ISPs bark at telco competitors
The leading Internet service providers won't say they're scared by new dial-up services from AT&T and MCI Telecommunications, but they are prepping bandwidth upgrades to their networks and forging new partnerships to show they're ready.
The telecommunications giants are making a splash in the ISP market with promotional campaigns for new services that promise five hours of free Internet access a month. Even without the promotions, the telco services--AT&T's WorldNet and MCI's Internet 2000--would have attracted attention because they're being offered by big companies with high name recognition.
Industry observers have said that WorldNet and Internet 2000 may spell trouble for the companies that until now have dominated the Net access market, Netcom, PSINet, and UUNET Technologies.
"This is the beginning of the end, maybe. There is a place for more than AT&T and MCI, but there's not a lot of room," said Ted Julian, research manager for Internet commerce at International Data Corporation, based in Framingham, Massachusetts. "Anyone who is going to play in that space will have to distinguish themselves, and they won't be able to do it on price."
At Jupiter Communications in New York, analyst Adam Schoenfeld added, "My gut reaction is that big national ISPs are likely acquisition targets. The Netcoms of this world have made their names by being responsive to consumers. But if those mammoth [telco] companies get moving, the ISPs have serious problems.
Netcom, for one, is trying to preempt competition from other network providers by snuggling up to them. The company announced today that it's redoubling its efforts to partner with cable, telephone, and wireless companies that want to offer Internet access.
Netcom is also tweaking its rates to bring them more in line with charges for unlimited access at AT&T and MCI. Netcom announced today that it will have a flat-rate charge of $19.95 per month for unlimited access, a price matched exactly by AT&T WorldNet's $19.95 monthly all-you-can-eat option. The company had been charging users $19.95 per month for 40 hours of peak-time useage, and unlimited off-hour usage. New Netcom users also now get unlimited access for $5 for their first month of service.
Its competitors are reacting by intensifying efforts to upgrade their networks and prevent Internet traffic jams. PSINet, for example, plans to boost the bandwidth on its Internet backbone from 45 mbps to 155 mbps to reduce network congestion, said Bill Schrader, CEO and chairman of PSINet. The upgrade will begin in 1996 and be concluded sometime in 1997. But even on this front, the company will have to face down MCI, which announced yesterday that it will increase the bandwidth on its network backbone to 155 mbps.
AT&T and MCI may be vulnerable in one key area, however: customer service. In fact, the free access promotions may backfire if demand proves far greater than anticipated.
"[AT&T] may have a success-disaster on their hands--too many callers, too much support required," said Ira Machefsky, industry analyst at market research firm Giga Information Group. "AT&T was swamped by requests for its free service. They trickled it out instead. Their past history would indicate they're going to have a hard time doing this."
PSINet's Schrader points out that a promise of five free hours--which both AT&T and MCI are offering for a limited period--targets casual, inexperienced users who could put a huge burden on customer support. He added that his service, as well as Netcom's and UUNET's, attracts customers who are already relatively Net savvy.
"[AT&T is] going after a market niche that we want to stay away from," Schrader said. "They're marketing to the wrong set of people. [The company's long distance customers] don't have computers. I know their customer support is going to be overwhelmed. AT&T has trouble answering their phone in the evening [for telco support]."
Still, PSINet's most popular commercial offering is a $20 monthly unlimited access option, a price matched exactly by AT&T WorldNet's unlimited access option.
But the telcos may also be slowed by their sheer size, allowing room for companies completely focused on Net access to still attract new customers.
"Taking a look at how long it took MCI to come up with a marketing plan for consumer Internet access services, that looks good for the PSIs and Netcoms," said Jupiter's Schoenfeld.
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