America Online has raised its rates again. But will the nation's dominant Internet service provider now lose customers? And how much higher can rates climb?
For the moment, most Internet industry analysts are saying AOL — by far the biggest, most-profitable Internet service provider in the United States — will not lose business because of its 9 percent, $1.95-per-month hike, which takes effect in July.
"I don't think it's going to slow them down," says Paul Noglows of investment bank J.P. Morgan in New York. "I think they're being judicious."
"Some price increases are more painful [for consumers] than others," adds John Corcoran of investment bank CIBC Oppenheimer in Boston. "But AOL hasn't had a price increase in years and they've added a lot of services."
Still, the increase, coming four months after the federal government approved the Virginia-based online giant's purchase of Time Warner, has raised eyebrows among some consumer watchdogs.
"When AOL first announced its plans to acquire Time Warner, [CEO] Steven Case ticked off a list of benefits," says David Butler of the Consumers' Union in Washington. "Somehow, a rate hike didn't make his list."
Justifying the Price
On May 22, AOL announced it would raise its monthly fee for unlimited Internet access to $23.90, a hike that could translate into a windfall of more than $400 million for the company in the next 12 months.
About 18 million of AOL's 23 million users in the United States use its standard plan, and will be affected by the hike. After the last fee increase, which in early 1998 lifted its basic rate from $19.95 to $21.95, relatively few subscribers canceled their service, and industry analysts don't expect this one to cost AOL much traffic either.
"There's still a remarkable amount of inertia out there," says Zia Daniell Wigder, research director of Internet research firm Jupiter Media Metrix in New York. "People don't want to switch their e-mail addresses, and they get used to their services, their chat rooms."
For its part, AOL has justified the increase by saying that in addition to Internet access, it has added so many features for consumers since 1998.
"We're confident that our members and prospective members will realize we're the best site on the Internet," says AOL spokesman Jim Whitney.
Indeed, for many users, AOL is virtually equivalent to the Internet, with its myriad chat rooms, online shopping opportunities, and links to the full range of Time Warner content now available since the merger. The site is also the key online destination for advertisers, and has taken to running ads in the pop-up window that accompanies its instant messaging.
Among the AOL features that continue to grow in popularity are its instant messaging service — both AOL Instant Messaging and ICQ — and its Buddy List, which notifies users when people they know are also online. The company has also added new features to its mobile services, inlcuding Mail Alert, which notifies users of high-priority e-mails, and new versions of multimedia players, allowing customers to use the MP3 format.
Competition Could Raise Prices
Still, some AOL competitors, including Microsoft, view the online service's rate hike as a chance to grab users away. The software giant announced a $50 million campaign on Tuesday to lure AOL users to its MSN service, the second-biggest U.S. Internet Service Provider, or ISP, with 5 million subscribers.