Rants & Essays
Internet Access: How Long Can Flat Rates Last?
By Cary Lu
Get ready to pay more for your Internet connectionsor
to get less for your money. The chronic busy signals America Online users
encountered in January led to a multimillion-dollar settlement out of
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.
AOLs 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 payersup 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
If users were shifted away from peak-time usage in the early
evening, the current traffic jams could be preventedphone 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
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 loadjust 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
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 growthlaying 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 ISPsand 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
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.
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
investmentessentially 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.