Internet Access Providers Begin to Fall

P> David Kline is mad as hell, and he's not going to take it anymore. More importantly, he's not alone.

Kline put the feelings of many Internet users into words in a recent HotWired column that drew 10 times the e-mail response he normally receives. In an interview, Kline said people are sick and tired of shoddy service that disconnects people and offers a busy signal more times than not. "I don't think this level of anger existed a year ago," said Kline, who co-wrote "Road Warriors: Dreams and Nightmares Along the Information Highway" with Daniel Burstein.

Quite simply, Internet users, now more sophisticated, are starting to expect the type of service they get from their telephone company or their electric utility. "If that's too tough, get into a new line of work," said Kline. "People want what they pay for."

Complaints from Kline and other Internet users are not just idle chatter, but seem to be a sign that the oft-predicted "shakeout" of the Internet service provider industry is on its way. "The fury around this issue is a real bellwether for the changes that are coming," said Kline.

What made those gripes really hit home, however, was the recent entry of AT&ampT into the Internet market. Hardly anyone had thought of AT&ampT as an Internet powerhouse -- the company had been conspicuously quiet about its Internet strategy. But when AT&ampT came out, it emerged with a bang. The Basking Ridge, N.J., company offers free Internet service for one year to its phone customers. People would pay more if they exceed the five-hour a month limit, or could opt to pay $19.95 a month for unlimited access. MCI matched the deal soon after.

Perhaps the most important attribute that AT&ampT and MCI have that the Internet service providers don't -- including the big three: Netcom, San Jose, Calif., PSINet Inc., Herndon, Va., and UUNET Technologies Inc., Fairfax, Va. -- is household name recognition. People trust AT&ampT the way they trust their banks and their grocery stores. For years, they've been counting on those businesses, and usually, they get reliable service.

Not so from the Internet access providers.

The AT&ampT announcement especially, with its promise of 24-hour customer service and its claim to cover to the dollar any Internet fraud if the customer uses the AT&ampT Universal Card, hit those companies hard.

Stocks plummeted. Netcom stock prices per share shrunk from $82.75 in November to $23.87 in March. PSINet's shares went from $28.50 in December to $9.37 in March, and UUNET stocks fell from $98.75 to $25.

The drop in Internet service provider stocks was so serious that UUNET in March withdrew a registration statement for a second public offering of 6 million shares. "The company is not going to offer stock to the public under the current market conditions," said UUNET CEO John Sidgmore. "We believe that the market for Internet-related stocks has been affected by several recent industry announcements, especially AT&ampT's consumer Internet offering."

Other industry analysts said UUNET's pullout could mean the company is in serious talks with a potential buyer.

Sidgmore criticized the public for not understanding the Internet business. He pointed out that UUNET's customers are primarily businesses, and AT&ampT is going after the consumer market.

PSINet is in a different Internet boat, however, because it sells access to both consumer and business markets. Although some analysts, including Alex. Brown in Baltimore, have said the mix will be deadly for Internet service providers, PSINet maintains that strategy.

"It's heating up -- there's going to be a shakeout," said PSINet spokesman Brian Muys. "So we're trying to stay focused."

But Muys admits it won't be easy. "If Microsoft is feeling the pinch, you have to look at the smaller players." So PSINet needs to work hard to even stay in the game.

The company's Pipeline service, particularly, has been criticized for having slow, inconsistent connections. That will change, Muys promised. This year, he said, more emphasis will be placed on adding and upgrading ports and modems to cut down on busy signals and less on rolling out new "points of presence" or geographical access points. "It will be Pipeline on steroids," Muys said.

As is common knowledge in the industry about UUNET, PSINet has also been approached for buyout. But Muys said PSINet is not interested. "We're not on the market," he said. "AT&ampT has approached us, all the big ones. But we have so much more we want to do for PSI. We can do this without being acquired."

Maybe so, but the "big ones" will put up a fight. "I'm glad I don't own stock in the independent [Internet service providers]," said Kline. "Only those with extraordinary service and some unique added value or content will survive."