AOL Raising Rate for Internet Access
The cost of connecting to the Internet will jump 9% in July for millions of America Online subscribers. The nation’s No. 1 Internet provider announced plans Tuesday to hike its monthly rate from $21.95 to $23.90 for unlimited use.
The widely expected rate hike, AOL’s first in three years, is the latest example of rising prices for Internet users. High-speed Internet providers such as EarthLink and SBC Communications recently raised their monthly rates from about $40 to $50. Even NetZero, one of the last remaining free Internet service providers, is pushing a new $9.95-a-month plan.
The trend reflects a growing sentiment among Internet service providers that consumers are willing to pay more to get online, perhaps even as much as the $40 to $50 a month many now pay for cell phones or cable service.
“I don’t think we’ve seen the end of it,” said Paul Noglows, Internet analyst at Chase H&Q; in San Francisco. “There’s still some additional price flexibility.”
He doubted, however, that AOL--which has about 29 million subscribers--would lose much business because of the hike. “An increase of $1.95 a month isn’t going to make or break someone,” he said, noting that AOL suffered no noticeable loss in customers after a similar price increase in 1998.
Nevertheless, rivals wasted no time Tuesday trying to capitalize on AOL’s move. Microsoft Corp., the No. 2 Internet service provider, vowed to stick with its $21.95-a-month price for MSN users.
“We think this is a great opportunity,” said Bob Visse, group product manager at MSN, which has about 5 million users. “AOL members who are considering their alternatives can rest assured that if they move over to MSN they will not have a price increase.”
A spokeswoman for EarthLink, the No. 3 ISP, said the company was “evaluating our options.” EarthLink’s 4.8 million users pay $19.95 a month.
Executives at AOL, a unit of New York-based AOL Time Warner Inc., said they planned to use proceeds from the price increase to improve service, including the release later this year of AOL 7.0, a software upgrade, and the continued roll-out of AOL on portable devices, such as cell phones and hand-held computers.
Consumer groups criticized the price hike, which they said demonstrated AOL’s dominance on the Internet. “It’s uncertain how many competitors will be able to compete head-to-head with a behemoth like AOL,” said David Butler, a spokesman for Consumers Union in Washington.
He noted that the rate hike came less than six months after government regulators approved AOL’s purchase of Time Warner. “When the company was talking about all the future consumer benefits of the merger, a quick price hike was never one of them.”
Analysts estimate the price hike will add about $50 million to the service provider’s revenue this year and $230 million in 2002.
Investors have been pressuring the company to increase its rates to help offset the slowdown in advertising. AOL executives have insisted all year that they do not need to raise rates to meet their financial targets, but at the same time they hinted that a price hike was likely.
AOL Time Warner shares rose 64 cents on Tuesday, or 1%, to close at $57.24 in New York Stock Exchange trading.
