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Whither The Net, When It's Pay As You Go?


Cover Story: Special Report

WHITHER THE NET, WHEN IT'S PAY-AS-YOU-GO?

As the Internet grows into a huge information machine, it is outgrowing one of its most cherished and long-standing traditions: unlimited usage for a flat fee. The transition to a new kind of pricing--based on the quantity and quality of service that a user receives--is inevitable, most economists and engineers say. But it will be wrenching, both in terms of the psychic disruption visited on longtime Internauts and the expense of accounting and billing systems.

What happens to the Net when the free ride ends? University and corporate Net surfers prize the intellectual freedom to explore Internet resources and experiment with new services without worrying about a ticking meter. "We may end up killing the most vital part of the Internet--the environment for the foment of new ideas and applications," says Stephen E. Deering, a computer scientist at Xerox Corp.'s Palo Alto Research Center. Deering, an advocate of flat fees, helped develop software for one of the services that could be costly under usage-based pricing: MBone, a means of sending video over the Internet to many locations simultaneously. MBone soaks up gobs of telecommunications "bandwidth."

While most big companies and universities still pay a flat fee to an Internet access provider--roughly $13,000 a month for a 1.5 megabit-per-second connection--the meter has already begun to tick for many consumers. The fastest-growing type of link is lower-speed dial-up. Performance Systems International Inc., for example, charges $9 a month for nine free hours at 14.4 kilobits per second, and $1.50 an hour thereafter.

Flat-rate pricing worked just fine in the days when the Internet was a club of like-minded techies who heeded each other's friendly warnings not to take advantage. But the honor system can no longer be depended upon for a network that is bigger, more impersonal, and rife with businesspeople who gladly exploit the underpriced resource to the hilt. "As an economist, I look at that and say, `How can that possibly work?"' says Hal R. Varian, a University of Michigan economics professor. Varian has been investigating Internet pricing options with other researchers, including Xerox PARC computer scientist Scott Shenker, a proponent of usage-based pricing and an office neighbor of flat-rate advocate Deering.

Snazzy new Internet services such as phone calling and Deering's MBone are hastening the day when usage-based pricing will be required. It's not just that they consume lots of bandwidth. Phone calls and videoconferences have to be sent in "real time"--they can't tolerate intermittent delays the way E-mail or other ordinary data can. To keep real-time services from being knocked out by network congestion, Internet operators will have to either spend heavily to add huge amounts of capacity, or give voice and video priority over conventional data. In either case, voice and video will end up being subsidized by users of conventional services such as E-mail--unless they pay extra for special treatment.

"THE GOOD OLD DAYS." A thorough form ef usage-based pricing would force the Internet to take on many of the trappings of a phone company. Automatic routers would need to track and record the source and destination of every piece of voice, video, or data. Then that information would have to be passed along to computers that would prepare itemized bills. If that comes to be, "Some people are going to think wistfully about the good old days," says George H. Heilmeier, president of Bellcore, the research arm of the Baby Bells.

But Xerox PARC's Shenker says there are cheaper, simpler ways to keep services such as the MBone from screwing up the Internet. For instance, Internet providers could require customers to pay extra for the right to transmit, say, 4 hours of video per month. How that would be monitored is uncertain: "People are in a denial phase because nobody knows how to do this," says Michigan's Varian. But if a solution isn't worked out soon, he says, Internet providers may have to unclog traffic jams by draconian measures--such as barring high-bandwidth services. And that would make everyone unhappy.By Peter Coy in New York


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