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AOL pricing sends ISPs running

AOL's announcement of flat-rate Net access eliminates the independent ISP's greatest competitive edge over the online behemoth: pricing.

Andreas Glocker's first reaction to America Online's just-announced unlimited pricing deal was plain surprise. His second was pure competitive instinct: He immediately lowered prices for his 8,000-member Internet service.

"I didn't expect that they would roll out a price at $19.95," said Glocker, president and CEO of Sirius Connections. "We lowered our price to $18.95 from $20."

He also sweetened the deal with other goodies, such as 5MB of disk space on the company's servers. The new pricing is effective as of tomorrow.

ISPs, already being squeezed by telephone companies and unlimited pricing deals offered by the Microsoft Network and Prodigy, are now finding themselves backed in an even tighter corner by AOL's all-you-can-eat pricing announced yesterday.

Flat-rate pricing eliminates the independent ISP's last and strongest competitive edge: pricing. Until yesterday, they had been able to tell prospective customers that, no matter how easy AOL was to install and no matter how much content it provided, it couldn't compete when it came to pricing.

But with AOL's new all-you-can-eat plan, the ISPs must come up with something different to survive. "People are now looking at AOL as an ISP, no longer as an online service provider," Glocker said.

With MSN and Prodigy moving directly onto the Web and all the online services jumping headfirst into the price war, analysts say ISPs should seriously consider changing strategies. Along with price cutting, many ISPs are considering other steps they can take to attract new customers, or even just to keep the ones they have.

Many ISPs are lowering prices, focusing on local service, specializing in niche markets, or turning to the business market where customers are willing to pay more for better and more specialized services.

For instance, PSINet earlier this month joined the scramble of Net access companies adding back-end electronic commerce services to their Web hosting services. AT&T unveiled similar services for would-be Web merchants.

PSINet is actually trying to get rid of its residential customers, agreeing this summer to sell off any new consumer sales leads to Southern California ISP Earthlink and focusing instead on setting up ISDN connections for Tandy retail stories and Holiday Inn hotels.

UUNet Technologies is among the ISPs looking to add new services, announcing in August a deal with advertising conglomerate True North Communications to provide Internet marketing services. With the deal, True North companies such as worldwide ad agency Foote, Cone & Belding will be able to collaborate with clients on Web site design and management over long distances using tools developed jointly by TN Technologies, a branch of True North, and UUNet.

All the larger ISPs have also announced plans to branch out into European, Asian, or Latin American markets.

All of this is much easier for companies the size of Netcom than for small regional ISPs. But even among this group, they are finding ways to differentiate their services.

Albert Cuevas, legal counsel and creative director for ICE Networks, for example, said that as an access provider in Puerto Rico, he's not threatened by AOL's move because he offers something AOL cannot: customer service geared to the local market.

"I think the impact will be minimal for one reason: Service is very important in this kind of business, and people, at least in this market, would rather call somebody who speaks Spanish," Cuevas said. He added, however, that his service caters primarily to businesses, not to home users.

"We have state-of-the-art equipment, state-of-the-art lines. Everything is set up so that it benefits business," Cuevas added. "That's our edge."

Cuevas is on to something, according to Kate Delhagen, an analyst with Forrester Research. Specialization will be the key to survival in this ever-tightening marketplace, Delhagen said. ISPs have to offer something more, be that a strong base with business customers, better customer service, or better content.

"I'm a firm believer there's a market for the small ISPs," Delhagen said. "There's a growing pie, and I think the battle is between the large players like America Online and Microsoft who have the wherewithal to go after that big pie and share the pie."

The question then, she added, will be whether the ISPs can survive on the crumbs.

Already, one ISP is out the door--the one AOL owned. A year and a half ago, AOL laid out $11 million for its own Internet service provider, Global Network Navigator in an attempt to capture customers interested in Internet access only.

But yesterday, GNN's raison d'etre dissolved. And so did GNN. While GNN will continue to produce Web-based content, the company and its more than 200,000 members will be "absorbed" into AOL, CEO Steve Case said.

Some customers reacted with anger by the abrupt cancellation.

Chuck Anderson, a beta tester and Internet teacher, was shocked to find a note telling him that his ISP was being phased out. "I'm not a happy camper," he said. "I think that America Online is a great place for my daughter, who is 12. It's a great place for me because I do a lot of work and computer companies have message boards. But for general Web access, it's still terrible.

"I don't think that there will ever be a time when AOL is not busy in the evening," Anderson added. That's why he'll be going to a local ISP where he counts on better access to the Web.

But others said they liked the strategy and welcome the ability to go to AOL on the cheap.

James McQueen, another GNN customer, said he was pleased by AOL's announcement because, for him, price was the bottom line. "I had tried AOL before and I thought the bills were too high," he said. For $19.95 a month, he'll gladly jump to the service.

But even though AOL's move is intimidating other ISPs, the company's new pricing model is also risky for America Online. In offering flat rates, AOL will have to rely more heavily on the unproved areas of the Internet business: advertising and commerce.

"AOL obviously decided that they've got to have the maximum number of eyeballs and access to credit cards and that they were not going to make any money from access," said Peter Krasilovsky, an analyst with Arlen Communications.

AOL has bragged that its advertising revenues have increased tenfold in the last year, going from $5 million to an expected $50 million this year.

But Krasilovsky himself is skeptical about whether Net advertising or online transaction software will work, but he agrees that AOL did what it had to do.

"Sure, it's risky," he said. "But did [AOL] have a choice? They want to survive in the future. They want to become a super media company, and they think this is the only way to do it."