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ISPs consider tiered pricing

Internet service providers search for a business model to distinguish "power users" from Sunday drivers.

Just when you thought it was safe to have no limits on Net access for $19.95 a month, Internet service providers are starting to rethink their pricing and marketing strategies.

Both AT&T and Sprint Communications said this week they are considering moving to a tiered pricing strategy that mimics the cable industry with a flat-rate price for basic service and incremental fees for add-ons. That might include charging more for a higher level of service.

This comes on top of strategic pricing shifts by Netcom and Concentric Network. (See related story)

Today, Tom Evslin, vice president of AT&T WorldNet, said that while AT&T remains committed to $19.95 flat-rate pricing--and in fact can make a profit at that price point--the company also is considering charging more for additional services.

"What we'll see is a $19.95, or some base rate, with additional services priced incrementally," Evslin said. "But you can't just load this stuff onto the $19.95 plan forever and expect that to be economically viable."

Sprint also disclosed that it is considering tiered pricing but said it won't make any final decisions until later this year. The company is trying to find a business model to distinguish "power users"--those who are logged on 40, 50, or 60 hours per month--from users who stay on less than 30 hours, Jim Dodd, vice president of Sprint Internet Services, said today.

"The reason we're at $19.95 was driven more by a need to be competitive with early players as opposed to some cost-related or consumer-driven price level," Dodd said. "We are exploring all kinds of price and service mixes." Any new pricing model would play to Sprint's strengths: a established backbone and customer base.

The company helped revolutionize a new pricing model in the telephone industry with its flat-rate, per-minute calling feature. (AT&T has since made a similar offering.)

While nothing has been decided for either Net access service, the mere rumblings from such heavy hitters may signify another shift in Net pricing and marketing. It's hardly surprising coming from an industry that has more seismic activity than the San Andreas fault.

The problem ISPs in general are facing with the $19.95 standard is at least twofold: With everyone charging the same price, services are having to find ways to differentiate themselves with service, reliability and content. In fact, just about every ISP claims to be the most reliable and accessible. AT&T is no different. But Evslin said the 750,000-member service would try to quantify its success by posting its daily call completion rates compared with other leading national ISPs. He issued a challenge for other ISPs to do the same.

But the problem of arriving at the pricing formula is complex. A lot of ISPs--especially those that don't own their networks--say they simply can't turn a profit at $19.95. Some, such as Netcom, have said they would abandon their $19.95 rate, and instead focus on the business market.

Netcom was among the first to offer the $19.95 price three years ago; two months ago, just after $19.95 had become the standard, Netcom announced it would abandon the flat-rate scheme and pursue the business customer willing to pay more.

That opened the door for others, said David Locke, an analyst with Volpe, Welty & Company. "Netcom lifted the umbrella back up and now everyone's diving back underneath because they can. It's not clear you can make money off of $19.95."

Even for Sprint, the costs of servicing "power users" can be more than the $19.95 pricing model can profitably support, Dodd said.

And many ISPs, including America Online, have been looking at other ways to make money, such as online advertising and online sales.

Lest anyone feel the course for ISPs is now set, Evslin added a cautionary note: "It's dangerous to predict on the Internet that the experience you're having today is going to be the same as you're going to have tomorrow," Evslin said. "We're always going to charge enough so we can have a profitable service. We're always going to charge enough so we can have a reliable service."