The next round of broadband wars is about to start, and desperate phone companies are all set to unleash pricing plans which will be a big bonus for the consumer, but not so good for the companies. According to this CNN/AP report, SBC has cut its DSL pricing to $26.95 a month, in an effort to catch up with the cable guys who are charging around $45 a month. In the report, analyst Bruce Leichtman makes a valid point.

bq. “Pretty much everybody has some type of offer out there,” said Bruce Leichtman, whose North Carolina firm conducts research on broadband products and services. “The question that remains is, will we have a price war?” Leichtman said. “The challenge is once you start this, it’s very hard to extract yourself from it.”

Cable providers have been quite successful with their offerings and will continue to do well as long as the Baby Bells keep chanting the mantra: Six times faster than dial-up. Which is about 384 kilobits per second in optimal conditions. For $26.95 a month you get a connection, which on a good day gets about 200 kilobits per second. Not that cable guys are not aggressive in themselves. Till earlier this month, Comcast San Francisco had a limited time offer of $19.95 a month.

Now compare this with the cable guys, who give you between 1 and 3 megabits per second connection, depending on the company. (In many cases too many people on the network kills the speed, but I am listening less and less about that complaint, thanks to better quality of equipment. Leichtman’s comments sound hollow because if you think about it, the difference between 200 kilobits per second and say a poorly performing cable connection of 500 kilobits per second is huge.

Anyway Patrick Mahoney, an analyst with The Yankee Group, offers the real reason for price cuts:

bq. Mahoney said telephone companies, or telcos, are willing to cut broadband prices if it helps them keep local and long-distance phone customers when cheap DSL is packaged with phone service. “Telcos are using DSL to protect their flagship product, which is voice,” he said. “They make good margins on voice.”

I have maintained that for the longest time. The DSL as we know it does not make that much money for the Bells but still helps them keep control of the access line and hence gives them an incremental opportunity to offer more services later. They are going to use this DSL connection to offer VoIP services and also by pass the regulatory structure.