AOL pricing sends ISPs running

Andreas Glocker's first reaction to America Online's just-announced unlimited pricing deal was plain surprise. His second was pure competitive instinct: He immediately lowered prices for his 8,000-member Internet service.

"I didn't expect that they would roll out a price at $19.95," said Glocker, president and CEO of Sirius Connections. "We lowered our price to $18.95 from $20."

He also sweetened the deal with other goodies, such as 5MB of disk space on the company's servers. The new pricing is effective as of tomorrow.

ISPs, already being squeezed by telephone companies and unlimited pricing deals offered by the Microsoft Network and Prodigy, are now finding themselves backed in an even tighter corner by AOL's all-you-can-eat pricing announced yesterday.

Flat-rate pricing eliminates the independent ISP's last and strongest competitive edge: pricing. Until yesterday, they had been able to tell prospective customers that, no matter how easy AOL was to install and no matter how much content it provided, it couldn't compete when it came to pricing.

But with AOL's new all-you-can-eat plan, the ISPs must come up with something different to survive. "People are now looking at AOL as an ISP, no longer as an online service provider," Glocker said.

With MSN and Prodigy moving directly onto the Web and all the online services jumping headfirst into the price war, analysts say ISPs should seriously consider changing strategies. Along with price cutting, many ISPs are considering other steps they can take to attract new customers, or even just to keep the ones they have.

Many ISPs are lowering prices, focusing on local service, specializing in niche markets, or turning to the business market where customers are willing to pay more for better and more specialized services.

For instance, PSINet earlier this month joined the scramble of Net access companies adding back-end electronic commerce services to their Web hosting services. AT&T unveiled similar services for would-be Web merchants.

PSINet is actually trying to get rid of its residential customers, agreeing this summer to sell off any new consumer sales leads to Southern California ISP Earthlink and focusing instead on setting up ISDN connections for Tandy retail stories and Holiday Inn hotels.