07/01/96 MONKEY BUSINESS IN CYBERSPACE?

MONKEY BUSINESS IN CYBERSPACE?
AOL and rivals may face an FTC probe of billing practices
America Online Inc. has been on a wild ride this year. Spectacular subscriber growth boosted AOL stock from the mid-30s to a record high of 70 on May 7. But rising competition from Internet services and slowing growth has since plunged AOL stock to around 40.
There may be another dip on this roller coaster. BUSINESS WEEK has learned that regulators at the Federal Trade Commission are examining the billing practices of AOL and other online service providers. A government source cautions that the probe isn't a formal investigation. Regulators are concerned that online operators may not have followed FTC rules about unfair billing practices. The New York State Attorney General is also said to be loking at online services. ``Several state attorneys general have informally inquired into industry practices,'' says an AOL spokeswoman.
TALLIES FOLLY. As the No.1 service, AOL may get the most attention. The company already faces 12 lawsuits from subscribers accusing it of overbilling. Among other issues, the FTC is examining whether online companies have made it hard to cancel service after a free trial. The spokeswoman says AOL is negotiating a single settlement for the suits and is discussing ``routine'' industry practices with the FTC.
Much of the criticism stems from how charges are tallied. AOL's $9.95 monthly fee includes five hours of service; additional use is $2.95 per hour. But instead of adding up the total time a customer spends online each month as Prodigy Services does, AOL and CompuServe Inc. round up each session to the next minute. AOL also adds 15 seconds to each session for connecting and disconnecting. CompuServe and Prodigy don't.
In one suit, Stephen E. Hagen, a Palo Alto (Calif.) attorney, contends that AOL did not fully disclose how it calculated bills. The suit also alleges that AOL billed for time spent in areas that were supposed to be free and didn't refund money for canceled subscriptions. AOL says it has clarified its policies and refunded charges incorrectly assessed for use of free areas.
The flap comes at a bad time. For the quarter ending Mar. 31, AOL's core subscriber base grew only 19.8%, to 5.5 million, compared with a 46% gain in 1995's first quarter. Cowen & Co. says growth could slow to 7.3% this quarter. Analysts such as David B. Readerman at Montgomery Securities fear that some of the slowdown--at AOL and rivals--is due to inroads by Internet services.
Stephen M. Case, AOL's chief executive, says the reason is that AOL dialed back on marketing this spring. Heavy promotion will resume when new AOL software ships this fall. AOL is ``uniquely positioned to bring interactive services to a mainstream audience,'' says Case, and it still aims to hit 10 million subscribers in 18 months.
But what will they pay? AOL acknowledges that the Internet is putting pressure on pricing and says it is seeking new sources of revenue, including online ads. Still, ``they haven't proven where the new revenues will come from,'' says Mark Mooradian, an analyst with Jupiter Communications Co. Subscribers would prefer that it doesn't come from overbilling.

TROUBLE ON THE LINE

BILLING PROBE
Regulators are eyeing billing practices in online services

SLOWING GROWTH
AOL's subscriber base grew 19.8% in the first quarter, down from 46% in 1995

INTERNET MANIA
Internet services could force AOL to cut fees
By Amy Barrett, with Catherine Yang, in Washington