[iwar] Net access for a price

From: St. Clair, James (jstclair@vredenburg.com)
Date: 2001-06-04 07:32:39

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Date: Mon, 4 Jun 2001 07:32:39 -0700 
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Subject: [iwar] Net access for a price
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High Speed, Higher Fees For Net Access 

By Christopher Stern and Peter S Goodman, Washington Post
04 Jun 2001, 6:19 AM CST

A price war is breaking out among many of the companies that provide access
to the Internet: They're now racing to raise their rates. 
In recent weeks, at least eight major cable or telephone companies have
joined big Internet providers such as AOL Time Warner Inc. to boost prices.
On Thursday, Comcast Corp. became the latest to announce plans for an
increase, its first since launching Internet service in 1996. Starting July
1, new customers -- and new customers alone -- will pay $5 more a month, or
$44.95 -- a 12.5 percent increase. 
The price increases come as a shakeout in the telecommunications sector has
eliminated some competitors and seriously hobbled others. With fewer strong
companies providing service, there is not as much pressure to hold down
rates, economists and analysts said. 
The rising prices are rekindling debate over the federal government's
decision to deregulate the telecommunications industry and not intervene in
the Internet marketplace. Concern also is growing over whether the expense
will widen the gap between those who have access to the Internet and those
who do not -- a worry because using the global computer network is fast
becoming part of everyday life. Governments and businesses are putting more
and more of their operations online, as are a variety of cultural
institutions. Meanwhile, entertainment companies and others are preparing to
roll out new online music, video and other data-rich services. 
Some Internet providers said they had set past rates artificially low to
compete with upstarts that were discounting service in an effort to build a
customer base. Many of those upstarts have since stumbled, forcing them to
curb their activities or merge with a more established company. 
In the Washington region, for instance, Northpoint Communications shut down
its DSL (digital subscriber line) business and UUNet was swallowed up by
WorldCom Inc. 
Higher rates will allow the remaining Internet providers to improve service
and expand their offerings, company officials argue. Cable companies are
particularly eager to show Wall Street that their decision to spend billions
of dollars to build fiber-optic networks is paying off. 
Tom Wolzien, senior media analyst with Sanford C. Bernstein & Co., said many
companies now feel comfortable raising rates because they have a backlog of
customers to hook up. 
In particular, local phone giants such as SBC Communications Inc. and
Verizon Communications Inc. "are having a tough time keeping up with the
installation of DSL at the rates people are demanding," Wolzien said. 
What customers are clamoring for most are "broadband" services that deliver
data at much higher speeds than simple dial-up telephone connections. Cable
modems and DSL technology provide turbocharged access to the Internet with
download speeds up to 50 times as fast as a regular dial-up modem. There is
a lively debate over which service is superior, cable or DSL, but both are
signing up customers at a brisk pace. During the first quarter of this year,
Verizon added 180,000 new subscribers and AT&T Broadband, the nation's
largest cable company, added more than 200,000. 
At top speed, a cable modem can download a 1 1/2-hour movie in 18 minutes, a
task that could take as long as 16 hours using a dial-up modem that
transmits at 56,000 bits per second. But cable's Internet service is shared
by users and can slow down when too many people in a neighborhood are online
at once. DSL has slower top-end speeds but can offer a more consistent
Consumer advocates cite the price increases for these services as evidence
that the deregulation of the telecommunications industry five years ago was
a failure. 
"This demonstrates more clearly than anything that there are no meaningful
competitive forces in this market," said Gene Kimmelman, co-director of the
Washington office of Consumers Union. "You have the cable and telephone
companies claiming that they want to compete against one another and
challenge each other to offer consumers better deals for broadband services.
Lo and behold they both jack up their rates for broadband, demonstrating
that they have no intention to compete on price." 
But don't look for the government to step in to keep prices down anytime
soon. Federal Communications Commission Chairman Michael K. Powell, a
Republican with a distinctly deregulatory bent, has said that it is too soon
to make any judgments about the direction of the high-speed Internet
"We're talking about services that, in reality, really only became a retail
alternative in '98. We have early adoption going on. I don't think that it's
a mass market yet," Powell said in comments to a group of industry analysts
and researchers. 
In those same comments, Powell predicted that the fee increases would slow
the rollout of the high-speed Internet. 
"I don't know whether they're justified or not, but I think that they're
going to hurt growth," Powell said. 
The cable industry is under particular pressure to show profits from a
business it has been building for several years. "There is a push by Wall
Street to get some payback for the capital investment," said Cynthia
Brumfield, president of Broadband Intelligence Inc., a Bethesda-based
research firm. 
It was no surprise to Brumfield that AT&T Broadband was one of the first
cable companies to announce it was raising rates. Its financially struggling
parent company is in the middle of a major corporate reorganization and it
needs to find ways to generate more revenue, she said. 
On Friday, AT&T Broadband raised rates for almost all of its 1.3 million
cable subscribers from $39.95 to $45.95 a month -- a 15 percent increase.
AT&T insists the price hikes are not related to its overall financial
"We think the new pricing best reflects the value of the product," said
Steve Lang, AT&T Broadband spokesman. 
Of course, not every Internet provider is raising rates. Some see
opportunities to win new business by holding the line on bills. Last week,
Microsoft Corp., the nation's No. 2 Internet provider, pointedly said it
will not follow online giant America Online's decision to boost its monthly
fees by 9 percent, to $23.90 from $21.95, effective in July. Microsoft said
AOL customers who switch to its MSN service will receive three months of
free Internet access and a guaranteed rate of $21.95 a month for unlimited
service until Jan. 1, 2003. 
Comcast, meanwhile, raised rates only for new customers. The dominant cable
provider in the Washington area said existing customers will continue to pay
$39.95 a month for service and use of a special modem. 
Analysts say the latest pricing strategies are part of an ongoing experiment
to find the right mix of price and service. Verizon, for instance, announced
on May 3 plans to require new customers who subscribe to its lowest tier of
service -- which costs $39.95 per month -- to pay a $200 set-up fee.
Previously, that fee was waived. 
In fact, Verizon no longer even advertises that tier; instead, it steers new
customers to an introductory package at $49.95 per month that has several
promotional features including a free DSL modem, a PC camera, four e-mail
boxes, and space on the company's servers to store e-mail and Web sites. 
Verizon spokesman Larry Plumb noted that customers are getting more for
their money, including faster speeds and more storage capacity, under the
company's new pricing plans. Plumb said the company felt it had to boost its
access speeds and storage capacity because more of its customers are using
the Internet to zap music and photos to one another -- applications that
gobble up capacity. 
"The whole thing is to make the service more capable and match what people
are doing today," Plumb said. 
John Orlando, a lobbyist who lives in Bethesda has subscribed to Verizon's
DSL service for 18 months at the $39.95-a-month rate. The few times the
service has gone out, Orlando said, he became frustrated by the slow speed
and inconvenience of having to use a standard telephone line to connect to
the Internet. 
"I'm probably willing to pay more than I would have as a new subscriber
because I have gotten used to it," Orlando said. 
But if newcomers become turned off by the cost, analysts say, the Internet
providers may not be able to win over more people like Orlando. It also
could be a huge disappointment to several industries that are counting on
the speedy rollout of a national broadband network to launch new businesses
of their own. 
For instance, Hollywood and other entertainment industries are planning to
sell movies, music and video games over the Internet. But this new business
depends on the development of a high-speed Internet service that allows
mass-market customers to download products quickly. 
Some economists question whether a marketplace dominated by cable and local
telephone companies, two industries that once enjoyed life as regulated
monopolies, is competitive enough to keep prices in line. Many of the
companies that have gone out of business or sharply curtailed their
offerings were upstart telephone companies or Internet providers that leased
lines from the traditional local telephone giants. 
"Two players is not enough for a horse race," said Lawrence J. White, a
professor of economics at New York University's Stern School of Business.
With fewer players in the market, he said, the possibility is increased that
big companies will coordinate price hikes and service offerings. 
"Two [primary players] is not as good as three or five or 20," said White,
who served as chief economist for the Justice Department's antitrust
division during the Reagan administration. 
Keith Kennebeck, a broadband analyst with Strategis Group, a
Washington-based telecommunications consulting firm, predicts that even if
rates for high-speed Internet service rise now, they will eventually have to
come back down. 
For the Internet to really take off, cable and DSL service must fall back
down closer to $30 a month, Kennebeck said. Until the price comes back down,
the service will remain a luxury item for most homes, he predicted. 
And with so much riding on the widespread distribution of a high-speed
Internet service, some analysts question the latest round of rate hikes.
Instead of building profit margins, the analysts say, now may be the time to
continue building market share and demand. "The jury is out as to whether or
not this is the time to raise rates," Brumfield said. High-speed Internet
service "is not yet a must-have," he said. 
Reported by Newsbytes.com, http://www.newsbytes.com 
 2001 The Washington Post Company



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