AT&T cuts prices; EarthLink bets on quality service and broadband

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The momentum of free ISPs, broadband service and America Online is shaking up the fragmented ISP market--and changing the game for some major services as they jockey for users and advertisers.

EarthLink, the distant No. 2 paid service behind AOL, vows to stick with paid services. AT&T Corp., with its user base slumping, has slashed its price to $4.95 a month for one service. Some analysts expect Microsoft Corp.'s MSN, the No. 3 standalone paid ISP, to introduce a free service, which could upend the market.

Paid ISPs, including MSN, Prodigy Communications and AOL's value brand CompuServe, have offered hefty rebates during the past year to attract subscribers. Rampant discounting has pressured services that rely on subscription revenue rather than advertising.

LESS THAN 10% FROM ADS

Since EarthLink and most other ISPs make less than 10% of overall revenue from advertising and Web hosting, said Steven Harris, a senior research analyst at International Data Corp., they rely on subscriptions, which he said is a weakness. In comparison, AOL got 31.6% of last quarter's revenue from advertising and commerce.

"ISPs are still very reliant on that 20 bucks a month" subscription fee, Mr. Harris said. "It costs them an average of $200 per customer acquisition and, with a 5% (monthly) average churn across all of them, you've pretty much turned over about 60% of your subscriber base in one year."

Another threat to paid ISPs is what Mr. Harris called "virtual ISPs," such as the Republican and Democratic parties, the AFL-CIO, Greenpeace and Delta Air Lines, all of which offer private-label Internet access to members and employees.

Paid ISPs are fighting back. AT&T WorldNet--which saw its customer base plummet 32% over three months earlier this year, according to researcher Telecommunications Reports International--recently introduced a $4.95-a-month, ad-supported offering.

"We wanted to give our customers a choice that doesn't require them to go down to a free service," said Ed Chatlos, VP-general manager, AT&T WorldNet. [It's] a quality offer at a low price."

MIGHT AS WELL BE FREE

Mr. Harris wasn't so optimistic. "We've definitely seen two main pricing structures that seem to actually function: Twenty bucks a month and free. . . . Instead of paying five bucks, you might as well get it for free if it's going to be ad-supported."

EarthLink, which merged in February with rival MindSpring Enterprises, touted its recent purchase of local ISP consolidator OneMain, which enhanced its user base; broadband offerings; and projected $40 million in 2000 revenue from content, commerce and advertising. It plans a new ad campaign from TBWA/Chiat/Day, Playa del Rey, Calif., in the fourth quarter, part of a $50 million to $60 million ad push. EarthLink claims 3.7 million subscribers now and expects 5 million by yearend. In addition, it has 100,000 broadband subscribers and expects 150,000 by yearend.

"Our aim is to be the best ISP possible and to connect people to the Internet in the easiest, most efficient manner and to offer the highest customer service and technical support to them," said Claudia Caplan, VP-brand marketing.

EarthLink--minority owned by Sprint--plans no free dial-up "because the service is too valuable," Ms. Caplan said. "Moving to free never made any sense to us."

"EarthLink's biggest priority now is rolling out broadband services as quickly as possible," said Emily Meehan, senior analyst at the Yankee Group. "Its customer base is significantly more mature and Net savvy than AOL's . . . [and its] subscribers are more ready to upgrade to broadband."

VALUE OF BUNDLING QUESTIONED

Gaining customers will be a challenge for paid ISPs. Current acquisition moves include bundling service with PC makers. But again, some experts questioned such offers' value as free options proliferate.

To win customers, EarthLink, which claims 35% of new users come from AOL, gives free digital cameras to new subscribers. Such offers are necessary in the "highly competitive environment," Ms. Caplan said.

Regional and local ISPs continue to attract advertisers and subscribers. SourceGate, launching this fall, aims to help local players augment subscription revenue with ad bars that would remain on the screen as users navigate the Web.

Ultimately, paid ISPs will have to offer dial-up service for free and broadband service for a fee if they want to maintain or gain market share, said Allen Weiner, NetRatings' VP-analytical services.

For example, he said he expects MSN soon will offer dial-up service for free while charging for wireless and broadband Internet services.

"Microsoft is not the kind of company to be No. 2 or 3 in any market," Mr. Weiner said. Although "they are never going to overtake AOL in the U.S.," offering free dial-up access "would elevate interest in all the content and services they want to deliver."

In addition to challenging other free ISPs, "MSN free service would create a seismic shift because then other companies offering paid service are going to have to evaluate their value in the market," Mr. Weiner said.

Asked about a free MSN offering, Bob Visse, MSN lead product manager, said: "Our goal for MSN is to offer a fast, reliable quality service and to make it easy and affordable for people to get online. . . . We've explored a variety of business models, but there are no plans to make MSN Internet Access free at this point." At this point.

Contributing: Tobi Elkin

Copyright August 2000, Crain Communications Inc.

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