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Why are ISP pricing plans so different?

America Online has been forced to price to market-slashing subscriber costs in Europe, but in America, where free ISPs have gained ground, it doesn't appear to face the same pricing pressures.

In London it's free. In Berlin it's $65 a year. And in San Francisco it can run you $21.95 a month. Or nothing at all.

As America Online launches international services, it has been forced to price to market-slashing subscriber costs in Europe, where it can take a cut of phone companies' local toll charges. But in America, where free ISPs such as NetZero and 1stUp.com have been gaining ground with consumers, it doesn't appear to be facing the same pricing pressures.

AOL has made some concessions to the price-shopper crowd. It now categorizes its subscribers as either "premium" or "value" users, for example, and gives a $400 rebate on a PC if users sign up for three years of service with its cheaper CompuServe service. But the company hasn't surrendered the field completely, charging top dollar--$21.95 a month--for its main offerings.

Similarly, Microsoft--which reportedly is considering launching free Internet access services throughout Europe--recently announced an increase of $2 in its ISP subscription rates, to $21.95.

In short, the growth of free ISPs in the United States--in contrast to Europe--has sparked a peculiar price war in which cheaper isn't always better, or so some seem willing to bet.

"People don't buy price, and I think that's true of almost any product category," said AOL spokeswoman Ann Brackbill. "They buy the service they want at the best price."

By default, AOL has become a litmus test for the effects of free ISPs on the U.S. market. And for a while, the online giant's stock suffered as analysts waited to gauge how consumers reacted to free services.

Although hard numbers don't yet exist, analysts are becoming more confident that the future is not destined for a fire sale.

"When Microsoft indicated a few weeks ago that they weren't going to do anything for free…that news helped AOL's stock," said Andrea Williams, an equity analyst at E*Offering. "And you won't see any evidence that AOL has been hurt by the popularity of NetZero."

Rather, all the hype over different ways to pay for Net access highlights a fear among ISPs that they are becoming a dime a dozen, according to Joe Laszlo, an analyst at market research firm Jupiter Communications.

"ISPs have tried several different strategies for getting away from a commoditized model," Laszlo said. "Now they're trying pricing as a way to break away from the pack and to do something unique to attract consumers' attention."

A different equation
Free ISPs have caught on big among Internet-hungry consumers in the United Kingdom. Heavyweights like Freeserve have scooped up millions of users in a relatively short time, forcing AOL to launch its own Netscape-branded free ISP service to compete.

But free ISPs in the United States are a different breed.

"It's working in Europe because of the telephone structure," said David Simons, managing director of research firm Digital Video Investments. "Free services that exist in the U.S. are doing it strictly as an advertising model."

Unlike the United States, European countries charge local phone calls by the minute, similar to the way American long distance telephone companies also meter calls. Free ISPs in Britain make money by taking a cut from the local phone charges.

In contrast, free ISPs in the United States hold truer to the moniker. Since local phone calls are billed at a flat rate, subscribers to services such as NetZero or AltaVista's free ISP 1stUp.com access the Internet at no cost.

So far, consumers have responded by signing on to these services at a fast clip. In close to a year, NetZero has signed on 1.68 million subscribers. And since 1stUp.com launched two months ago, the service has gained 550,00 users.

But there's a catch. NetZero earns its revenue by constantly subjecting users to banner advertisements embedded into its interface. And 1stUp.com lets sites that use its free Net access capabilities serve users direct mail and other product offers.

A revolution waiting to happen?
For Charles Katz, CEO of 1stUp.com, which was recently acquired by Internet investment firm CMGI, consumers will be hard-pressed to turn down the lure of free access over the long haul.

"Why should you pay for something if you can get that service for free?" Katz asked, echoing a crowd of giveaway schemers who offer a mind-boggling array of goods and services at no charge.

While the advertising model that Katz and others are banking on is equally unproven, he's confident that at the end of the day, consumers will always abandon the package deal in favor of the freebie.

Katz considers the idea that consumers are willing to pay for a service with content or community "a very short-sighted view."

"There are plenty of Web sites out there with good content, and if they offer a free ISP service, I don't see how that argument can hold water," Katz said.