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ISPs wary of following AOL's footsteps

Analysts predict copycat price hikes will quickly follow America Online's rate increase, although Internet service providers reacted cautiously to the news.

Analysts are predicting copycat price hikes will quickly follow AOL Time Warner's decision to raise rates for its America Online service, although Internet service providers reacted cautiously to the news.

In an expected move, AOL Time Warner's AOL unit said Tuesday that it will raise its $21.95 monthly fee to $23.90, making it the most expensive of the leading dial-up services.

Microsoft, which owns MSN Internet Access, said it does not plan to raise rates at this time. The service has 5 million members who pay $21.95 a month.

EarthLink spokesman Kurt Rahn said the company is weighing its options and could respond by raising its own rates, by initiating a campaign to lure AOL subscribers to a cheaper service, or by doing nothing.

"We're evaluating what the next step for us is," Rahn said. EarthLink has 4.8 million paid subscribers for its dial-up service, which costs $19.95 a month.

Still, the prospect of rate increases was welcomed on Wall Street, which saw a surge in stock prices from ISPs such as EarthLink, Juno Online Services and NetZero. All posted high gains in their prices Tuesday, up about 5 percent, 23 percent and 19 percent, respectively.

"It absolutely opens the door for other ISPs to raise their rates," said Frank Gristina, an equity analyst at Robinson-Humphrey.

Not just dial-up
AOL's move follows an industry trend in monthly subscription increases for Internet service. Already, companies that provide high-speed access have taken the lead. Earlier this month, cable giant AT&T announced a $6 monthly increase to $45.95 for high-speed Net access.

Other companies that offer high-speed DSL (digital subscriber line) service have increased their monthly fees as well. Companies such as SBC Communications and even EarthLink recently boosted fees to about $50 a month.

Much of the DSL sectors increases have been fueled by high costs and the thinning market of viable competitors. Many of the Baby Bells, which largely control the DSL market, gained considerable leverage after a spate of start-ups, including Verio, Concentric, PSINet, Flashcom and NorthPoint, either threw in the towel or are in dire straits.

Because of their competitive edge, many of the DSL leaders have been able to raise rates to more accurately balance costs. The same could be true for dial-up ISPs.

The death of the free ISP?
AOL's price hike underscores the company's increasing confidence in taking on lower-priced ISPs such as Juno and NetZero, which have been paring back free, ad-supported services. Although the majority of Juno's and NetZero's customers pay nothing to access the Internet, both companies have begun aggressively marketing their fee-based services in recent months.

Paying the premium
When it comes to monthly unlimited-use subscription plans, AOL tops the price list among popular ISPs.
Service Monthly cost
AOL $23.90
MSN $21.95
EarthLink $19.95
Juno Web $14.95
NetZero Platinum $9.95

Source: Company Web sites

Earlier this year, Juno raised its premium service to $14.95 from $9.95. NetZero offers a "platinum" version of its service for $9.95. Both paid versions eliminate persistent banner advertisements, which served as revenue for free ISPs until the online advertising downfall took its toll on the business.

For a while, free services put pressure on existing ISPs--including AOL. In the summer of 1999, AOL's stock took a dip as investors began expressing concerns that free ISPs would pluck from the company's subscriber base.

But the trend has led instead to higher prices.

Microsoft took the industry by surprise when it announced a price increase from $19.95 to $21.95 in the fall of 1999. AOL executives, meanwhile, maintained their belief that free ISPs would not be profitable and avoided entering that market.

Robinson-Humphrey's Gristina said AOL's increase would put the remaining ISPs in a better position. When AOL unveiled its first price increase, there were many rival ISPs. Now, the sector has diminished to a handful of players, removing some competitive pressure.

"Pricing power is returning to the surviving ISPs," Gristina said. "As free ISPs go away, you're left with fewer choices and that gives companies pricing power again."