SBC's Gambit, Yahoo's Tidy Gain

The Baby Bell's $14.95 broadband plan puts dial-up rivals on the spot, especially AOL, and send lots of fresh traffic to its portal partner

By Burt Helm

A fast Internet connection just got a lot cheaper. On June 1, SBC Communications (SBC ) slashed prices on its high-speed broadband service by 25% -- setting a new floor of $14.95 a month for a speedy DSL connection. But consumers aren't the only ones to benefit from lower prices. Yahoo (YHOO ) is sitting pretty.

The portal has a deal with SBC to provide all of its Internet customers with services like e-mail, instant-messaging, and Web-hosting. Yahoo collects an undisclosed fee from the telecom giant for the services.


  As lower prices lure more users to high-speed services, Yahoo will pick up a significant amount of new business with very little effort. Already, "the vast majority" of SBC's 5.6 million DSL subscribers use Yahoo's services, according to an SBC spokesperson.

The move comes as SBC and the other Baby Bells increasingly duke it out with the cable giants, which in addition to providing competing high-speed connections have recently encroached on telecom turf by offering voice-over-Internet protocol phone service (VoIP).

"We're continuing to experience pricing pressures as cable competitors continue to move the voice and broadband price points down" says Randall Stephenson, SBC's chief operating officer. "It's a competitive marketplace. We're seeing a move every month."

The new SBC pricing scheme is aimed at wooing users who still go online with poky dial-up modems. The price is comparable to fees charged by low-cost dial-up providers, and sharply undercuts AOL's $23.90 a month dial-up service. AOL declined to comment about SBC's price cut.


  By going after the dial-up crowd, SBC hopes keep the cable companies at bay. "This is a market-share grab" says Mike McCormack, an analyst with Bear Stearns. "By using [aggressive pricing] as a tool to take broadband share, it means one less voice-over-IP customer for a cable company." And down the road, that customer may upgrade to a more-expensive level of DSL service.

Last quarter, SBC had a net increase of 504,000 in the number of DSL lines it provides customers. During the same period, Comcast (CMCSA ), the nation's largest broadband provider with 7.4 million subscribers, added 414,000 cable-modem lines. Cable connections are generally faster than DSL lines but are also more expensive.

While the aggressive pricing for a basic DSL service could come at a cost to SBC's profit margins, Yahoo will enjoy new business in one of its fastest growing segments -- fees from Internet providers that use its service. While making up only 13% of Yahoo's total revenue in the first quarter of 2005, that segment grew at a rate of 61% from the same period last year. In all, Yahoo has 8.9 million customers coming from partnerships with Rogers Communications (RG ) in Canada, British Telecom in Britain, and SBC.


  That means even more traffic and related ad revenues for the Web portal. "You're not talking about a huge percentage of Yahoo's revenue overall," says Scott Kessler, director of Information Technology Equity Research at Standard & Poor's. "But any way you slice it, it's definitely a positive for Yahoo."

This summer, Yahoo will partner with Verizon Communications (VZ ), the other leading DSL provider, with 3.9 million subscribers, to offer Internet services to all of that company's new customers, as well as to existing subscribers who wish to use the Yahoo service.

And as the two telecom companies woo more people online, one thing is certain: Yahoo's portal will be the first thing waiting for each and every new broadband user.

With Roger Crockett in Chicago and Tom Lowry in New York

Helm is a reporter for BusinessWeek Online in New York

Edited by Ira Sager

Before it's here, it's on the Bloomberg Terminal.