The Internet service provider, which has about 190,000 customers, has been charging $19.95 for unlimited access.
As of August, Pac Bell subscribers who use the service more than 150 hours per month will be charged $1.80 per hour. The 150-hour cap will not affect subscribers who sign up for a $199.50 yearly plan--which comes out to about $16.62 per month.
Pac Bell is the latest in a string of ISPs and online services to alter their pricing and access plans, putting into question whether unlimited access is destined for extinction. Major ISPs such as AT&T WorldNet and MCI Internet in recent months have introduced limited Internet access plans in hopes of reducing network congestion.
Although it is a regional company, Pac Bell is an influential player in the industry because of its size and location. It is the Baby Bell carrier for Northern California and, specifically, Silicon Valley, a status that often makes it a bellwether for Internet access and related businesses.
Pac Bell said it is raising rates and capping access to boost its service reliability and to offer new features such as personal home pages for subscribers, two extra email boxes and aliases, 56-kbps Internet access capability, and roaming service.
"We're going to go after the position in the marketplace where we offer high-quality service and a high degree of features and functionality," said Ed Callan, vice president of consumer marketing for Pac Bell Internet.
"We're running a best-in-class service, and clearly it costs money to do that," he added. "We're spending 67 percent more on our network from last year. At $19.95 [per month for access], ISPs' profit margins are razor thin--there is no doubt about that."
America Online was the first major service to break the $19.95 barrier in February when it raised its monthly fee $2 to $21.95. AOL went to flat-rate pricing in 1996. In March, WebTV raised its monthly rate $4 to $24.95.
But not all major ISPs are following the trend. EarthLink, which has 680,000 subscribers, today reiterated that it will not raise prices or cap its unlimited access plan.
AOL ran into legal trouble when it automatically switched customers from $9.95 per month for ten hours to the monthly flat rate of $19.95 in 1996. Pac Bell acknowledged the perils of raising prices, but it is not concerned about consumers taking action as they did with AOL.
"We know that 100 percent of our customers will not be happy with this, and some will decide they want to take their business elsewhere," Callan said. "Every customer agrees when they sign up with us that we can raise our rates. We're trying to make it clear to our customers, however, that we're not just changing our price--we're offering better service."
The company's terms of service (TOS) state that rates are subject to change. "The terms, conditions, and charges for the service may be periodically modified. After notice of a modification, your continued use of the service constitutes an affirmative agreement to be bound by such new terms, conditions, and charges," the TOS states.
However, some customers will dump the service, since consumers have a growing number of Net access services from which to choose.
"I'm going to cancel my service," said Jim Hoopes, a Pac Bell Internet user. "I have the Road Runner cable modem service, but there have been enough reliability problems with it that I kept my Pac Bell dial-up service as a back-up. However, this rate change is the incentive I need to cancel my Pac Bell account."
Despite a rocky history with ISDN (integrated services digital network) and some notable outages with its dial-up service, at least one analyst said Pac Bell is moving in the right direction by raising rates to improve service and profits.
"It's a 'me too' strategy," said Kate Delhagen, an analyst at Forrester Research. "It's a move to adjust to a new standard."
Delhagen applauded the plan, noting that other ISPs still using the $19.95 unlimited access model should not be far behind in restructuring their pricing and access schemes.
"Managing the network will help them control network costs," she added. "[The $2 increase] really goes to the bottom line: consumers should expect to pay $21.95 a month for at least another year."
Since AOL first increased its pricing plan, many ISPs have watched from the sidelines to see whether the online service would suffer from massive cancellations and defections from the service. When it became clear that AOL would withstand any backlash, the prospects of increasing monthly rates became more appealing, Delhagen said.
But while many analysts have been strong supporters of limiting Net usage, others are beginning to raise warning flags about ISPs using AOL as a litmus test for raising prices. ISPs with significantly smaller subscriber bases should worry more about increasing their user base instead of replicating the success of the world's largest online service. Also, many wonder how much service Pac Bell can offer for the extra $2.
"Raising prices is a bad strategy if they're looking to grow their subscription base because of competition in the Internet access space," said Abhi Chaki, an analyst at Jupiter Communications. "It's not that they're offering anything special, so there's no reason to charge $21.95 when AT&T and MCI are charging $14.95 for bundling services," he added, referring to the telcos tying together less expensive Net access with long distance phone service.
Adam Schoenfeld, also an analyst with Jupiter Communications, agreed. "While capping hours is fine and rapidly becoming a standard, it is a dreadful mistake to raise the monthly price point beyond the consensus price [$19.95]," he said. "AOL can get away with it, in the short term. But even they will eventually yield to downward pressure on access pricing."
Pac Bell also announced it plans to decrease its monthly ISDN access rate by 40 percent from $49.95 to $29.95. The price change also will go into effect August 1.
The company's ISDN service has been plagued with complaints. The California Public Utilities Commission (CPUC) is now considering ordering the company to lower rates and pay a fine of $515,000 for falling below ISDN service performance standards the commission set last year.