Last week’s announcements of price increases by two influential Internet service providers highlight the competing schools of thought regarding how to provide Internet access profitably when a handful of users hog a significant share of system capacity.
The announcements came from AT&T, which offers Internet access around the globe, and WebTV Networks Inc., a Microsoft subsidiary that is the leading U.S. provider of Internet access through television sets. Previously announced price increases from America Online and IBM, two of the world’s largest providers of Internet access, took effect last Wednesday.
Retaining its flat-rate pricing, which charges users the same amount regardless of how many hours they spend on-line, WebTV said it will raise the monthly price of its WebTV Plus service from $19.95 to $24.95 on June 1. Subscribers who register before then will remain eligible for today’s rates for one year. The monthly rate for WebTV Classic will remain $19.95.
AOL, the nation’s biggest on-line provider, unveiled a similar strategy in February. Retaining its own flat rates for unlimited service, AOL announced that its basic rate would increase to $21.95 from $19.95, effective April 1.
WebTV President Steve Perlman said his company’s move stemmed from the added costs of serving customers who now stay on-line an average of 41 hours a month.
“In the case of AOL and WebTV, both of us are saying, `You can use it all you want, but we have to increase the floor,’ ” Perlman said.
AOL’s costs have risen as its average user’s daily on-line time has surged from 16 to 51 minutes since the company shifted to flat rates in December 1996, spokeswoman Wendy Goldberg said last week.
“In the wake of unlimited pricing . . . we’ve seen our members throw away the clock,” Goldberg said.
AT&T WorldNet Service said that beginning May 1, customers who spend more than 150 hours a month on-line will pay an added 99 cents an hour.
But in keeping with charging different classes of users different amounts, AT&T also will cut its rates for infrequent and moderate users. The rate that subscribers to AT&T’s $9.95 limited-access plan will pay for each hour after 10 hours a month will drop from $2.50 to 99 cents.
“We had a small percentage of Internet users who are taking a disproportionate share of network performance,” AT&T WorldNet President Dan Schulman said. “There are actually customers who log on and just never log off. . . . They’re not necessarily using the Net.”
Schulman said the rate increase would only affect 3 percent of AT&T WorldNet’s customers, and he predicted that the vast majority of those consumers would simply adjust their usage to fall under the 150-hour limit.
“You have to segment the industry,” said Internet services analyst Brian Oakes of the Lehman Brothers investment firm. “Clearly, for someone that can’t tap into the high-profit revenue streams of advertising and commerce, this is the move you have to make.”
His observation highlights the different reasons that AOL and WebTV are retaining flat-rate pricing. In the case of AOL, revenue from advertising and other sources permits the company to make more money off users who stay on-line longer.
WebTV, on the other hand, which allows subscribers to access the Internet with their television, is sticking with flat-rate pricing out of a fear that families might shy away from a service in which children could generate usage charges without the knowledge of their parents.
