Cutting Through the Cable Modem Madness

AT&T Broadband recently gave its subscribers some puzzling news. A price restructuring will "save" cable modem renters $7 per month while charging cable modem owners $7 more per month. Or, put another way, the new plan charges renters $3 more per month and owners $7. Yet renters will pay the same amount they do now. Confused? Me, too.

Here's how it works: Today, base pricing for nearly all AT&T Broadband customers is $35.95 per month. But those who rent the modem pay $10 to do so, upping their rate to $45.95 per month.

Under the new plan effective July 1, base pricing for everyone increases $7 to $42.95. But AT&T Broadband will now decrease the cable modem rental fee from $10 to $3, in effect, giving renters a $7 price break. However, modem owners will pay $7 more (from $35.95 to $42.95) and that's that. (To appease modem owners, AT&T Broadband is sending them coupons that defer the rate increase to January 2003.)

An AT&T Broadband spokesperson says the restructuring is in reaction to the steep drop in modem prices--from $300 two years ago to $70 today.

Sharing the Savings?

"But they're not passing on the cost savings to the customer," says Mike Wolf, an analyst with Instat/MDR. "It's a pretty sneaky move but one that may get overlooked by the end user."

Instead of announcing an across-the-board price hike--which is what this is--AT&T Broadband has spun the restructuring as a rate decrease for its modem renters. Worse, the drop in modem prices means AT&T Broadband is making more money from modem renters than ever.

So where does all this leave AT&T Broadband's 1.6 million customers--90 percent of whom lease their modems? Overall, modem buyers are more tech savvy than modem renters. The 10 percent who knew enough to buy the modem and pay a cheaper rate will lose the benefit. So much for being smart; there's always DSL. But the company assumes these users won't complain or jump to DSL because they've already invested in the hardware. We'll see.

And the modem renters? If they've already chosen to pay $10 per month for the privilege of using someone else's hardware, they'll probably believe that AT&T Broadband is cutting them a break. (And that AOL 7.0 is faster, too.) Nevertheless, such a move could foster a long-term loyalty, and even prime them over time to buy additional services with the money they think they've saved.

Money Makers

What's more, "AT&T Broadband wants to ensure that every new customer leases rather than buys the modem, especially since it's figured out how to make money leasing," adds Michael Greeson, Parks senior analyst and director of broadband research.

Of course, modem leasing is just one model cable operators experiment with to generate revenue. Cox Communications keeps its monthly service fixed at $34.95, but charges a high $15 per month as a modem rental fee, which in turn drives many users to buy the modem. Then Cox turns around and sells modems for as much as $149, delivering more than $80 profit per box, according to a recent Kinetic Research report.

"We do not lease our modems," a Time Warner Cable spokesperson says. "Our approach is to get the most sophisticated boxes into the home, so that they would provide a gateway to a myriad of new services we could turn on or off at the customer's request. Our revenues would be derived in selling those services, not leasing the hardware."