Netcom to Set Time Limits on Internet Use

Charting a new direction for money-losing Internet service providers, San Jose-based Netcom On-Line Communications Services announced Monday that it will put restrictions on its heavy users and offer better service for customers who are willing to pay more.

“There is a significant segment of our customers who say, ‘I want to get on when I want to get on,’ ” said David Garrison, chief executive at Netcom, which, with 580,000 customers, is one of the nation’s largest service providers.

The company, which broke ground three years ago when it introduced flat-rate Internet service for $19.95 a month, will now offer premium plans for new customers costing $25 a month, or $30 a month for those who want access to online research libraries. Both plans include a guarantee that Netcom’s service will be available to customers 95% of the time.

Netcom says it will limit the number of premium customers so it can deliver on the guarantee. If it fails to deliver for two consecutive months, customers will get the second month free. In the future, the company will make arrangements with alternative network providers to assure that it can fulfill its promised connection rate.

America Online angered customers early this year when network congestion resulted in connection rates that the Gartner Group estimates were as low as 25%.

Although Netcom will continue to offer existing customers the basic $19.95 service, the company plans to implement a “fair use” initiative in which heavy users of the network could get cut off during peak usage periods.

“Health clubs offer unlimited usage, but you can’t use the Stairmaster machine for three hours if there is somebody else waiting to use it,” Garrison said.

Netcom says 3% of its customers currently tie up 30% of its network capacity. Restricting those users, Garrison said, will leave far more capacity for the other 97%. Focusing on heavy Internet users could also reduce support costs, which cost Netcom $15 a call, Garrison said.

Netcom’s new plan brought mixed reviews from competitors and analysts.

Gartner Group analyst Eric Paulak said Netcom’s approach could anger customers without solving the problem of network congestion.

“I absolutely challenge them to deliver a 95% connect rate,” Paulak said. He pointed out that there are so many elements beyond Netcom’s control, including local phone service problems, that any effort by the company to meet its promises could result in finger pointing and a public relations nightmare.

And Netcom’s proposal to downgrade heavy network users could be hard, technically, to carry out.

“It isn’t clear how they could do that,” Paulak said. “It could be an empty threat.”

Some competitors insist they can offer the same high-quality service at a $19.95 rate.

Sky Dayton, chairman of Earthlink Network, argues that his company can continue to provide quality unlimited service at existing prices, although it may choose to add premium services.

Dayton contends that Netcom was forced to change its strategy because it owns its own network and has to spend heavily on new equipment to handle peak traffic. Companies like Earthlink, by contrast, lease their networks and can more easily adjust capacity as demand rises and falls.

Others argue that service providers should turn to new revenue sources, especially advertising, rather than risk alienating their customers with higher access prices.

“I think Netcom is going in the wrong direction,” said John Robb, analyst at Forrester Research in Cambridge, Mass. “Some are even predicting service fees could fall to $9.95.”

Already some companies are offering very-low-cost access in exchange for customers’ accepting advertising on the service.

Still, Netcom’s move could signal an end to the cutthroat pricing that has plagued the industry. AT&T; recently terminated its promotional pricing offer, and some believe the company could eventually follow Netcom with higher prices.

Netcom’s move could also offer an opening for smaller service providers to offer a range of higher-priced services.

Currently, most regional service providers offer a choice between a $20 monthly flat rate for individuals and a $150 rate for a dedicated line that small businesses can use full time.

“Service providers are struggling with the in-between people,” says Jonathan Plotkin, an Ithaca, N.Y.-based consultant who advises regional Internet service providers. “Netcom is developing a model that is a lot more rational.”

Netcom’s effort to crack down on heavy Internet users could also find a strong following among service providers, some of whom have already begun to redefine the term “unlimited usage” to mean something closer to “reasonable usage.”

Many regional providers now use peer pressure to keep usage times down. Earthlink, for example, has an “acceptable use” policy that asks customers to disconnect when they are not actually at their computers.

Netcom says the new pricing plan was designed based on a survey of 20,000 customers. It concluded that a majority used the Net for business needs and that they put much value on getting connected when they needed to.

Garrison sees the Internet market becoming increasingly divided between “hobbyists,” who aren’t that concerned about problems getting online, and business users, for whom the Internet link is critical.

“The hobbyist says if I can’t get online I’ll watch ‘Seinfeld,’ ” Garrison said. “Hobbyists won’t be well served by our products going forward.”