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The world's largest Internet access company, America Online, is raising rates for its unlimited Internet access plan by $1.95, bringing the price to $23.90 per month for most of its 26 million U.S. subscribers. And while AOL is not extending the price hike to its CompuServe customers or other pricing plans, analysts expect a ripple effect to other ISPs.

"Consumers should be concerned," says Rob Lancaster, a Yankee Group analyst. "Every time a market leader makes a move, there is going to be a ripple effect among other players."

AOL last raised its rates three years ago, from $19.95.

Trend or Challenge?

For smaller ISPs like NetZero, Juno, and BlueLight.com, AOL's price hike will be a boon that's used as a differentiator, Lancaster says. Larger players like MSN and EarthLink may use it as a precedent to raise their own rates. According to Cahners In-Stat, 63 percent of U.S. Internet-connected homes use AOL, MSN, or EarthLink.

MSN does not plan to raise its unlimited access rate of $21.95, MSN representatives say.

"We think this is a great time for AOL consumers who are dissatisfied with their service to switch to MSN," Microsoft's ISP arm says in a statement. MSN last raised its rates in September 1999, from $19.95 to $21.95.

"We haven't gone either way; we're evaluating what we are going to do now," says Kurt Rahn, EarthLink spokesperson. He says EarthLink hasn't raised its rates since 1996. The ISP charges $19.95 monthly for unlimited access.

AOL's price hike takes effect in July, and does not affect any pricing plans other than the unlimited service option. AOL says the "modest" price increase will help fund continued improvements in the AOL service and pay for development of its upcoming 7.0 version of its software.

"This price increase is about looking ahead," says Ann Brackbill, an AOL spokesperson. "We will be expanding our AOL Anywhere offerings along with building an online music destination and developing broadband content." AOL Anywhere is an umbrella term that describes AOL's strategy to give access to its service via myriad devices including televisions, cell phones, and pagers. The average AOL member spends "as much as" 70 minutes online per day, according to the company. It expects the number to increase as AOL continues to add services.

Paying the Bills

The price ISPs pay for Internet bandwidth has been falling 20 percent a year for the past three years, says Daryl Schoolar, an analyst with Cahners In-Stat. AOL's price hike will boost its monthly bottom line by $38 million, he estimates.

"Many consumers will reevaluate the worth of their AOL service, and some will switch," Schoolar says. Most won't, he adds. "AOL is like TV these days. AOL is raising rates because it can," Schoolar says, not because its costs are rising.

New dial-up revenue will help fund the build-out of AOL broadband business, says Yankee Group's Lancaster. It will also offset weak online advertising revenues that have hurt many Internet companies. Also, the price hike will likely help pay for AOL's merger with Time Warner, which reportedly cost more than $1 billion.

Scarlet Pruitt of the IDG News Service contributed to this report.

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