Will Xtra's aggressive move strain the industry?

Xtra is abusing its dominance. Small ISPs will be killed off. Quality of service will collapse. The Commerce Commission will have to wade in. So people were saying nearly three years ago, when Telecom's fledgling consumer ISP slashed its hourly rates by as much as 64%. It didn't happen then - but will it happen now?

Xtra is abusing its dominance. Small ISPs will be killed off. Quality of service will collapse. The Commerce Commission will have to wade in.

So people were saying nearly three years ago, when Telecom's consumer ISP, barely three months old, slashed its hourly rates by as much as 64%. The move by then general manager Chris Tyler set benchmarks so aggressive they've moved little since.

Until now. Xtra's size in the Internet access market means its offer of a flat-rate plan has permanently changed the industry model.

Anticipating Xtra's move, Clear Net jumped in two days ahead to announce its own flat-rate plan - but not pricing. After professing a relaxed view, flat-rate pioneer Ihug took only a couple of days to cut its own rate by $5 to match Xtra's $39.95.

The heat is on again. But will the new shift kill off the ISP minnows? It's too soon to tell. While some smaller ISPs were driven out, many others survived by refocusing their businesses toward higher value services, usually for business customers. Indeed, one small ISP, Meridian, charged in last week with a $34.95 flat rate that undercut the big players.

Nonetheless, there are plenty of lessons in what happened in 1996. Xtra's aggressive marketing and pricing put a terrible strain on both its own and Telecom's infrastructure. The experience of America Online was cited, often by Xtra's management itself.

But AOL didn't enter its famous service meltdown until it did what Xtra has just done - moved from time-based charging to flat-rate.

Ihug director Tim Wood has predicted dire capacity problems for both Xtra and Clear under the new model, and it seems some Xtra customers are already complaining of degraded service.

Clear Net seems set to take the path it took on its launch in November 1996 - emphasising its infrastructural investment and promising quality at the same or similar prices to Xtra. Until its announcement of a $2 million network upgrade, its reputation for quality had been slipping along with its competitiveness on price.

The most bitterly debated price cut in 1996 was to Xtra's rate for 0800 access. Competitors claimed Xtra was selling 0800 dial-up for less than they could buy 0800 access from Telecom. Now, ironically, it seems the same issue is arising around access via IPNet, the national dial-up network Telecom spawned to get around the anomalies of 0800 pricing, and which Xtra now uses for all dial-up. If the regulators step in anywhere, it will be there.

Ihug, having last year capped the hours available to regional customers on its IPNet-based NZWide service - on grounds of cost - has felt obliged to offer those customers its new $39.95 unlimited rate. It now seems set to quit IPNet as far as possible in favour of its own local POPs, but until then it will probably have to run NZWide at a loss - as will anyone else who wants to compete with Xtra.

How much money Xtra has spent gearing up to go flat-rate, and which, if any, services it will lose money on, we don't know. But the shift to flat-rate was probably made in search of cashflow as much as competitive advantage.

That the moves by its two large competitors represent a vindication of Ihug's model will probably be of scant comfort to Ihug's management. The company has lost the differentiator on which its business was built.

That's not to say it can't compete. The 30% stake taken in the company by Sky Television has brought in resources at just the right time. After nearly four years of funding growth from cashflow, the company needs to expand its next-generation services at the same time it faces tighter margins - and a loss on IPNet business.

But in an environment where everyone is offering the same product at the same price, marketing will become even more important. The winner in it all will be the consumer. The move to flat-rate is well timed given the increasing trend toward streaming and other rich media on the Internet. The Xtra customers who downloaded the 25Mb Star Wars trailer paid for the privilege; flat-rate Ihug customers didn't.

Join the newsletter!

Error: Please check your email address.
Show Comments
[]