New residential digital subscriber line pricing rates released by Verizon Online Friday has Internet service
providers demanding government action.
Verizon Online, a subsidiary of Verizon
Communications Inc., is offering residential customers up to 768Kbps
downstream and 128Kbps downstream for $39.95 with a one-year contract.
That’s predatory pricing, as far as smaller ISPs are concerned, and subject
to antitrust laws.
A first-draft letter of complaint, addressed to William Kennard, Federal Communications Commission chairman,
is making its way through the ISP ranks, calling for government
intervention against Verizon’s “anti-competitive agenda.”
Normally the domain of the state Public Utilities Commissions, which
handles complaints between ISPs and telcos, a July, 2000, court case
between AT&T Corp. and the City of
Portland put all high-speed issues in the lap of the federal government —
namely the FCC.
An excerpt from the letter, authored by Rod Dixon, chief counsel of Freebuyers Net LLC, states the
ISPs’ objections:
“Verizon currently offers to Internet users “Verizon Online DSL” as its
high-speed Internet access for home users. This service is priced at
$39.95/month, and we are convinced that this pricing structure evidences
predatory pricing by Verizon. Under the law of antitrust, predatory
pricing arises when a business rival prices its products in an unfair
manner with an object to eliminate or retard competition and thereby gain
and exercise control over prices in the relevant market. We are convinced
that Verizon’s pricing of its Internet access services fits within this
framework.”
When a customer orders DSL service from an ISP, the provider in turn goes
to the telephone company to provision a line. The normal provisioning fee
is $32.50, in the case of Verizon Communications. Any additional costs to
the consumer pay for the ISPs overhead including payroll, customer support,
building maintenance and advertising.
Verizon Online decided to lower its prices from $49.95 to $39.95 a month,
giving it only $7.45 per subscriber per month. Not much, officials
concede, to operate an ISP, but a necessary one.
According to Bill Kula, Verizon Online spokesperson, the decision to lower
its prices was not a predatory move but a necessary business decision to
compete with the other broadband choice: cable.
“Verizon Online isn’t being shown any preferential treatment from Verizon
Communications,” Kula said. “Verizon Online, just like any other ISP, have
the choice to determine the price to charge their customers. We believe
$39.95 is extremely competitive and in the best interests of customers who
want high-speed Internet access.”
Also, Kula points out, the main reason the prices were lowered was to
compete with cable Internet providers like AT&T and Time Warner, Inc.,
which provides high-speed access in the $40 range.
Kula went on to mention the fact that preferential treatment wouldn’t
happen, because it’s a federal offense. US West [now Qwest Communications ] tried
that in the past, Kula said, telling customers it could only buy DSL
service through its site, and they got in trouble for it.
Dixon said that whether the companies are in collusion or not is
irrelevant, it’s just a matter of time before the low prices force other
ISPs out of the DSL market entirely, leaving Verizon Online with its deep
pockets the only provider.
“Of course, it depends on an ISPs particular cost structure, but no one is
making money competing
against Verizon now,” Dixon said. “In other words,
the issue is how low can Verizon go before the government should say that
its below-cost pricing is predatory? We know the stakes are very high and
that Verizon has determined that it can recoup its
losses if they sustain predatory pricing long enough to eliminate its DSL
competition and, at the same time, weaken broadband cable. Antitrust issues
are extraordinarily complicated arguments that often involve arcane aspects
of economic theory.”
“For ISPs to spend valuable time preparing data to support our positions,
we would need to be convinced that significant threat to our business model
has arisen. For many of us, Verizon represents that threat.”
Spurring ISP anxiety is a report published by Cahners In-Stat, an online analysis
company, which claims the incumbent local exchange carriers as the eventual
winner in DSL. Since the ILEC owns the network, the report states, it’s
just a matter of time before they also own the services and the customers
on that network
Industry trends seem to bear out the report’s conclusion, as ILEC’s
continue to drive prices down, cutting into the profit margin smaller ISPs
need to compete and remain in business.
Verizon isn’t the first, but merely the latest, telephone company to reduce DSL
pricing. SBC Communications Inc.,
dropped prices on its basic DSL package to $39.95 back in February, as part
of its $6 billion initiative called Project Pronto. In addition to lower
pricing, SBC offered a low-price DSL-enabled computer for
customers who signed up for its 28-month contract. The tactic succeeded,
making the telco the number one DSL provider in the country with 435,000
subscribers.
