Is Outlook for Internet Access Revenues Dimming?

By: Steve Outing

Yesterday I reported on a move by The Salt Lake Tribune in Utah to drastically cut the price of consumer Internet access. The paper partnered with a local Internet service provider (ISP) and is offering accounts for a bargain-basement rate of $5.95 per month for 30 hours of usage (limited to print newspaper subscribers). Is this just a blip on the radar screen, or a signal that Internet access prices are on the way down in the U.S. -- and with them the profits some publishers have been counting on?

The ISP business is a competitive one -- and about to get more so -- and you can be sure that ISP operators around the U.S. are watching the Salt Lake experiment. Pricing for Internet access today is, on average, significantly higher than $6 a month. For an account that offers a large number of hours of unlimited access, the going rate in the U.S. ranges between $15 and $25. Many providers offer lower-priced packages with a small number of hours for around $10, with an hourly charge beyond the time limit.

I asked Dave Richards, president of the Norfolk, Virginia-based ISP InfiNet, how he sees the Internet access business shaping up over the next few years, and what the trends indicate for newspapers hoping to tap access as a revenue source. (InfiNet is owned 50/50 by Knight-Ridder Inc. and Landmark Communications. Its primary business is setting up newspapers -- including most of those owned by KRI and Landmark -- as ISPs and sharing access revenues with the publishers.)

InfiNet will watch the Salt Lake experiment closely, as it does with other Internet pricing schemes being tried -- including those who are giving Internet access away free -- but will not jump to lower prices, Richards says. InfiNet's rates for a consumer account are $9.95 for 10 hours or $24.95 for 100 hours, with additional hours at $2. Its access accounts are co-branded with the name of the affiliate newspaper in a particular market.

Richards sees the Salt Lake strategy less as a threat than an opportunity to watch an experiment in action. (InfiNet does not do business in the Utah market; nor does it have any competitors in the markets it operates in that have tried a low-ball pricing scheme.) "We hope that some winning models will emerge" from the marketing strategies being tried now by other ISPs, he says. If the Salt Lake strategy is successful, Richards says he might be willing to try it. "We're not too proud to copy a good idea" if it works.

The Salt Lake strategy will be challenging, in Richards' view, because the low profit margin at that price point will make it difficult to scale up the service gracefully as more users come on board. Supporting a user base in the low thousands is manageable, but once an ISP gets past several thousand users, "the problems expand exponentially," he says. "That doesn't mean (the Salt Lake strategy) is not going to work," only that it will be extremely challenging. And The Salt Lake Tribune is heavily dependent on its ISP partner to provide quality service, since the newspaper's name and reputation is on the line.

Richards sees the ISP market "segmenting" into different classes of service. The model represented by Salt Lake represents the low end, with minimal services to customers and potentially spotty service and technical support. This will attract customers for whom price is the primary factor, and who do not require dial-in access outside of their geographic area (such as is offered by a national provider like Netcom). Such services are likely to be sponsored by publishers and others wishing to grow potential audiences for their content, but who care less about access as a revenue source.

InfiNet, and its partner newspapers, for now prefer to stay in the middle ground of ISP pricing -- representing a smaller number of subscribers for whom InfiNet can provide quality service. Its model is suited for publishers who want to pull in access revenues and are willing to settle for smaller subscriber numbers because of the higher price point. For some of InfiNet's affiliate newspapers, access income makes up the biggest chunk of the revenue pie today.

The high end of the ISP market will come into play beginning in 1996, when the likes of AT&T, MCI, the regional telcos, cable television companies, @Home and others enter the consumer Internet access business. Such services are likely to be higher priced, because institutions like the telephone companies cannot afford to match the low rates of traditional ISPs. "We charge 25 cents per hour," Richards points out. "They (the telcos) won't do it (sell access accounts) for that price," leaving room for the InfiNets of the world.

Similarly high-end will be @Home, the cable industry joint venture that beginning next year will bring Internet access into U.S. homes over existing cable television wires at 10 megabits per second. (That's about 100 times faster than accessing the Internet over a 14,400-baud modem.) @Home has not announced its pricing, but a figure of $30 per month has been mentioned by company representatives as being appropriate.

This segmenting of the market will mean that opportunities continue to exist for newspapers wishing to tap the Internet access market, even with the arrival of major players like the telcos into the access business, Richards says. He thinks the access business is a relatively safe bet for the next year; it will be much more competitive in about 3 years. Five years out, "InfiNet will still be playing around with access with newspapers," he says. Ten years from now, he's not bullish that there will be a place for smaller access providers.

Best advice for newspaper publishers is to go into the access business with your eyes wide open and a recognition that this represents a short-term opportunity. All the signs point to downward price pressures for consumer access accounts and increasing competition. Publishers are well advised to be developing content strategies that will pay off when access revenues begin to dry up.

Salt Lake-like budget-priced experiments, where Internet access is used as a draw to bring in more online viewers and is not being used as a revenue source, are so new that it is difficult to draw conclusions. Since no online newspaper service has yet hit it big with advertising, it is a gamble to turn away the access business so soon in hopes of funding a service with ads and premium services. The Salt Lake Tribune's pricing move is significant, in that it will force access prices down locally, and could even have an impact nationally.

If there's a lesson here, it's don't rely on access revenues as a solid, recurring revenue source. Enjoy the cash flow for the short term if there exists an opportunity in your market, and concentrate on advertising, premium content and other revenue-producing strategies. That's the same advice I would have given prior to the announcement of The Salt Lake Tribune's $5.95 Internet access strategy.

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