At&T Is Making Surfing's Biggest Splash

Its plunge into Internet services could cause a tidal wave

For more than a year, AT&T was the gorilla in the corner that nobody in the Internet business wanted to acknowledge. Everybody knew the long-distance behemoth was getting ready to jump into the online information services business, but few in the industry anticipated just how far AT&T would go. Indeed, since the company had flubbed its attempt at launching a proprietary commercial online service--the Interchange network, which it acquired for $50 million two years ago--some competitors wrote AT&T off.

Big mistake. On Feb. 27, the company announced an offer for its 80 million residential long-distance customers: Five hours a month on WorldNet, its Internet access service, free--for 12 months. After a year, users will pay what they would with today's top Internet service providers (ISPs): $19.95 a month for unlimited use. For non-AT&T long-distance customers, WorldNet access will cost $4.95 for three hours per month or $24.95 for unlimited monthly access.

The offer, which includes access via an 800 number, a free copy of the popular Netscape Navigator browser, unlimited customer assistance, and features such as filters to restrict where kids can roam, is resetting the bar for the Internet business. And when you factor in the software and frills, such as AT&T's offer to cover the cost of any credit-card fraud that may occur when WorldNet members use their AT&T Universal Card on the Net, even the $19.95 regular price beats other low-cost Internet services.

"It's a winner," says Emily Green, director of research for People & Technology Strategies at Forrester Research Inc. How big? Prior to the announcement, Forrester had predicted that AT&T might snag 10 million consumers for WorldNet by 2000. Now, Green is upping her estimates. "We hadn't thought it would be so strong," she says.

AT&T's entry is bound to accelerate the race among phone and cable companies to get into the Internet-access business. On the same day that AT&T announced the consumer version of WorldNet (a business version has been available since last September), Sprint Corp. announced Sprint Intranet Dial Service, aimed at business customers. The phone company estimates that the market for Internet services in corporations could be $1 billion annually by the end of the decade, says Dominick J. DeAngelo, Sprint's vice-president for data product management. The No.3 long-distance company is also expected to move into consumer Internet services later this year. Says DeAngelo: "We're knee-deep in this."

BABY BELL DEBUT. MCI Communications Corp., the nation's second-largest long-distance company and the first major phone company to offer an Internet service, is already getting $100 million a year in revenue from Web surfers, says Brian A. Brewer, senior vice-president for business marketing. He dismisses the AT&T come-on as a ploy to make up for its late entry. "We've been there but didn't find it necessary to grow our business that way," he says. For now, InternetMCI will remain at $19.95 for 20 hours a month. "We've been with this for a while--we'll remain competitive, and we won't lose share," he says.

MCI, which has teamed up with Microsoft Corp. to offer the Microsoft Network to Web surfers, may change its plans sooner rather than later. "It won't be long before the regional Bell operating companies and other local carriers come out, too," says Gary Arlen, president of Arlen Communications Inc., an online industry research group in Bethesda, Md. The next likely entry: Bell Atlantic Corp., which is said to be readying an Internet access option by mid-April. And Nynex Corp. may be close to jumping in, too.

Further away are the cable-TV providers. Tele-Communications Inc. is developing an Internet service called Home, which will let customers use a special version of the Netscape Navigator to cruise the Net on their TVs or personal computers. The system is being tested now, but Home--and similar offerings--won't reach homes until the cable systems are upgraded to handle two-way data.

FEELING THE PINCH. Long before the cable gang jumps in, however, the 1,200 mostly tiny ISPs across the U.S. will feel the pinch. The largest of them, Netcom On-Line Communication Services Inc. in Reston, Va., saw its shares tumble $2.50, to $20.25, after the AT&T announcement. Shares of UUNet Technologies Inc. fell $4, to $28. These companies, says Arlen, will now have to scramble to add new features and better customer service--or risk extinction.

In the undecided column--for now--are the proprietary online services, such as high-flying America Online Inc. Investors took the AT&T move as a sell signal, and AOL's stock fell nearly 10%, to $49.13. But AOL has 5 million customers, lots of content that's not on the Web (including publications such as BUSINESS WEEK), and growing links to the Internet. The party line at the competing online services is that AT&T's entry is a positive: "It will bring more people online," says Ted Leonsis, president of AOL. And maybe some paying customers, too.