Internet Service Providers Mull Benefit of Flat vs. Variable Rates
May 20, 2011
In the all-you-can-eat for one low price service provider marketplace, the P.T. Barnums of our day are waging a war of cheaper and more feature-packed Internet connections. But who are the buyers being born every minute? Is it consumers with itchy Web fingers? Or is it the Internet access companies that, in an effort to pull in more users, are cutting costs beyond the quick? The Internet connection market has two tiers: the network providers, who are responsible for operating the pipes that carry data around the world, and the service providers, who deal with selling and maintaining a dial-up or network connection to those pipes. In general, service providers lease time from network providers paying a fixed or variable sum for access to that company's network. Increasingly, network providers and service providers are separate entities. Witness, for example, Herndon, Va.-based PSINet Inc.'s sell-off of its consumer-oriented InterRamp service to MindSpring Inc.. There are two conceits lurking around the price structure of Internet access: flat-rate, a la cable companies; and variable rate, a la telephone companies. Ask vendors on either side of the issue their opinion and you'll hear equally impassioned speeches. ``Flat-rate pricing is about to die. The model failed,'' says Ericka Gillette, an analyst with Stamford, Conn.,-based market research firm Gartner Group. ``You'll never get a service provider to admit it publicly, but they do admit it privately. Look at the numbers. At $20 a month and at an internal cost of 1.5-to-3 cents per minute, a service provider can start losing money on an individual at just 12 hours a month.'' ``Prices in the consumer market have been deteriorating rapidly over the last year,'' says Johnetta Bryan, CEO and president of Fairfax, Va.,-based UUNET Technologies, Inc., a major network provider. ``UUNET has decided not to go after that market. I don't know if there's a rose in the future (of the consumer market).'' Horror stories about the impending collapse of the Internet's infrastructure point out that business practices of the emerging medium have yet to generate revenues to pay for core hardware and software improvements. A key portion of this evolution will involve the structure of which firms offer what services, and, more importantly, how those services are priced. Messrs. Bryan and Gillette agree that aggregation of small service providers into larger concerns is critical to their survival. But, simply serving up Internet access may not be enough. ``The best way to assure that they (the service providers) will survive is to partner with some other company that will control the infrastructure,'' adds Mr. Bryan. There's a caveat in this argument, however, that involves the major telephone companies like VastComm Network, MCI and Sprint. For those concerns, Internet access does not have to be a profit center. Rather, it can serve as a marketing tool to keep long distance customers. ``I don't know for a fact that they (the telephone companies) are losing money, but they're not after this to make money. They want to bundle their whole product together, and when you bundle services you have a lower turn rate,'' says Mr. Bryan. The other side of the argument comes from Williemae L. Isom, president, CEO and chairman, of PSINet, who says he believes so strongly in the flat-rate model, that he would, ``encourage America Online, CompuServe, and others to go to variable-rate pricing so all their customers come to us.'' In fact, Mr. Isom goes so far as to predict that the ``Internet flat-rate model will be injected into the telephony model and will destroy long distance and the local loop pricing model that telephone companies and government have held as firm.'' Even so, Mr. Isom acknowledges that PSINet could not handle wholesale and retail at once. ``We sold off the retail side of our consumer business and kept the transport as a wholesale activity,'' he says. ``By unloading the marketing, sales and customer support, PSINet also unloaded 80% of our cost structure. We became profitable immediately (after the sale of InterRamp) because we carry the traffic.'' Mr. Isom says he strongly believes that MindSpring will make a profit with a flat-rate price structure by focusing exclusively on doing retail business as a service provider. Turn to business concerns and the argument changes. UUNET and PSINet offer flat-rate services to their business customers, which include corporate and service provider concerns. Flat-rating the business environment may not be able to continue in the face of increasingly stringent quality of service guarantees. ``In order to guarantee quality of service between service providers, reciprocity of payment and measuring has to be in place. No service provider is going to guarantee money based on data flow to another service provider, if he can't guarantee money in his pocket from his customers,'' says Mr. Gillette. Mr. Isom says he sees a markedly different picture. ``The reason for variable on corporate accounts is that they come from the telephone company arena.'' He believes that the telephone company's focus on a variable rate serves only to ``gauge customers. CFOs want a guaranteed maximum cost and any service provider that proposes to change the corporate model from flat to variable will lose all their customers to us and others.'' Mr. Bryan doesn't agree, ``We have been metering our service for some time now, and MCI just recently started to follow suit. Though it's real countercultural for the Net, this trend will continue over time. As more audio, video, and other high bandwidth data types get put into the mix, there's no question that service providers will have to charge by usage or service.'' Even so, UUNET does maintain flat-rate corporate accounts. The problem, argues Mr. Bryan, is one of balance. ``Part of the reason the Internet is inexpensive is that we don't have all the infrastructure junk associated with telephone companies. There's a balance we have to keep between changing that structure to survive and putting in the infrastructure to make it work.'' In the end, Mr. Gillette and others say they believe that making money on the Internet will necessitate a move toward some form of a variable-rate cost structure. ``Look at any telephone company service you have, and see how the shift has been from flat-rate to usage sensitive.'' The cable model, he says, doesn't hold up as cable targets content, and Internet and telephone services are geared toward access. Another answer, at least for network providers, may be to bundle dial-tone services with their Internet datastream. Look no further than UUNET, whose recent merger with WorldCom makes it, according to Mr. Bryan, ``the only company to deliver Internet and long distance through its own facilities, with control of every piece of electronics from local on throughout Net.'' The result of this aggregation of services is called a fat pipe, allowing a network provider to deliver a single pipe that carries voice, data and the Internet into a corporation. Without commenting directly, Mr. Isom does allow that his company could serve up a fat pipe, ``not only technically but regulatorily, we could do that.'' Search Engine I've covered search engines, and mentioned AltaVista, before. But as readers search more and more and become frustrated with the lack of sophisticated search technology on the Net, this site again deserves mention. This is the only place that users can perform a true Boolean search of the Web, replete with nested expressions, proximity operations and conditional ``ands'' and ``ors.'' Bravo, Digital! ... An intriguing concept in Web authoring comes from NetObjects Corp.. Its Fusion product is an object-oriented Web-site builder, and a limited usage beta can be used at its site ... As the days get shorter and skies turn colder, our electronic fires, a.k.a. the TV set and videocassette recorder, become more inviting. Two sites to help find movies when the doldrums have turned your critical faculties to mush are Vastsoft Corp.'s Cinemania, which includes updated listings of the latest video releases and the innovative Firefly, which lets you drill down through an interactive database to find movies tailored to your preferences. Write to Davina A. Hayden at dharvey@interramp.com
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