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Analysts: Rates could push surfers away

Higher Internet access prices could cut into online usage at a time when the U.S. market is nearing saturation, according to Net analysts.

Higher prices from AOL Time Warner and rivals offering Internet access could cut into online usage at a time when the U.S. market is nearing saturation, according to Net analysts.

On Tuesday, AOL Time Warner's America Online unit raised its monthly fee for U.S. members by roughly $2 to $23.90, its first price increase in more than three years. Industry watchers say competitors such as EarthLink won't be far behind in trying to boost rates.

Such a trend could have an adverse effect on consumer Net adoption, which has already shown signs of cooling in the first part this year. According to a recent survey by Telecommunications Reports International, the number of U.S. homes with Internet access dropped slightly during the first quarter of 2001, marking its first decrease.

Although many researchers say this is an inevitable plateau reached through mass-market Internet adoption, higher prices from popular Internet service providers could cause newbies to think twice before hopping on the information superhighway.

"If widespread price hikes continue, it will have an impact on the consumer market as people think a little bit harder about getting dial-up to the home and (decide) to wait for broadband," said Rob Lancaster, Internet analyst at The Yankee Group.

Researchers say that the Web population is growing at a slower rate since a majority of U.S. households are already online; about 60 percent of all U.S. households are hooked to the Web at home, according to The Yankee Group. In 2001, the U.S. Internet population is expected to rise only 9 percent, a large drop from the 53 percent increase from 1998 to 1999.

Still, Internet adoption is going gangbusters worldwide. From February to March, almost 7 million more people worldwide had access to the Internet from their homes, with Asia leading usage, according to a study from AC Nielsen eRatings.com. Some 211 million people were active Internet users in March, a rise of 4 percent from February.

Lancaster said the number of consumers signing on to ISPs in the United States has slowed in the first part of the year partly because of decreased consumer spending and far less marketing from the ISPs, which have slashed their marketing budgets in the face of an economic downturn.

Other signs of weak growth can be seen in the online retail market. Jupiter Media Metrix just reduced its U.S. Internet sales projections by 5.6 percent. The research company's forecast dropped from $36 billion to $34 billion for 2001.

Analysts say that although price increases for Net access most likely will not nudge current users off the Internet, they may act as road signs for finding less expensive models.

"It's opening up the ISP market for a myriad of smaller-budget ISPs to offer consumers less expensive Internet access, which is just like basic TV that we get without any cable," said Emily Meehan, program manager at The Yankee Group.

Industry experts compare the Internet service industry to the cable TV market. New price hikes reflect early changes in cable TV, when providers started charging for "premium" channels. Basic cable is the least expensive option with the least stations to view.

"Now you can't get as much for your dollar; it's not an all-you-can-eat model anymore. The ISP industry will mimic that," Meehan said.

With higher prices for Internet access looming, many people will increasingly take inventory of their time spent online. For some, attractive alternatives may be turning to a free ISP; cutting back to a basic, time-limited service; or allotting Net time at work.

"For people who are already marginal users, seeing a price hike might be the thing that pushes them to say, 'I don't want home Internet access,' or to go sign up with a free service like Juno" Online Services, said Lydia Leong, principal analyst at research firm Dataquest.