Rants & Essays

Internet Access: How Long Can Flat Rates Last?

By Cary Lu

Get ready to pay more for your Internet connections—or to get less for your money. The chronic busy signals America Online users encountered in January led to a multimillion-dollar settlement out of court.

Despite the settlement, however, problems continue to vex online business users. Janet L. Spiegel of Spiegel Media Entertainment Communications says she was frustrated by the constant busy signals and wondered if she was receiving all her important e -mail. In addition, she said she could not change service providers because she'd given her e -mail address to so many people.

UNIVERSAL HASSLE

AOL’s difficulty is merely an extreme example of a growing trend: Providers can't keep up with demand, and service outages are all too common. Millions of users expect to be able to log on at any time for as long as they want and pay just $20 a month. That expectation may soon be deflated by a market and technology developments that place cheap Internet access at risk. Many Internet service providers and online services say they can make a profit from the $20 -per-month charge only when users connect for fewer than 8 hours each month. Larger ISPs can sustain longer connect times profitably because they control more of their data network costs. But under current conditions, no ISP can survive the heavy usage that has become typical of flat -rate payers—up to an hour a day or more per user.

Some of the largest ISPs admit they are stuck at the $20-per-month price for competitive reasons. No one wants to be the first to break away. Among the biggest online services, only CompuServe has resisted the flat -rate siren song (see "Alternatives to the Flat Rate"). But $20 per month leaves little money for investing in more and better connections, or for maintaining tech support. Some ISPs such as Netcom plan to direct more attention to the premium business market, although they have not yet given up on the $20-per-month fee for existing subscribers.

For competitive reasons, Netcom and other providers will not disclose specific plans. But Alan Taetle, vice president of sales and product management for Atlanta-based MindSpring, one of the largest ISPs, predicts, "You may see a change in the term unlimited." He expects that many ISPs will shortly add a surcharge affecting the heaviest ussers. Initially the surcharge might kick in after 200 hours a month, a burden only for extreme Internet junkies.

If users were shifted away from peak-time usage in the early evening, the current traffic jams could be prevented—phone lines already in place have enough capacity to handle the load. ISPs could accomplish this shift by charging users according to the time of day they connected.

Higher rates for peak-period access seem likely to proliferate before the end of 1997. The University of Michigan, which operates a noncommercial Internet service provider, now charges 44 cents an hour for prime time (from 5 to 11 p.m.) but only 11 cents an hour in the early morning.

STOPGAP SOLUTIONS

Some flat-rate providers have already attempted to raise revenues with premium services. MindSpring now charges $19.95 for regular Net access; for $7 more, you can get the Clarinet news service, two additional e -mail addresses, and your own home page. MindSpring's Taetle believes this cable TV-like model, which bundles extra-cost services, will replace flat-rate pricing for many users.

The immediate problem of too many busy signals is a call for online services such as AOL to install more modems and phone lines. ISPs and online services typically can accommodate about 5 percent of their customers at any one time; AOL has been able to handle only 3 percent, but it plans to increase its capacity to 5 percent by summer. And more providers will inevitably need to set prices that discourage users from connecting for long periods and charge higher rates for unrestricted service. Seattle -based Northwest Nexus, for example, charges $30 per month for unrestricted service; but for $22.50 you can get service that permits you to be online for 2 hours at a stretch but then requires you to log off for 2 hours.

Ultimately, the Baby Bells and long-distance companies that own the telecommunications infrastructure must increase capacity. Internet traffic reduces the calling capacity of the phone system, which is able to support only about 10 percent of all telephones at any given time.

WHO SHOULD PAY?

Clearly, computer users accustomed to low, flat -rate Internet access don't want to foot the bill. But phone companies say the regulated telephone tariffs were set up for voice calls rather than data. The average voice call lasts about 4 minutes, and in California the average phone customer talks only 17 minutes a day, according to Pacific Bell. But the average Internet user logs on for 45 minutes a day.

Telephone companies want the ISPs to reimburse them for the increase in the phone system's load—just as the long -distance companies reimburse local telephone companies for the long -distance calls that go through the local phone system. In 1983, the Federal Communications Commission exempted data services from such reimbursements to encourage what was then a new industry. The phone companies say this exemption is now an obsolete subsidy, paid by their shareholders and phone customers for the benefit of Net users.

Critics reject such arguments as disingenuous. Fred Goldstein, a telecommunications consultant at BBN, a company instrumental in the development of the Internet, points out that in the early 1990s, phone companies bet on slow annual growth—laying off thousands of workers and trimming phone -switching capacity. And several Baby Bells convinced state regulators to change from their traditional phone pricing, which was based on costs plus a fixed percentage profit, to a new capped -rate price that let the phone company keep the savings from improved efficiency. These changes constricted phone company capacity just as the Internet boom began.

Meanwhile ISPs pay a flat rate for the phone lines used to provide Internet access. This makes possible the $20 per -month Internet connection offered by independent ISPs—and also by the online service divisions of the same phone companies that complain about Internet pricing.

There's always the chance that generating revenue by selling advertisements will ease the pressure to raise Internet connection rates. Bigger.net, a new California-based ISP, offers unlimited lifetime Internet service for a one-time $60 setup charge plus $10 a year for e-mail. (These rates are initially available only in the San Francisco Bay Area.) Bigger.net will need to recoup $320 a year per subscriber in advertising revenue to pay for the service, which keeps an advertisement on screen at all times. "It's going to be very difficult for them to generate enough…advertising to, cover the cost of keeping their networks up and running." says J. William Gurley, an analyst for the Deutsche Morgan Grenfell Technology Group.

In the long run, low access rates depend on the Internet moving from voice lines to true data lines that support packet -switching technology. Voice lines and ISDN lines in use today are inefficient and costly for carrying data.

NETWORK SOLUTION

Packet-switched data networks are far more efficient. Cable modems and Digital Subscriber Lines technology (DSL or xDSL) that runs over phone lines both use packet switching and could ultimately reduce the cost of data connections. They operate independently of the voice phone system and allow continuous 24 -hour connection without tying up telephone circuits.

But a packet-switched data network that's both accessible and affordable to most consumers and businesses will require a major initial investment—essentially the creation of a second telecommunications network running in parallel to the voice phone system. That prospect is a number of years away, and it may never be universally available. But until providers create a packet network, most of us will face connection logjams and higher Internet access fees.