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ISPs find niche with Net-savvy users

As they fight for their lives, Internet service providers target veteran users as their primary customers.

Last month, the Internet received something akin to the Good Housekeeping seal of approval with the launch of low-cost, consumer-oriented Net access services from two U.S. powerhouses: AT&T and MCI Telecommunications.

But as the Internet goes mainstream with long distance and regional telephone companies jumping into the game, pioneering Internet service providers (ISPs) such as NetCom, PSINet, and UUNet Technologies are gearing up for an increasingly competitive market by targeting technically savvy users, rather than novices.

PSINet, for one, is preparing to revamp its Internet offerings in the third quarter with a next-generation Internet access service aimed at more advanced users that will provide such features as guaranteed bandwidth, point-to-point protocol service, and a guarantee of no busy signals. The company will provide more details on the service in the second quarter, but PSINet did say that it will cost "substantially but not unreasonably" more than its current $19.95 unlimited monthly fee.

Some analysts, however, remain skeptical about the long-term future of the ISPs. "Immediately, there won't be an incredible impact," said Margie Wylie, editor of the industry newsletter Digital Media. "But in the long run, I think AT&T will probably drive those sorts of services like Netcom out of business."

With their size, brand recognition, and massive databases of customers, AT&T, MCI, and Regional Bell Operating Companies (RBOCs) like Pacific Bell and Bell Atlantic will be able to consistently undercut smaller service providers on price, according to some experts.

ISPs, for their part, maintain that a Pandora's box of troubles await telcos, which will face huge challenges extending their expertise in voice communications into the rough-and-tumble world of Internet access. "Providing Internet access and long distance dial tone are two totally different things," said Doug McClean, senior director of product marketing at Netcom. "We still believe this is a level playing field."

Many ISPs, though, seem increasingly willing to cede to AT&T and others some territory, namely the novice Net user. Observers say AT&T's WorldNet and MCI's Internet 2000 access services are primarily aimed at luring first-time Net users through five free hours of access per month, promotional offers that could easily flood the telcos with support-hungry customers.

Netcom, PSINet, and SpryNet have so far avoided the free monthly promotional offers, although pricing for unlimited Internet access has become virtually standardized among telcos and ISPs at $19.95 per month.

"AT&T and MCI seem really focused on getting people who've never signed up for Net access before," Netcom's McClean said. "These customers churn [change service providers] an immense amount. They create the bulk of support expenses."

One major ISP, UUNet, abandoned the dial-up access market altogether in favor of dedicated Internet access aimed at corporations because it wanted to avoid competing against AT&T and others for consumers, a market the telco knows intimately.

"We will not compete in the consumer marketplace," said Paula Jagemann, director of investor relations for UUNet. "We left that two years ago knowing that the barrier to entry [for dial-up service] is very low and that the telcos, with a little switching, could get into it."

UUNet says it has actually profited from telco Internet access services because it resells its Internet infrastructure--including industrial-strength routers, switches, hardware, software, and management expertise--to AT&T, MCI, US West, and Southwestern Bell. "For consumer offerings, [the telcos] don't have the infrastructure themselves. We wholesale our infrastructure to them," Jagemann.

Meanwhile, PSINet and Netcom are betting the farm on capturing more sophisticated Net users--a more profitable, technically adept group.

"I don't regret moving away from the newbie," said Bill Schraeder, founder and CEO of PSINet. "It was fun while it lasted. We want to get away from training people how to use a computer." Schraeder, however, added that PSINet will continue to offer its Pipeline Internet access service at $19.95 a month.

Some experts predict that telcos will be seriously hampered, rather than helped, in the Internet by their core business--phone service--and that ISPs will become likely acquisition targets.

"[The telcos] don't get this wide-open marketplace," said J. Neil Weintraut, head of Internet research at Hambrecht & Quist. "That's their ball and chain: their regulatory background and lack of marketing expertise. Their core business will continue to influence their movements in the Internet."

"If they really want to bear down and get into the [Internet] market and get frustrated, they'll throw their arms up in the air and look for acquisitions," said UUNet's Jagemann.

Most ISPs, however, seem to agree that the telcos have helped raise the profile of the Internet. After AT&T made its free offer for WorldNet service, several even reported sharp increases in sign-ups for their service.

As AT&T spokesman Mike Miller put it, his company's entry into the Internet access market "will increase the tide that raises all boats."