Is WebTV's rate hike premature?

WebTV Networks' surprise announcement that it is raising the monthly rate for its WebTV Plus subscribers has some analysts questioning the company's strategy.

The company, which is owned by Microsoft, said the $5 monthly increase was based on two factors: a software upgrade this summer and the rising costs of maintaining the network and integrating television and the Internet. Although the explanations are certainly reasonable, what is questionable about the move is its timing.

"The Net access via set-top box market is struggling now as it is," said Jae Kim, associate analyst with Paul Kagan & Associates. "And this might not be the best message to send out to consumers now--especially when you're touting affordability and accessibility. It's a very mixed message."

The price increase seems to run counter to basic strategy that drives many nascent industries, where companies often run up huge losses to gain market share before passing along costs to the consumer. The idea behind TV set-top boxes and other low-cost Internet devices has been to attract as many customers as possible to a technology that basically "locks in" users--similar to the cellular phone business model.

Other Internet service providers have been loathe to raise prices in the highly competitive field, even when their rates have proven increasingly difficult to maintain. And it is easy to see why: America Online saw its stock jump 4-5/8 to another 52-week high today, in part because of the WebTV increase and another rate hike by AT&T's WorldNet ISP.

In defending its strategy, WebTV says it wants to gain subscribers through its enhanced services, given that the market for Net access is in flux and customers have more choices. Also worrisome is the rapidly expanding number of PCs priced under $1,000, allowing for far more enhanced Internet usage.

"They're positioning this as: The rates need to go up because they're offering many more services," said Van Baker, director of consumer research at Dataquest. "It used to be that you either surfed the Web or you watched television. When you truly integrate the two media, it changes the viewing pattern. With the WebTV Plus box, the two blend together. That gives significantly better value to the subscribers."

Baker pointed out that the rate increase is being imposed only on users of the WebTV Plus enhanced service, not subscribers who have the WebTV Classic service. "The WebTV folks are trying not to impact the majority of their subscriber base, and the new subscribers are paying for the significantly increased value--and that's fair," he said.

Technology companies generally raise prices when they offer upgrades to their products, and ISPs are no exception. Even AOL raised its monthly rates in February, an increase that coincidentally goes into effect today. Users will be charged $21.95 per month, $2 more than before.

But even WebTV's own chief executive, Steve Perlman, told attendees at an industry conference just over a year ago that the price for Internet access was too high already.

Kim agreed, saying that the rate increase makes little sense when the market has only just begun to grow in earnest. The business began to show true signs of mass interest around the holiday season, when stores started seeing quick turnover for the limited number of set-top boxes made available. According to WebTV's Web site, it has more than 300,000 subscribers.

The rate increase "defies the trend of most consumer platforms," Kim argued. "They're subsidizing the cost of the box to get it into homes, but then they jack up the fee?"