.

Michael Lunsford, executive vice president of broadband services at EarthLink, expects that cable industry prices will rise once AOL Time Warner begins offering the high-speed access over Time Warner Cable systems.

Lunsford believes AOL will charge a premium, much as it does with higher-than-average rates for dial-up Net access. He expects to raise EarthLink's cable service fees when, or if, that happens. The price would likely be below AOL but higher than the low-cost cable providers--perhaps $45 per month.

Any future cable rate hikes may not be as simple as raising the basic rate by $5 or $10 per month, however.

For example, Excite@Home's Bell said the company is working on as many as three different premium-level services, which could be available by year-end. Although no prices or specific features have been set, Bell said customers conceivably could pay an additional $9.95 per month for certain speed guarantees, under one example.

Bell emphasized that no final decisions have been made on how such premium services would be structured, or whether they will be offered.

Some analysts maintain that the cable industry has been fixated on grabbing as many customers as possible and therefore will be reluctant to consider rate hikes.

Rate-hike reluctance
A former industry executive believes AT&T Broadband has been particularly reluctant to raise rates--and in fact offered several months of free service as a holiday season promotion last year--in order to insure the company would meet certain subscriber goals. As the majority owner of Excite@Home, AT&T faced certain penalties for failing to meet its targets under a prior agreement between the company and fellow Excite@Home partners Cox and Comcast.

"Nobody right now is talking about raising rates," said Cynthia Brumfield, an analyst and author of the "Broadband Intelligence" newsletter. "In fact, just the opposite is happening. Cox will sell it to you for $29.95 per month if you buy your own modem (and subscribe to another Cox service)."

Brumfield said the cable industry has largely settled on $40 per month--or $30 under some promotions.

"Never say never when it comes to rate increases. But I think the cable operators are comfortable with their pricing. I think, for now, they're quite content," she said.

"I think cable will think twice about raising rates due to competition. Granted, right now the competition seems like it's slipped, but it's still there. It's not like the old days of cable (television) when there was no competition."

Topics: Broadband, Networking

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