Internet service providers can’t continue to compete on price alone, and they must find ways to offer more services to attract and keep subscribers, according to a new study by the Yankee Group. These are two warnings the research and consulting firm makes in its latest report despite noting that Canadian residential broadband penetration continues to grow. The Yankee Group has released Canadian Residential Broadband Providers Struggle to Differentiate, another in its continuing Canadian Market Strategies series. The report predicts that the number of residential Internet subscribers will double from 3.5 million in 1999 to 7 million by 2006 (see chart). The dial-up market continues to lose share, falling below DSL and cable for the first time in 2002. The Yankee Group expects this trend to continue based on four factors: consumer frustration with dial-up; network rollouts across all areas, thereby increasing the addressable market; the launch of tiered services, which adds new users and reduces churn; and the introduction of TV-over-DSL by Telus Corp., SaskTel and MTS Communications Inc. The introduction of tiered services - especially the slower speed "lite" Internet - has proven very attractive to consumers (NL, Nov. 4/02). A competitive price combined with a better product has subscribers running to their ISPs. "An all-you-can-eat service is going to cost you in the neighbourhood of 20 bucks a month and the lite services were $24.95 and then, depending on the deals the various service providers had ongoing, it was less than 20 bucks a month for the first x number of months," report author Mark Quigley tells Network Letter. "So a very attractive way to transition into a service other than dial-up. Price wasn’t that objectionable anymore. From a performance perspective, you’re certainly going to see better performance than with dial-up." The study does raise the prospect of "reverse cannibalization" - a process whereby subscribers abandon regular high-speed Internet service in favour of the lower-priced lite service. Quigley concedes that that option will be attractive to a small portion of customers. "Some folks perhaps have looked at the fact the price has increased five dollars a month recently from $39.95 to $44.95, perhaps looked at their usage and don’t think they’re getting maximum bang for their buck but do see that perhaps spending $24 or $20 a month does make sense," he explains. "I don’t think we’ve seen as much of that. I think that a lot of that stuff was sort of used as a retention tool." The report doubts telcos and cablecos will suffer greatly from such reverse cannibalization. "A large migration to low-end packages is unlikely, specifically among long-term broadband subscribers (of 1 year or more)," the study states. "For these customers - telecommuters, home-based businesses, and other tech-savvy customers - low-speed services require a significant and unacceptable change in online habits." One of the companies that has been hit by higher than expected cannibalization is Bell Canada. Bell, which offers regular, lite and higher-speed products, has seen many subscribers resist the faster speeds. "The company’s performance is likely further affected by usage caps. These caps put the company at a competitive disadvantage to Rogers, which does not enforce usage caps at present but is likely to do so in the second half of 2003," the report says. "Rogers Cable enjoyed another successful year, adding more than 160,000 subscribers to finish the year at nearly 640,000 subscribers….The Yankee Group estimates that the split between Hi-Speed Light and Rogers Hi-Speed at 40:60 - much healthier than the splits shown by Bell. The company expects to add a higher tier of service during the second half of the year." Quigley praises Telus’ decision to expand its network coverage. For too long, he believes, the telco had conceded the marketplace to Shaw Cable. Last year, Telus’ subscriber growth surpassed Shaw’s for the first time. Telus offers regular and higher-speed service; Shaw offers regular and lite. "Telus for example has only just begun, in the last six or nine months I guess, to have the same kind of network coverage that Shaw has had because they were slow in rolling the service out," he notes. "So all of a sudden their addressable market is much larger than it used to be, which makes it an easier product to market. You can blanket the same message across the whole province as opposed to being very specific about where those messages went." Aliant Telecom Inc. holds most of the market in the Atlantic provinces. The Yankee Group estimates that the BCE Inc. subsidiary has 96,000 high-speed subscribers. That is almost twice what its two main competitors, Rogers and EastLink Cable Systems, have combined. The Quebec market is divided between Bell and Vidéotron ltée, with Cogeco Cable Inc. holding a small part of the marketplace. Bell and Vidéotron both offer all three tiers of service. The Yankee Group study reports that the Quebec-based cableco has done well despite its recent drawn-out labour problems. Shaw and MTS share the Manitoba market about evenly, while SaskTel dominates its home turf. The provincial telco provides four tiers of service - lite, regular, an enhanced service offering 2 megs, and a "high-speed extra" that goes to 3 megs. Shaw offers Saskatchewan residents with only regular and lite service. ISPs cannot be lulled into thinking price is the only component consumers use in determining their choice of a service provider. As users become more sophisticated they will need more incentive to sign on, the report states. "I think one thing that both segments of the marketplace are beginning to see is the ability to begin to layer on value-added services. That’s something we’ve all talked about for a while," Quigley opines. "You certainly see it with the ability, for example, to offer anti-viral services and those sorts of things." He is not impressed with AOL Canada’s plan for broadband rollout (NL, June 16/03). The company currently offers broadband in British Columbia and Alberta using Telus as its carrier and is expected to announce a third-party deal in central Canada later this month. But Quigley thinks it’s too little, too late. "Here we are, we’re five years into the game," he says. "I’m sure they’re going to have some measure of success but I think they’re a little late to come to the party. This is something they should have done a couple of years ago."