AOL seeks poll position in the flat-rate scramble

The unmetered ISP market has proved a minefield for some big players and the waiting game with BT has caused confusion among...

The unmetered ISP market has proved a minefield for some big players and the waiting game with BT has caused confusion among consumers and the industry. AOL UK is hoping Friaco access can help it to succeed where others have failed, as Davey Winder reports

AOL, the world’s biggest ISP and the parent company behind CompuServe and Netscape Online thanks to its acquisition trail, has finally entered the unmetered Internet service provision (ISP) market.

It’s been a long time coming and AOL has always stated that it would only enter the market when the time was right to ensure it could do so successfully, but in the wake of so many high-profile, heavyweight failures already in this particularly fast-growing but monumentally hazardous sector, the big question is, can it succeed where so many others have fallen by the wayside.

With “flat-rate” accounts being activated from October on an initially limited rollout to existing members only — and then on the basis of longest-established members first — AOL hopes to avoid the “tsunami” effect that has hit many of its competitors. Could AOL emerge as the leader in the unmetered race in the same way that Freeserve mopped up the “free” ISP market a short couple of years ago?

State of confusion

There are so many charging options to choose from, depending on who is providing the service, that it should come as no surprise that both consumers and the industry are confused. Take your pick from 24/7 access for a yearly fee, or maybe a monthly subscription, or off-peak access only on a similar fee basis, or how about an all-you-can-eat charging model — assuming that you switch your voice calls to a specific telecom operator and make a certain amount of calls each month.

AltaVista UK hyped up its service, but it was all smoke and mirrors and ended up being officially withdrawn before a single paying customer had the opportunity to try it out. Virgin has delayed the launch of its planned service while the market sorts itself out and it assesses the situation. LineOne at least got its offering off the ground for a few months before it was closed down because the demand was too great. EZSurf had to pull the plug on its unmetered offering after it received a phone bill for £2,083,351.21 from Energis Squared (who provided its telecom capacity) and was unable to pay it. Some have, apparently, been able to carry a service with a degree of success: both the much-maligned RedHotAnt and little-publicised TFI-Excite are still providing services months after launch.

Some light at the end of the tunnel started to filter through in May, when Oftel told BT that it had to make wholesale unmetered access rates available to other operators by way of a system known as Friaco (flat-rate Internet access call origination). This was helped along in no small measure by AOL — or MCI WorldCom to be precise — which carries a large proportion of AOL’s data traffic. The company successfully argued that such flat-rate provision was needed in order for it to compete fairly with BT’s own SurfTime service. A valid point well made — or at least Oftel thought so.

The AOL answer We put Matt Peacock, director of corporate communications at AOL UK, in the hot seat to try and understand why AOL’s Flat Rate may work where other models have failed.

(Q) Let’s start with the obvious question: what’s the state of unmetered play today, as far as AOL sees things?

(MP) “For consumers, the picture is one of confusion and dismay. For almost all ISPs, the story is a waiting game whose rules and timing are dictated by BT. Consumer confusion is a by-product of the fact that all but one (AOL) of the ISPs offering unmetered access are doing so purely on the basis of a metered product. In other words, those ISPs are receiving fixed monthly revenues from their users (the monthly flat-fee, or in the case of a switched telephony product such as World Online, the monthly line rental) but are paying uncapped metered rates, minute by minute, to their telecommunications providers in order to gain those revenues.”

(Q) What about the gap between low-level fixed revenues and potentially high-level uncapped costs? Is this the problem here?

(MP) “That’s why Breathe, World Online and Freeserve have had to take action to curtail usage — in the process confusing and angering consumers who thought “unmetered” meant...well...“not metered”. In other words, the present unmetered offerings are undermined by economic vulnerabilities as much as technological ones.”

(Q) And the solution is?

(MP) “The solution lies in the Friaco wholesale unmetered tariff now being offered by BT to telecoms providers and invented last summer by telecoms economists commissioned by AOL UK. We asked those economists to come up with a blueprint that would allow BT to introduce a truly transparent, US-style flat-rate tariff that was unmetered ‘at source’ — in other words, where there was no ticking ‘on-line clock’ at any point in the connection chain. Friaco enables telecoms providers (companies like Cable & Wireless, Energis, Colt, MCI Worldcom and many others) to pay flat rates to BT for the use of a local loop circuit — that is, the connection between the consumer’s house and the local telephone exchange. In simple terms, this is a similar kind of arrangement that exists in the US.”

(Q) BT has been consistently hostile to the whole notion of Friaco. Why?

(MP) “Well, our economists discovered an interesting fact about BT’s pricing methodology. Essentially, BT recovers the full cost of a local telephone call within the first three minutes of the call. Every minute thereafter is pure profit for the former state monopoly. UK Internet users spend around 15 minutes a day on-line — so the revenues from around 12 of those 15 minutes go straight into BT’s coffers. Bear in mind that US Internet users spend around 60 minutes a day on-line and you can see why BT wasn’t too keen on the idea of true cost-based unmetered charging.”

(Q) In the face of such apparent unmitigated disasters by some very big names, what is AOL doing differently to ensure that its service succeeds?

(MP) “The big difference is that AOL Flat Rate has Friaco at its core. We’re paying flat rates to our telecoms network providers and the others are not. We’re also being responsible and realistic about what can be achieved over the next few weeks. We’re not yet opening AOL Flat Rate up to all UK consumers, because there isn’t enough Friaco capacity in the whole country yet. But every week, our providers are adding more and more flat-rate capacity — so every week we get significantly closer to extending this true flat-rate service to new members.”

(Q) Should other ISPs and resellers be considering entering the unmetered Internet access market, then?

(MP) “Yes, but only if they do so on the back of Friaco rates from their network providers. The alternative is potentially ruinous for the ISP (ask World Online or Freeserve) and infuriating for customers (ask anyone who pre-registered with AltaVista).

“Friaco actually increases the potential for smaller niche ISPs to enter the unmetered market, because it means that they can budget on fixed costs for providing access to their customers. We’re committed to consumer choice and diversity — that’s why we spent so much time and energy creating a tariff which will be adopted by the whole Internet industry, our competitors included. Basically, Friaco is the future for all ISPs looking to offer unmetered, narrowband access.”

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