Column: The Next Cyberrevolution Will Be Financial

Shortages. Poor service. Crumbling infrastructure. These phrases are usually associated with an economic failure, such as in the former Soviet Union. But soon they will describe in the same way a vital part of the world's largest free-market economy - the U.S. telecommunications system.

Shortages. Poor service. Crumbling infrastructure. These phrases are usually associated with an economic failure, such as in the former Soviet Union. But soon they will describe in the same way a vital part of the world's largest free-market economy - the U.S. telecommunications system.

The system has already suffered some ministrokes from clogged arteries. The Internet is the source of the arterial sclerosis. In one recent and dramatic example, 16% of calls attempted through a Silicon Valley switch during peak evening hours failed because of Internet traffic.

The growing population of cybernauts, which is estimated at 25 million to 30 million, requires far more capacity than the population of regular telephone users. A Pacific Bell study timed the average Internet surf at 20.8 minutes, compared with 3.8 minutes for an average phone call. And 10% of Internet calls lasted six hours or longer. As usage gains, capacity strains.

This will only worsen with the advent of capacity-hungry multimedia applications and entertainment appliances, such as Sony's WebTV. The appliances are touted as Internet for the masses. But the system isn't ready for the masses. Its performance is already compromised.

Expanding capacity is technically possible. But who will pay for it? The Internet is too unstable economically to support such investment. There are currently about 3,600 Internet service providers; unfortunately, the business is unprofitable for many of them because of irrational pricing.

Instead of charging according to usage, the service providers use a flat monthly fee, usually US$19.95. Excluding marketing and overhead costs, an ISP can break even at that fee only if the average consumer's daily online use is less than 40 minutes. But given the exponential growth of time-consuming Internet applications, even the modest Internet user soon may become a money-losing proposition. In essence, the service providers are sacrificing profit for growth.

What keeps the Internet afloat is huge investment by telecommunications giants and highly publicised stock offerings by Internet service providers. Capital markets are so excited about the Internet that they provide more cash for its operation than users do. The major providers collectively raised more capital between 1993 and 1996 than their total revenues in the same period. That bubble has to burst.

One alternative is for the U.S. Federal Communications Commission to impose metering of local calls. Other countries have done this for years, but Americans regard unmetered local calls as their birthright.

A better choice is more rational pricing by the private sector.

One model is usage-sensitive pricing, which combines a flat monthly fee with additional charges for those who spend a lot of time or use a lot of bandwidth. Another model is priority-based pricing, in which customers who want faster or more reliable service pay more.

Service providers also could offer value-added services. Customers who want real-time audio and video could pay to have the resources reserved in advance. And providers could let customers rent software for network-centric computing. That will become popular in the next two to three years and will create excellent moneymaking opportunities.

The result will be greater profitability for the Internet industry and more choices and better service for users. Then, providers will be able to establish rational economic order and prevent gridlock on the information superhighway.

(Eric Firdman is a senior consultant at American Management Systems, Inc. in Redwood City, California. His Internet address is eric_firdman@mail.amsinc.com.)

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