January 19, 1999


by Andy Oram
American Reporter Correspondent

(Also available in a Spanish translation.)

CAMBRIDGE, MASS.—Your Internet provider may offer a whole new kind of contract a few years from now, to solve the pricing and funding squeezes the Internet industries are experiencing. A combination of problems in bandwidth and in Web site promotion could be cleared up by a restructuring of the industry.

I started to think about this possibility several months ago when I saw the prices for the kind of high-bandwidth access that cable and telephone companies are offering. Everybody wants better graphics and audio, and someday the Internet will even offer video. But the $40 per month or more that you have to pay for cable modem access or ADSL is simply more than Internet access at any speed is worth, unless you are telecommuting or running a business that depends on the Net.

Prices are starting to come down in a bidding war for early adopters, but they can’t stay down for long. The costs at the provider’s end—upgrading lines, putting in switches or routers, and so on—requires high prices on the user ends. And as more people sign up for access, congestion will force even more investment in switches and routers.

Meanwhile, a very different funding problem is plaguing companies at the other end of the TCP session—the large portals, news channels, and other content providers that are trying to develop loyal followings.

It’s no secret that the portals are having trouble making a living. Content costs money, even though portals have no paper, ink, or shipping costs. Nearly every commercial site now offers advertising, but hardly any get enough revenue from selling ads to support the site.

What do these two problems have in common? Nothing, except perhaps a solution.

This week’s column is speculation. It’s based not on any changes I observe in the industry currently, but on my guess that the pursuit of solutions will lead Internet providers and content providers to an entirely new pricing and funding model.

If they don’t find a way out, most Internet users’ future may be very restricted. Cable companies are gobbling up Internet users with unbeatable prices and speeds for cable modems. When the customers sign up, they are captive to the cable company for their Internet access. And this company further directs them to a hand-picked portal where it tries to entertain them with carefully selected content.

I’m not going to predict whether the small Internet provider will survive or how the telephone companies will fare against the cable companies. My only interest today is in what kind of deal the home user will get, whoever wins.

The germ of the providers’ contracts could ultimately come from what portals and advertisers are doing to improve the effectiveness of advertising. Unsatisfied with clickthrough rates, they are exploring all the snazzy technical means that computing technology makes available to target customers better.

Some search engines dog you like you were carrying top sirloin. I had fun looking back at this scrutiny recently when I helped my mother search for information on a medical condition online.

With every selection we made, a new set of ads appeared, and at each step the search engine was clearly trying to figure out what kind of person my mother was and what she’d be interested in. I knew we must have been getting pretty nitty-gritty medical information when an ad came up for medical journals.

I don’t know what kind of impression my mother left and whether she’ll be hearing from her insurance company, but I expect the information that the portal thinks it knows about her will last far longer than her presence online.

Since I’m not pretending to humility this week, I will boldly suggest that the search for Total Knowledge of the consumer will fail. There are just too many sites, and people jump around too much. Even when sites combine their knowledge by sharing databases (or using a service that automatically combines information, like Doubleclick) they will never gather enough information on each person to know what he or she wants to buy.

Furthermore, people are getting fed up with the invisible spies. Government is starting to intervene, forced tortuously along the path toward privacy protection despite the clear ideological bias against regulation in the United States.

But people may feel differently about entrusting personal information to their Internet provider. The provider is not going to persecute them for political beliefs or withhold medical treatment. If it promises to keep their personal information confidential, signing a thousand forms and swearing by all that is holy and some things that are not, customers may just possibly be willing to fill out a card about their demographics and interests.

The incentive to relinquish privacy, of course, would be a reduction in the cost of service. That fast hook-up that costs $60 today may come down to $50 or even $40 (I don’t claim to know the micro-economics of direct marketing) if the Internet provider can get revenue from advertisers.

Wouldn’t it be more efficient to keep information about a customer at the Internet provider through which all data comes? Every advertiser could contract with the Internet providers, instead of today’s portals, to show ads to people who have previously expressed a preference. Internet providers can also refine their knowledge of each customer by tracking what ads lead to actually clickthroughs or purchases—all without giving a single byte of customer information to the advertisers.

This model has been tried before, of course. Proprietary services like Prodigy had ads many years ago, and many people found it annoying. But with a high-speed connection costing three times what the old Prodigy service used to, customers may be willing to swallow their annoyance.

Should Internet providers start handling ads, what happens to the current crop of famous portals? A curtain may best be drawn over their fate. Futurists have been predicting for years that the Internet would cut out the middleman, so the portals’ attempt to create a whole new industry of middlemen is swimming against the stream. Some portals are branching out now into other services—evidence that their position in the middle led to an uncomfortable squeeze from both sides.

I won’t say whether the model I’ve predicted is good or bad. If it represents the best way out of the scissors crises I’ve described in Internet access and content, it may simply be one of the options offered by Internet providers and advertisers. I just hope that I can find a place for my own content-generating skills, whatever the industry chooses to do.

Shortly after writing this article I discovered a recently-started Internet provider called NetZero that implements a model very close to what I’ve described here: free services of all types in exchange for filling out a form with personal information and agreeing to receive advertising. Free-PC goes even farther and gives customers the computer too!

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