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Consumers are turning to high-speed internet

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For years, Michelle Phillips, a real estate agent in Indianapolis, used to drive to her office at odd hours just to check her e-mail messages and search Web sites because her company had high-speed Internet lines. Doing those tasks at home with her dial-up connection was just too slow.

"At home, I can do laundry, take a shower and wash dishes while the computer is logging on to the Internet," she said with a laugh.

Now she can pocket the gas money. Last weekend, she signed up for a promotional offer from SBC Communications: introductory broadband service for $14.95 a month, or nearly $10 less than what she pays now for a dial-up account with AOL. To qualify, she had to sign a one-year contract and have an SBC phone line.

Phillips is among the 7 million Americans expected to drop their slow Internet connections this year for high-speed lines, which are as much as 100 times as fast and are always on. As recently as six months ago, a majority of Americans were using dial-up connections at home. In the first quarter of this year, broadband connections for the first time overtook dial-up.

SBC's deep discount — $5 below its lowest offer previously, and among the cheapest on the market — is just the latest strategy in the broadband wars.

More people are dropping dial-up connections from services like AOL, MSN and EarthLink because so much Internet content — music, videos, games, interactive retail sites — now requires high-speed connections for performance. A record 630,000 Internet viewers, for instance, visited MSNBC.com to watch NBC's coverage of the Michael Jackson verdict last week.

For broadband sellers, getting those users as they convert to either a digital subscriber line or cable modem connection is crucial because they are harder to recruit once they sign up with a broadband provider and they are likely to order new services, like television plans.

"If I'm a dial-up person and I'm a moderate-to-heavy user of the Internet, I'm going to look at the aggravation," said Jim Andrew, a consultant at Adventis, which advises telecommunications firms. "Now, everyone wants to have faster performance."

Last year, 36 million American homes, or 52 percent of all households with Internet access, used dial-up services, according to SG Cowen, the brokerage firm. That percentage is expected to drop to 40 percent at the end of this year. At the same time, cable and phone companies, between them, are expected to add 8 million broadband subscribers this year, to bring their total to 38.7 million.

In grabbing new subscribers, competitors are taking different tacks. Cable providers are chasing customers by making broadband service part of package deals with their traditional TV plans and new digital phone services. Phone companies like SBC and Verizon are hoping lower prices and extra services will drive in converts.

SBC also offers its broadband subscribers commercial-free Internet radio, music videos and premium television and movie clips, as well as online security software. The company also plans to start selling television programming over its broadband lines this year.

Cable companies, of course, offer a similar array of free services to woo customers. They also say that their broadband customers get faster and more reliable connections and that those features justify the higher prices they typically charge. They do offer some discounts if subscribers also order TV and digital phone services.

But those discounts cannot beat the prices offered by phone companies like SBC and Verizon for their digital subscriber lines, or DSL. They also market satellite television services that are generally cheaper than comparable cable television packages, and sell discounted wireless phone plans, too.

The strategy is paying off. Though cable companies provide nearly 60 percent of all home broadband connections, the phone companies are catching up. In the first quarter of this year, DSL providers signed up a record 1.38 million subscribers, while cable companies added 1.19 million new broadband customers, according to the Leichtman Research Group.

Price is a significant factor in the shift. According to a survey by Goldman Sachs, when broadband connections are priced below $29 a month — closer to the average cost of dial-up service, which is around $20 — twice as many consumers sign up.

Verizon sells its broadband service for $29.95 a month, $10 to $15 cheaper than broadband from Comcast, Time Warner and other cable companies. BellSouth, Qwest Communications and smaller DSL providers are not far behind.

But it is unclear whether the phone companies can make money selling deeply discounted broadband lines and, if prices continue falling, how dial-up providers can withstand the assault.

Edward M. Cholerton, vice president in charge of consumer broadband marketing at SBC, says his company can afford to sell broadband for $14.95 a month because applications are processed online, not through call centers or retail outlets. Customers also install their own DSL modems; those who want a technician to visit their homes pay up to $200.

SBC's superlow offer is temporary; the company has not said how long it will last. But Cholerton said it was unlikely that SBC or any other broadband provider could afford to cut prices much further.

"The real reason you have to get down to the $15 range is to attract more price-sensitive consumers," he said. But "we're probably running out of room" to make deeper cuts. Besides, if prices were lowered too far, he said, existing SBC customers who pay more would get upset.

The price cuts have made waves at dial-up providers. EarthLink, the second largest dial-up provider after AOL, says its premium dial-up business is shrinking by as much as 15 percent a year, and SBC's discounts may accelerate that decline. Still, the company's own cut-rate dial-up service called PeoplePC has been growing briskly.

At the same time, EarthLink is trying to persuade its customers to upgrade to EarthLink broadband lines, which are leased from phone and cable companies. EarthLink has 1.5 million broadband subscribers, representing nearly 30 percent of its customers. Prompted by SBC, it has unveiled new promotional discounts, too.

"You will see EarthLink try and get the dial-up folks to fall off the fence and get broadband," said Garry Betty, EarthLink's chief executive.

Despite compelling reasons to switch to broadband, dial-up lines will always have a place in American homes, Betty said. Customers in rural areas where broadband is not available will continue to log on via a dial-up connection. Infrequent Internet users may also prefer the simplicity of dial-up service.

"Some analysts predict our demise," he said. But for some pockets of the country, "dial-up is going to be the only offer around for some time."