New Study Cautions On-Line Users: "Surfer Beware".

ROCHESTER, N.Y.--(BUSINESS WIRE)--Oct. 8, 1998--

Price for Obtaining Information On the Web to Climb

While gaining access to the Internet is more affordable than ever, a new study by a leading business school predicts this trend will leave consumers paying more for online content that was once less expensive or free.

Internet Service Providers, Proprietary Content, and the Battle for Users' Dollars, released by the William E. Simon Graduate School of Business Administration, counteracts the illusion that consumers are saving money as competition increases and prices decrease in the Internet access wars. The study predicts that fees for obtaining popular on-line information - from movie reviews to airline fares to stock market quotes - will rise proportionately, counteracting a part of the bottom-line savings.

"The Internet is fast becoming an amusement park that charges both for admission and tickets to individual attractions," says Rajiv M. Dewan, assistant professor of computers and information systems at the Simon School. "As the cost of admission drops, more Internet attractions will charge higher fees with the consumer doing better, but not as well as some might expect."

The study, conducted by Dewan along with fellow Simon professors Marshall L. Freimer and Abraham Seidmann, is the first to develop models that examine the economic link between Internet service providers (those providing access to the Internet) and content providers (those offering information and services on the Internet). According to Dewan, firms providing valuable content on the Internet rely on access providers to bring customers to their doorsteps. Conversely, the access providers serve customers who are attracted to the Internet because of specific content offerings."

"The relationship between access providers and those dealing in content is very symbiotic," says Dewan. "Factors affecting one will have dramatic results on the other and in turn, every customer utilizing their services." Technology and the changing telecommunications marketplace are some of these factors. Providing access is becoming a commodity business in which prices are decreasing and only firms utilizing large networks can survive. In such an environment, customers arrive at the content provider's doorsteps with more money remaining in their pockets, and the content providers take advantage of this by raising prices.

In establishing these trends, the study cites the 1997 business deal in which America Online sold its access division to WorldCom while absorbing Compuserve's content and customers. AOL's shift in focus from access to content sent up a red flag about the future of the industry. "This trend is taking the emphasis off access, which offers less profit opportunity, and increasing the business focus on content where there is more money to be made," says Dewan.

The study compares providing content to the business of providing other information goods (i.e.: software and movies) with high development costs and low variable costs. In addition, very few content providers compete in the same area and many have near monopolies, such as Dow-Jones for financial information and Lexis-Nexis for news retrieval. "Falling access costs paint a picture of better Internet value, but in reality allow specialized content providers to increase their fees," says Dewan. "People will also find themselves paying for information that was previously free of charge."

The study identifies taxation as another issue that could dramatically affect Internet consumers. Nine states currently levy taxes on Internet access. "It is important for government officials to realize that one state taxing Internet access has a domino effect on the Internet economy as a whole," says Dewan. Reduced revenue for the content provider will force it to sacrifice the quality of the information they offer or be forced to close shop. This will reduce the welfare of all customers whether they reside in states that tax Internet access or not.

"We have seen similar phenomena with changes in business focus, increased competition and taxation in the telecommunication industry where reduced tolls and calling charges have been accompanied by increased fees for directory information and other information services that were previously free," says Dewan, "Internet users will see an explosion of content available for a fee that parallels, if not exceeds, the 900 service on the telephone."

Abraham Seidmann is Xerox Professor of Computers and Information Systems and Operation Management.

Marshall L. Freimer is associate professor of applied statistics, management science, and computers and information systems.

Rajiv M. Dewan is assistant professor of computers and information systems.

The Simon School is routinely ranked among the top 25 graduate business schools by U.S. News & World Report and Business Week. The School, recognized worldwide for its leading scholarship in education, employs a distinctive approach to business education because of its flexibility, innovation, youth, size, global outlook and vision.

EDITOR NOTE: Copies of "Internet Service Providers, Proprietary Content, and the Battle for Users' Dollars" are available upon request. Please call the Simon School's Office of Public Affairs at 716/275-3736; fax: [phone]; e-mail: [e-mail].

Information about the Simon School is also available on the World Wide Web at http://www.ssb.rochester.edu.