Will bigger AT&T spur a broadband TV price war?

Competition from a larger AT&T could force cable to lower prices, but experts caution not to expect changes overnight.

By Marguerite Reardon
Staff Writer, CNET News.com

Published: March 8, 2006, 12:00 PM PST

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The proposed $67 billion merger between AT&T and BellSouth could help ignite a pricing war between telephone companies and cable operators, but experts say that price cuts, if they happen at all, are a long way off.

The environment in the communications market is changing, and cable companies, which have long resisted dropping prices, could eventually be forced to make price cuts to compete, say experts.

"You have to think that at some point the cable operators are going to be forced to do something," said Jim Penhune, an analyst with Strategies Analytics. "But then again I said the same thing last year when the phone companies cut DSL pricing. It's hard to know where the breaking point is and how long it will take to get there."

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What's new:
Should its proposed merger with BellSouth be approved, a bigger AT&T could start a price war, pressuring cable companies to lower fees for broadband service packages that include phone, Internet and TV.

Bottom line:
With the AT&T/BellSouth merger at least a year away, and because rollouts of the phone company's TV-ready broadband networks are moving slowly, a pricing battle with cable companies could be a long way off.

More stories on this topic

AT&T's merger with BellSouth won't create a new competitor, but it will make an already aggressive AT&T even bigger. With an expanded, 22-state territory, AT&T will have even more opportunity to pitch its $12.99-per-month service against the offerings of cable operators. Factor in AT&T's move to sell TV service throughout its territory, and cable companies, at least in some parts of the country, may finally be forced to cut prices.

But consumers shouldn't expect a price war to break out overnight. Not only will the AT&T/BellSouth merger take at least a year to be approved by regulators, but how much competitive pressure AT&T exerts depends on how quickly it can compete with cable on delivery of TV service. And progress there has been slow.

In general, phone companies--namely AT&T and Verizon Communications--have adopted an aggressive strategy when it comes to competing with cable. They have drastically dropped prices on broadband service in the hope that customers getting a taste of broadband at a low price will eventually order more services from them.

Last June, AT&T (then SBC Communications) slashed prices to $14.95 for the first year of service. In February it lowered its price again, to $12.99. Verizon also offers a new tier of service, which includes 768kbps downloads, for $14.95 per month.

The strategy has worked. Phone companies are closing the gap between DSL subscribers and cable subscribers. Last year, for the first time, phone companies signed up more subscribers than cable operators did, according to the Leichtman Research Group. Phone companies scored 5.2 million new subscribers for a total of 18.5 million customers, while cable signed up 4.4 million new subscribers for a total of 24.3 million.

So far cable companies have resisted cutting prices. Instead they've responded by raising download and upload speeds and adding more features to their service. The straw that could finally break the cable companies' backs could be television.

AT&T and Verizon are both in the process of upgrading their networks so