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Sega, WebTV change Internet access pricing

Proving that the rules for making money on hardware and services in the Internet appliance era are not written in stone, Microsoft's WebTV and Sega have revised their respective pricing strategies--again.

    Proving that the rules for making money on hardware and services in the Internet appliance era are not written in stone, Microsoft's WebTV and Sega have revised their respective pricing strategies--again.

    The two companies are taking completely opposite approaches. Sega today announced it will begin offering rebates equal to the price of its Dreamcast game console to customers who sign up for its new SegaNet Internet service. At the same time, WebTV today confirmed that it is essentially raising its service price to $30 per month by instituting a $5 monthly surcharge for subscribers who pay by check.

    Both moves reflect the emerging nature of the Internet appliance market, which consists of set-top boxes like WebTV, gaming consoles with Internet access like the Dreamcast, along with handheld computers and other Web-enabled devices.

    The market for these devices is expected to grow from 11 million units shipped this year to 89 million in 2004, according to International Data Corp.

    As prices for traditionally high-end hardware, such as PCs, and normally expensive service contracts have migrated to the lowest end of the price spectrum--free--Internet appliance manufacturers and service providers have struggled to find the sweet spot for pricing that will both attract subscribers and make money.

    "I think this is something we've always anticipated in the gaming industry. The business of the computer game industry is to deliver games to users, not to deliver the game players to users," said Greg Blatnik, an analyst with Zona Research.

    Sega's move is basically an extension of its current strategy, Blatnik said, which consists of selling the game consoles at a loss and recouping costs on game cartridges.

    But WebTV's decision to essentially increase its service fees is more confusing strategically. The increase comes as other service providers and hardware manufacturers, including Microsoft and WebTV itself, have explored ways to offer free services and hardware.

    Just a few months ago, for example, WebTV launched a trial program offering two months free service to new subscribers. But for customers who pay by check for the WebTV Plus service, the $5 surcharge pushes the monthly fees up to $30 per month, among the highest service fees around.

    WebTV estimates that approximately half of the 90,000 WebTV users who pay by check will be affected by the charge.

    "That's kind of forcing people into making a payment choice," said Blatnik. WebTV now counts about one million users, but its user growth hasn't reflected the skyrocketing popularity of the Internet as a whole. With the upcoming launch of AOL TV, along with other Internet appliances, the timing for a price increase may be unwise, he said.

    For its part, WebTV maintains comparisons to Sega--or other ISPs--are invalid because the service is designed to offer enhanced television programming, not merely Internet access.

    "WebTV Plus service is a lot more than email and Internet," a WebTV spokesperson said, explaining that no existing subscriber contracts would be affected by the surcharge. "I wouldn't look at us as just an ISP."

    Despite Microsoft positioning the set-top box as enhanced television, many subscribers still use the service mainly for Internet access. "WebTV has started to face competition from a lot of different angles, including Internet appliances, although WebTV says its not an Internet appliance," Blatnik said. "It's pretty much been a simple way to get online."

    Some WebTV members, upset about promised upgrades which were not delivered, including support for standard Web technologies like Java and new versions of Real Networks media player, say the de facto price increase is unacceptable. WebTV also recently angered users when it started, then stopped, including banner ads in user emails.

    "I think (it) is outrageous," said WebTV user Hans Wortman in an email to News.com. "I pay my utilities by check and they do not increase them if I do not pay by credit card, so why should WebTV?"