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Netcom setting ISP pricing trend

ISPs are breaking free from $19.95 pricing as Netcom introduces new business offerings and AOL hints at higher fees for "premium" services.

As Internet service providers large and small are complaining about the paucity of profit and poor service available to customers paying $19.95 a month for unlimited Internet access, Netcom (NETC) today is introducing new offerings for small and medium-sized businesses that breaks the price barrier it established for the industry three years ago.

Netcom's long-awaited suite of products range from Net access at $24.95 a month to complete Web hosting services for $2,000 a month.

In addition, America Online (AOL), the world's largest ISP, reiterated today that at some eventual point it too will have tiered pricing for "premium" services, including multiplayer games.

Speaking at the PC Forum conference in Tucson, Arizona, AOL's chairman and CEO Steve Case said that the service's new $19.95-a-month pricing plan is currently the right model, but the company is looking at higher charges for other service features. "We do intend over time to offer premium services, like multiplayer games," he said.

Just as Netcom set a new standard with its $19.95 pricing structure, the move toward tiered pricing could well set another precedent, one which ISPs trying to make money are almost sure to follow. Other large ISPs such as Sprint Communications and AT&T have hinted at offering the same kind of tiered pricing as well.

Netcom in December announced it was dumping the $19.95 unlimited pricing plan for Internet access that it had pioneered, saying it couldn't make money at that price.

Now it is abandoning the casual user or "hobbyist" to lure the potentially lucrative small and medium-sized business market with an array of products that adhere to the old adage, "You get what you pay for."

"We realized that customers across the industry are getting frustrated because they couldn't get reliable access," Netcom CEO David Garrison said in an interview today.

Netcom used a survey completed by 20,000 of its customers, along with focus groups, to derive the new strategy, Garrison said. Customers were saying, "I'm mad as hell. Why can't I have a product designed around my needs instead of what the industry wants to push down my throat?" Garrison said.

So Netcom took it upon itself to develop its new offerings around customer needs. And it is betting the business that people will be willing to pay more for better access, better customer service, and tailored offerings. "This isn't about a price point. This is about redefining an approach to the business," Garrison said.

Under $19.95 pricing scheme (which Netcom is allowing its old customers to keep), everyone paid the same amount regardless of how much they used the product. The new structure allows companies and individuals to pay based on how much they use the Net, how much help they want from Netcom, and how reliable they want their service to be.

The lowest price being offered by Netcom falls at $24.95. Services offered under this price do not differ dramatically from other ISPs offering service at $19.95. But this plan does include an innovative "fair use" policy that at the lower levels gives higher priority during peak hours to users who aren't constantly logged on.

ISPs recently have been struggling with how to handle hard-core users. Netcom plans to steer those who want to stay logged on all the time to more expensive pricing plans.

For instance, for $5 more a month, Netcom will offer a service with more support and better access to online research. Those who want guaranteed access will have to pay even more.

Netcom's new services range from straight access to Web hosting. Features include automatic rerouting of traffic to other lines if one fails, secure connections, and internally managed Web sites.

Access issues were thrust to the forefront of Internet consciousness in December when America Online started offering unlimited access for $19.95. All of a sudden, the system became overburdened and users who relied on AOL weren't able to get online.

Ironically, this happened just as ISPs were kvetching that unlimited access at $19.95 just wouldn't pay the bills. Large companies such as AOL and Microsoft Network decided to supplement access fees with the promise of advertising and commerce.

But other Internet leaders such as Netcom and CompuServe (CSRV) took a different route, announcing that they would no longer go after the casual Netizen but cater to the business user who was willing to pay more for better service. (CompuServe has not yet announced details of its plans.)

Other ISPs will be watching Netcom closely. But Netcom's success or failure also will be contingent upon other ISPs developing reliable access at lower prices, said Adam Schoenfeld at Jupiter Communications.

If the larger services can offer excellent access at lower prices, then Netcom's strategy could fall through, he said. But industry leader AOL is a long way from being able to offer the access guarantees that Netcom is promising.

"It's all an interesting test case and Netcom has to be watched really closely to see if there really is a business model in higher pricing," Schoenfeld added.

Reuters contributed to this report.