ISPs want to take care of business

Just as the dust was beginning to settle from the $19.95 Internet access pricing war, Netcom (NETC) dropped a new bomb: The service that established the $19.95 standard is now abandoning it.

And it appears that others will follow in the quest for what has become the Holy Grail of Internet service providers: profits.

Yesterday, Netcom announced that it will join the ranks of CompuServe (CSRV) and other services that are abandoning the mass consumer market in favor of small and medium-sized businesses.

At $19.95 for unlimited access, Internet service providers simply can't make money. "Implicitly at $19.95, you've got to find alternative revenue sources to make money," said David Locke, an analyst at Volpe Welty and Company.

Both online giant America Online (AOL) and its prime competitor, Microsoft Network, know that only too well. Both companies had to move to flat-rate $19.95 pricing if they were to stay competitive in the consumer market. Today they are faced with making up for the revenues that hourly rates had generated. And they are searching for new income through sources such as online advertising and commercial transactions.

Netcom, on the other hand, is one of a handful of ISPs deciding to march in the other direction. Instead of handing out access at cheap rates in exchange for the promise of other customer-generating revenue, Netcom will be raising its rates and promising business customers better service.

CompuServe made the same move last month when it announced that it would drop its failing consumer service and refocus on its commercial business. Others are sure to follow, in hopes of gaining a toehold in the potentially lucrative small-business market.

While ISPs have catered to large companies and the mass consumer market, all but a few have virtually ignored the middle ground: the home office customers who are willing to pay more for access--if it caters to their needs. The move toward businesses is a sign that the market is maturing to the point where there's more room for diversity, Locke said.

But ISPs can't simply slap a new label and some cosmetic improvements on their consumer service and call it good enough for business. Business customers will expect more for their money, refusing to tolerate outages or the kinds of problems that have been plaguing AOL, such as busy signals and lost connections.

"You're going to see a movement of people who need the network and for whom it's not a toy," Locke said. "They are going to be willing to pay extra for guaranteed levels of service If they're going to charge people extra money for better service, then they're going to be on the hook for providing that level of service, and they're making a bet that they're going to be able to do that."

No one knows that better than Doug Hickey, the CEO of GlobalCenter, a spin-off of Global Village established in February with the specific mission of catering to businesses between 1 and 500 people.

Hickey says they decided to cater to the SOHO (small office-home office) market because it made sense. "I saw a number of companies going after the high-end market and a whole series of others going after the consumer space," he said. "The problem with that strategy was I could never figure out, at $19.95, how anybody could ever really make money."

So he structured GlobalCenter--which merged yesterday with Phoenix-based provider Primenet--around the small to medium-sized business market.

Hickey warns that these consumer-oriented companies will have to restructure from the bottom up, offering software and hardware to a new breed of customer.

And he remains skeptical that companies like Netcom can successfully make the transition to the business market. "All they're trying to do is get out of the $19.95 space, quite frankly," he said. "The thing those companies are struggling with is 'how do I get myself out of this mess I've gotten myself into.' The thing most companies will miss is you can't take a consumer product and turn it into a business market. You can't take a large market and expect to sell it in the small to medium-sized space."

But Hickey adds that there's plenty of room in the arena for serious players, and he welcomes the competition.

"I think it validates our concept by virtue of other companies coming into the marketplace and understanding that the business division is a very attractive arena, and an arena that has worked for the last few years," he said.