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Mixed messages over cheap broadband offer

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UK Online's headline-grabbing offer of entry-level broadband for under £10 a month has caused a stir among UK punters keen to snap up the offer of cheap broadband.

Tempted by high-speed net access for under a tenner a month, many readers who contacted El Reg were disappointed to find out that the service is only available in some areas. In fact, it is only available via 232 exchanges where EasyNet - UK Online's parent company - has installed its kit ready to provide telecoms services direct to punters.

A spokeswoman for UK Online said the company did make it clear that the £9.99 a month offer is only available to 4.4m people in the UK but would take on board any feedback. Whether or not the ISP needs to be a little less forceful with the spin and more upfront about the practicalities of its offer is of little concern. More interesting, though, are suggestions that UK Online's new prices could spark a new round of price cutting by ISPs. And this is where it gets tricky.

For yesterday's move by UK Online has effectively introduced a two-tier broadband pricing structure for DSL in the UK. If you're lucky enough to be hooked up to an exchange that has been unbundled then you can get cheap broadband - because UK Online has the choice of BT or EasyNet as its wholesale broadband provider. When unbundler EasyNet provides the wholesale service, UK Online can offer 512k broadband for £9.99 a month, while the same 512k service via BT Wholesale costs £19.99 a month.

That price difference is why so many telcos and ISPs are interested in LLU.

However, industry insiders remain unconvinced that the intervention of UK Online will spark a price war - for the immediate future at least. One reason is that the ISP is still very small. Although it declines to reveal subscriber numbers, industry sources have told us that at the end of last year UK Online only had around 4,000 punters and is hardly in a position to challenge those already firmly established in the industry.

Then there's the dosh. Sure, ISPs could cut prices but unless underlying costs are also trimmed, such a move - in the long-term at least - would just prove uneconomic. As one industry source told us: "You either have to invest in LLU or lose lots of money."

Some ISPs such as Wanadoo are investing in LLU but decline to reveal any significant detail because they don't want to give the game away ahead of a commercial launch. When Wanadoo finally does unveil an unbundled product it will face the same conundrum as to whether it also employs a two-tier pricing strategy. The view among a handful of the UK's biggest ISPs today is mixed. One told us that setting two prices depending on location could confuse punters, as UK Online has already found out, and obstruct national marketing campaigns. Another broadband provider told us that setting different prices for different areas wouldn't be a problem.

Of course, all this could be resolved at a stroke if the wholesale cost of broadband supplied by BT could be cut. But due to regulatory intervention designed to underpin investment in LLU by rivals, this can't happen. Instead, BT has engaged in "de-averaging" and won regulatory clearance to cut the cost of its wholesale broadband products in 561 exchanges in the UK that are buzzing with broadband lines.

As a result, ISPs get a rebate of up to £1.40 for every broadband line installed. Now, it just so happens that there is a clear overlap between the 561 exchanges highlighted by BT and those chosen by the industry that are ripe for LLU investment. The result, is that from 1 April, BT's wholesale broadband services are cheaper in some parts of the country than others - effectively making a two-tier wholesale pricing structure.

However, this approach was criticised by a recent parliamentary committee which was concerned at BT's proposals to vary prices that are currently applied nationally so that it can compete in areas where LLU takes off. The price cuts of around eight per cent will only be applied in areas where there is "a combination of high customer demand, high take up and lower costs". MPs warned that "BT's decision to 'de-average' wholesale prices - vary them from area to area - has created uncertainty which may jeopardise future LLU plans".

That aside, now that ISPs are getting broadband cheaper from BT in some key areas, will they be tempted to drop the prices in some regions to compete with the likes of UK Online? Dunno, is the answer at the moment. But a spokesman for BT Retail told us: "We have no plans to reduce prices in some regions but that is not to say that it wouldn't happen." ®

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