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March 25, 1996

A Steep Hurdle to Web Shortcut

By EDMUND L. ANDREWS

When Stewart Dickson moved to Delaware last year, he signed up with one of Bell Atlantic Corp.'s newest residential services: a digital phone line that would let him browse the Internet four times as fast as he could on ordinary phone lines.

Dickson, a computer artist, promptly set up a colorful site on the Internet's World Wide Web to display his work.

Then he got his bill for the month of September: $1,014.

He tried turning off the Web site for much of the day. It wasn't enough. "I'm out of money," he said recently. "I'm giving this up."

Dickson is on the front lines of a consumer rebellion that has flared from coast to coast and caught telephone companies flat-footed.

The fight is ostensibly over something called Integrated Services Digital Network, or ISDN. But this dispute over roadblocks to the Internet has exposed another gap between the rhetoric and the reality of technological advances.

ISDN is a modest technology, an ugly-duckling compared with fiber optics or technologies for delivering movies on demand. For years, wags said, the letters stood for "It Still Does Nothing."

But now, thanks to soaring demand for speed fueled by the growth of the Internet -- particularly the World Wide Web, whose complex graphics can cause tedious waits on ordinary phone lines -- ISDN is a potentially hot technology.

Yet the telephone companies' approach to marketing it has been inconsistent at best. Some, like Bell Atlantic and Pacific Bell, are advertising it on the World Wide Web and elsewhere. But their pricing policies reflect the old days of monopoly: charges that far exceed the costs of providing the service, in the view of many state regulators, and limited interest in building market share.

Others do not even try to market it. Indeed, many telephone executives sound alarmed by Internet fans like Dickson.

What frightens them most is that unlike customers for old-fashioned voice services, computers will not hang up. "These guys don't understand what is happening very well," said Michael Kleeman, a technology analyst with the Boston Consulting Group. "These are voice companies, and they have a 100-year tradition of doing that the best in the world. But the majority of them are just starting to learn about data, and all of them were surprised by the Internet."

It seems odd. With the right structure and prices, some industry experts say, the telephone companies could make loads of money and capture the loyalty of a fast-growing and important group of customers. They do not have much time, either: cable television modems are on the horizon, offering connection speeds that make ISDN look pokey.

But one customer after another has been rebuffed. When Lorraine Ashton, who discovered the Internet only a few months ago, called her local phone company to get ISDN service, she learned that U S West could not offer service to her neighborhood, a 15-minute drive from downtown Salt Lake City, until it had at least 10 orders from the area.

In places where homes can get ISDN, U S West wants to charge heavy users up to $184 a month.

"The telephone companies look on it as a bother, and they're afraid it will cut into their revenues," said Mrs. Ashton, who is fighting U S West before Utah state regulators. "Someone has to convince them that there is money to be made -- just not the way they thought it was going to be made."

Indeed, some industry analysts argue that telephone companies have botched a huge opportunity, charging too much and misreading the needs of consumers.

Telephone executives disagree, insisting that they are determined to make ISDN a mass-market service. In a sharp contrast from only two years ago, Pacific Bell, a unit of Pacific Telesis Group, is selling the service through consumer-electronics stores and over the World Wide Web.

Bell Atlantic has set up an expansive operation called Infospeed, which guarantees availability, no matter how far a customer is from the nearest digital switching station.

But, while companies like Netscape Communications and America Online are giving away software to line up on-line customers, many telephone companies are charging as much as they can for ISDN service and are actually trying to fend off heavy users.

The results are tangible. Industry executives estimate that despite a surge in popularity last year, there are still no more than one million ISDN lines in service -- and most are for business rather than homes.

By contrast, America Online added nearly three million subscribers in 1995 and pushed its membership to five million. Overall, about 20 million or more people use the Internet and commercial on-line services.

Across the country, the dispute over ISDN prices is shaping up as a major regulatory and political battle. State regulators have begun investigations of ISDN prices in nearly a dozen states, and several states have bluntly rejected proposals and demanded lower prices.

Pacific Bell and U S West both proposed steep price increases for ISDN and set off a storm of protest from customers. On the East Coast, meanwhile, Bell Atlantic has provoked rate battles in five states by charging up to 4 cents a minute for ISDN use. At those rates, telecommuters who stay on line with their main offices for 100 hours a month could run up a bill of nearly $200.

"ISDN customers are getting creamed," said James Love, director of the Consumer Project on Technology, a nonprofit group affiliated with Ralph Nader. "By keeping prices so high for digital service, we are killing off a whole generation of new services that depend on a high-speed platform."

The dispute is also shaping up as an industry battle. Intel Corp., the computer-chip giant, and AT&T Corp. have lobbied intensively in a half-dozen states for ISDN rates of $30 to $35 a month.

"Until they wake up to the reality that this is not a high-end premium service, but rather a new form of plain old telephone service, it won't be priced appropriately," said Tad Hetu, the director of strategic alliances at Intel.

State regulators are listening carefully. "We're not asking them to offer the service below their cost," said Tom Spinks, a utility rate specialist on ISDN at the Washington State Utilities and Telecommunications Commission.

"If a service costs $184 a month, that's fine. But the point is, it doesn't cost $184 a month."

Spinks, who analyzed U S West's ISDN proposal last fall, recommended that the company cut its flat-rate charge to about $50 a month from $184.

Some companies do offer prices that low. Ameritech, for example, offers nearly unlimited use for less than $40 a month in Illinois, Michigan and Wisconsin. And Northern Arkansas Telephone Co., a rural company in Arkansas that is known as NATCO, boasts the lowest rates in the country: $17.90 a month for unlimited use.

Other companies are coming under heavy pressure. In New Mexico last month, the state corporation commission conducted five days of hearings on U S West's prices. Before the hearings were over, U S West had offered to cut its monthly charge for unlimited service to $75 from $184.

But the question of whether computer users should be allowed to tie up lines indefinitely remains. "Your typical voice call is four to five minutes," said Curt Koeppen, who oversees Bell Atlantic's ISDN service. "Your typical Internet call is 30 minutes to an hour." The problem is that an open line ties up circuits. The more open lines, the greater the need for expensive new equipment to avoid dial-tone delays.

That argument makes sense to telephone industry experts, but it befuddles computer users. "I invested $1,500 in ISDN equipment, my own infrastructure, and now I find I have to pay $1,000 a month just to keep it all running," Dickson, the Bell Atlantic customer in Delaware, said.

Bell Atlantic officials, however, say that they plan to offer new rate proposals with discounts for moderate ISDN users.

Some analysts warn that phone executives may be making a strategic mistake in treating ISDN as a high-cost "premium" service, because cable-television operators are rushing ahead with technology to offer data communications at speeds many times faster than ISDN.

Still, that technology is at least two or three years away in most markets.

And telephone executives insist that they are committed to making ISDN a mass-market product quickly. "We try to be out front of our customers," said Scott Berman, U S West's product director for ISDN. "One year ago, I was banging my head against the wall trying to get customers. Now there are people who have discovered they really want this, and they want it right now. We're doing everything we can to get it there."

Even so, many customers have other complaints: Local telephone sales representatives do not know what ISDN is, and service is not available, even in some metropolitan areas.

Benson Margulies, a software engineer in Arlington, Mass., is one such customer. After ordering a digital phone line in late 1994 from NYNEX Corp., he waited more than two months and was then told that NYNEX could not offer service to his neighborhood.

"I can see the telephone central office from my house, but they said the wiring between my house and the central office was too poor and they couldn't offer me the service," he said.

Those who have signed up for ISDN caution that it can be fiendishly difficult to get working properly, because there are dozens of technical variations based on the equipment a customer is using.

"It has gotten much better in the last year or so," said Gene Chesser, the head of a Texas user's group for ISDN. But, he added, "you don't want to try this on your own if you're the kind of person who throws golf clubs."


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