Web Access Providers Weave A Tangled Payment Structure
Date: 3/2/98
Author: Pete Barlas
Does improving Internet service mean higher fees for customers? Yes, say analysts and industry executives.
In '97, the 13 largest Internet service providers cut customer connection problems by half, says a January study by Inverse Network Technology Inc., a Sunnyvale, Calif., research firm.
Referring to its costs to improve service, Dulles, Va.-based America Online Inc., the nation's largest ISP, last month said it will raise its monthly flat- rate fee by $2 to $21.95. That starts in April.
Also starting that month, IBM Corp.'s Global Services, which provides ISP service, says it will add an hourly charge of $1.95 on top of its monthly rate of $19.95 for all Web usage over 100 hours a month.
Analysts expect to see more price hikes soon.
''There was a collective sigh of relief when AOL raised its prices, because everyone in the industry has struggled,'' said Greg Wester, an analyst with Yankee Group, a Boston-based market researcher.
That struggle shows on the bottom line. Only two publicly held companies whose primary business is to provide Internet service have ever posted a quarterly profit. They are AOL and Atlanta-based MindSpring Enterprises Inc.
Since late '96, when AOL joined the trend, flat-rate pricing of $19.95 a month has been nearly universal.
''There is no reason to believe that the $19.95 rate is going to live in perpetuity,'' Wester said. ''This is an industry that is cash-starved.''
AT&T Corp.'s WorldNet Service, Concentric Network Corp., Erols Internet Inc. , WorldCom Inc.'s GridNet International, MCI Communications Corp., Microsoft Corp. and MindSpring were among the ISPs providing the best service in '97, says the study by Inverse. And they all spent money to improve.
Inverse rated ISPs on the number of busy signals and disconnections it encountered when logging on to the various services.
The study found that ISP customer connection problems in the less-busy, daytime hours dropped from 13.2% in January '97 to 5.2% in December. That means nearly 95% of all Web surfers got online during their first attempt in December, while about one in six failed to do so in January.
The percentage of customers failing to get on the Web in the busier, evening hours fell from 25.5% to 7.9%, says Inverse.
AOL had the biggest improvement. It had an 80% failure rate in January, but only 15% in December, the study says.
The improvements show a maturing industry that's responding to customer demand, says Bobbi Murphy, Inverse's vice president of marketing.
''People are pressing ISPs to act more like a utility provider,'' she said.
AOL spent more than $700 million last year upgrading its service. For example, it added 25,000 modems per month to handle more traffic.
AOL spokeswoman Wendy Goldberg says the rate hike is needed to cover higher costs stemming from more use.
AOL has added about 3 million subscribers over the last 18 months. And customers are spending more time on the Web - an average of 50 minutes a day, from only 13 minutes in '96, says Goldberg.
Other ISPs are spending to improve service. Concentric spent $20 million on improvements last year, up from less than $7 million in '96.
The result: Concentric says its customer connection rate during evening hours is 94.1%. In the daytime, it says its success rate is 97%. It says both rates are 2% better than the industry average.
''We have to spend money to grow our network,'' said John Peters, Concentric's executive vice president and general manager of network services. ''Our goal is to maintain that performance.''
Given costs, Peters says Concentric is reviewing possible rate hikes. It still charges the flat fee of $19.95 a month.
''We always felt that the $19.95 price model was unsustainable,'' he said.
AT&T WorldNet in Basking Ridge, N.J., says it spent millions of dollars last year to improve its network. As a result, it cut the number of times users got busy signals from 8% to 4% during daylight hours, says company Vice President Dan Schulman.
Schulman says AT&T also is reviewing its rates.
''We are always evaluating the price- to-value mix,'' said Schulman. ''Most of the ISPs are looking at the price-to-value proposition and making decisions on it.''
IBM's rate hike also stems from more costs. Last year, IBM tripled its modem count. At the same time, its subscribers doubled to about 500,000.
''Our focus is to provide a quality service so that people don't get a busy signal,'' said IBM spokeswoman Linda Wizner.
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