AT&T REWIRES THE NET

THE INTERNET IS A GREAT PLACE TO visit, but most modem jockeys, once they receive their first online bill, find they wouldn’t want to live there–at least for long. Commercial online services like America Online, CompuServe and Prodigy have made the Net accessible to millions at an hourly rate, making it all too easy to run up hundreds of dollars a month in connection charges. Smaller, flat-rate, local-access providers like Netcom or PSInet have championed flat-rate service that allows unlimited access at $20 to $30 a month but can’t always keep up with demand; busy phone lines have led many users to give up in frustration. The outcome: service that is pricey for some and problematic for others.

All that promised to change dramatically last week when mammoth AT&T announced that it would offer its regular residential telephone customers–all 80 million of them–five hours of free access to the Internet each month, or unlimited access for $19.95 a month, on its newly announced Worldnet access service. Suddenly, the right flat rate and the right number of phone lines were in the same place, and the entire Internet-service industry seemed on the verge of a brutal shake-out. At week’s end AOL’s share price dropped 15%, from 53 7/8 to 45 3/4, while the stock of Netcom Online Communications, a leading provider of direct Internet access, fell more than 13%, from 28 1/4 to 24 1/2. Jacques Gauchey, a new-media consultant in San Francisco, says of AT&T’s scheme, “It’s very hard to compete with this price.”

Even after a careful reading of the fine print, AT&T’s offer looks like a great deal for its customers. The telecommunications giant expects to provide the service through 200 specialized electronic outlets scattered all over the U.S. For 80% of Americans, in effect, the Internet will be only a local phone call away. And thanks to a loophole in the nation’s telephone accounting rules, which all Internet service providers use, AT&T can’t be charged by local phone companies for making that connection. Ironically, the Federal Communications Commission made the ruling back in 1983 in order to encourage competition against AT&T. By taking advantage of it now, AT&T stands to save billions of dollars in access charges.

Providing low-cost Internet access is a smart move for AT&T in other ways too. It seems likely to increase customer loyalty, because switching phone companies will now mean switching E-mail addresses and installing new software as well. The most lucrative service in the future, however, may be hooking up businesses to the Net. Currently most consumers access the Internet through their inexpensive plain old telephone line, which cannot handle much information quickly. By contrast, many businesses link to the Internet through specialized T1 lines. Although they can cost up to $30,000 a year, T1 lines can handle enormous amounts of data at very high speeds. “If AT&T can put 50 million consumers on their network, then every business in America is going to want to buy T1s from AT&T,” says Halsey Minor, CEO of C/Net, one of the largest publishers on the Internet. “Businesses like ours are going to want to buy from AT&T because that is where the customers are.”

Most of all, AT&T’s service promises to change the way the Internet is used. With tens of millions of new users poised to enter cyberspace for longer amounts of time, more businesses and services are likely to start finding a niche on the Net–reaching out to touch someone, so to speak, through the economies of scale.

–By Christine Gorman. Reported by William Dowell/New York