Shares of AOL jumped 11-15/16 to 110-7/16 on the news, up 12 percent from Friday's close of 98-1/2. Nearly 7 million shares traded hands, more than four times the average daily volume.
AOL said the price increase was necessary to "keep pace with the cost of members' increased usage." It said that revenue from advertising, e-commerce, and other sources continues to grow, but the company is "not yet able" to cover the growth in member usage. Rumors of a price increase by AOL have been circulating in recent weeks, but company executives have steadfastly denied them.
"Our expanding members have told us--and their usage demonstrates--that they want us to continue to provide AOL on an unlimited basis," AOL chief executive Steve Case said in a statement. "The pricing changes we are announcing today will help AOL continue to make the necessary investments to provide the best possible Internet online experience, while keeping pace with the cost of our members' rise in usage."
AOL said its members now spend on average more than 23 hours per month online, compared to just seven hours before it introduced flat-rate pricing for unlimited use. According to Case, "Web hits by AOL members have quadrupled to 700 million daily, and the number of email messages has more than tripled to 22 million each day."
The company said it has spent $700 million during the past year in building its network, has added 1,000 customer service representatives, and has rolled out upgraded software dubbed AOL 4.0 or "Casablanca." The company has had an eventful year on several other fronts as well. (See related timeline)
AOL said it will continue to offer alternative pricing plans such as its "bring your own access" rate of $9.95 per month, as well as its "light usage" plan of $4.95 per month for the first three hours of use and $2.50 for each additional hour.
Some AOL customers were disgruntled by the new pricing plans, set to take effect with the April billing cycle.
The price increase comes in the wake of AOL's buyout of the online services division of what had been its biggest competitor, CompuServe. The deal had won approval from the Justice Department and shareholders. The network services piece of CompuServe was bought by WorldCom.
AOL's move comes as other service providers, including CompuServe and Netcom, have increased their "all-you-can-eat" monthly rates above the standard $19.95.
IBM recently put a 100-hour-per-month cap on access for subscribers who pay $19.95 per month for its service; after that they pay extra. The services all cite pressure on profits as more users stay logged on for longer periods.
On the other hand, some Internet service providers recently have been lowering their rates. As reported earlier, MCI, for example, quietly has been offering Internet access for $14.95 per month for customers who subscribe to its long distance service.
Analysts speculate that the telecommunications carriers potentially could have an advantage in any Net access pricing wars, because they can offer bundling deals that other ISPs and online services cannot.
Microsoft Network declined to comment on AOL's price increase. "Microsoft does not comment on its competitors' business strategies," an MSN spokesman said. He added that MSN has nothing new to announce on its own pricing scheme, which stands at $19.95 per month for unlimited access.
Analyst reaction to the price increase was mixed.
Some applauded it. They said AOL was gambling that it would lose a relatively small number of subscribers to competing online services and ISPs, and others would follow suit.
But some were skeptical that many other ISPs would join AOL in raising prices. "It's a risky move," said David Card, an analyst at International Data Corporation.
Internet news editor Jeff Pelline contributed to this report.