Squeeze Play: Internet Industry Heads for a Showdown

AT&ampT launches second strike on smaller Internet players

Since AT&T entered the Internet service market seven months ago, smaller Internet players such as BBN Corp., Cambridge, Mass., PSINet Inc., Herndon, Va. and UUnet Technologies Inc., Fairfax, Va., have seen profits drop, analysts criticize their strategies and shareholder confidence fade.

This week, things got a lot worse.

AT&T jumped in again with an even bigger splash than its consumer Internet offering. On Oct. 8, AT&T raised the bar for electronic commerce by unveiling a series of World Wide Web buying and selling strategies that the company claims will help any business jump-start its electronic commerce strategy.

"AT&T revolutionized business with the invention of 800 toll-free service, and we intend to do no less for Web-based commerce," said AT&T Chairman Robert Allen in announcing the plan.

Besides bringing an enviable brand name to the table that no ISP can hope to match, AT&T will offer an unprecedented service guarantee. Web shoppers, both business and consumer, will be guaranteed a secure Internet purchase if they join the AT&T Secure Buyer's Program and pay with AT&T's Universal Card, no matter which access provider they choose. If an unauthorized person uses that card online, the card-holder is not responsible.

AT&T is also promising that the Web sites it hosts will stay open 24 hours a day, seven days a week. If the server is busy, the person or business that owns the site will get one month's service for free.

These service guarantees are vital in an industry where unreliability is the Achilles' heel. The market has already been hit hard by what many call "Metcalf's theory," after Bob Metcalf of 3M who says the Internet may just completely black out. It didn't help either when online service provider America Online experienced several outages. A business person may not be able to get on the World Wide Web or use e-mail for 10 minutes, but those 10 minutes may cost him a deal or create an unfortunate miscommunication.

The need for continuous service also shows that Internet use has entered a next stage. "It's occupying a different role," said John Curran, chief technical officer at BBN. "Internet is being used as a business-critical function."

Earlier this month, BBN came out with a new service guarantee that promises a full free day of service for any outage of 15 minutes or more in a 24-hour period. At the same time, BBN said it has increased its backbone performance to 99.9 percent reliability.

Other companies such as PSINet already had service agreements in place. But all of these companies are taking a look at how they can improve them in an increasingly competitive market.

Analysts say now is the greatest window of opportunity for the ISPs. "Through at least the first half of 1998, most Internet-related profits will come from selling Internet access," said Doug Cayne an analyst with Gartner Group. But by 2000, said Cayne, content creators will be making the most money.

While AT&T is clearly out to crush the ISPs, don't expect them to go gently.

"We are not going after the Internet access market," said UUnet CEO John Sidgmore at a Northern Virginia Technology Council conference last week. "We are going after the telecom market."

Even before the recent AT&T announcement, ISPs have of late been on a marketing campaign tour. They are at different life stages: UUnet is now part of WorldCom and MFS; PSINet is said to be still looking for a buyer and BBN is a strong stand-alone with roots to the ARPAnet.

But the ISPs are all marketing themselves heavily -- some would say desperately -- going on press tours, announcing these customer service guarantees, and more than anything, trying to distance themselves from traditional telephone companies and online service providers such as America Online. For the ISPs, who claim to "get" Internet better than the other related companies, the dirty word - the one that means low-quality - is "consumer." Each of the access providers makes a big point of portraying themselves as the business provider - the one serious about not letting the customer down.

And the big telco is not the first to come out with an electronic commerce plan. PSINet, for example, this week announced partnerships with CyberCash, Reston, Va,. and Mercantec Inc., Lisle, Ill. Together, the companies have formed PSIWebecommerce, a system through which businesses can buy and sell products on the Internet. PSINet and partners will create virtual storefronts for customers that wouldn't otherwise create their own. CyberCash will provide the electronic payment system, and Mercantec will devise the shopping strategy.

When AT&T made its last big Internet splash in March, the Internet service provider industry went into what Sidgmore recently called the "Internet death spiral on Wall Street."

This latest foray may bring about a more permanent demise.

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