Software Choices and Switching Costs

It can be hard to admit you’re wrong… but I’ve been wrong many times.

I was wrong about eBay, for instance. I believed it had to either police its auctions and sink the balance sheet or get sued to death. It has avoided both fates so far.

I was also wrong, very wrong, about America Online. I left the service in 1997 and figured millions more would follow me. AOL, with a series of price hikes for its default unlimited-use plan, is proving just how wrong I was.

Despite the July price of nearly $24 per month, nearly all of AOL’s roughly 28 million customers are expected to stick around.

In addition, AOL earns roughly $8.50 per month, per user, from advertising and e-commerce on top of its monthly fees, against maybe 50 cents for the average Internet service provider (ISP).

Why has AOL won?

As with Microsoft, it’s the software, stupid. While most ISPs offer only a browser and perhaps an email package, AOL’s bundle has long included chat, instant messaging, buddy lists, and other features whose power increases the more people use them.

I ran forums and wrote AOL pages for the late NetGuide magazine in the mid-1990s, and I can tell you there’s not much difference between AOL’s structure and that of the Web. There were many more graphic “units” on each page, but the tags were virtually identical.

So why didn’t AOL disappear under the withering onslaught of thousands of ISPs offering “the real Internet” for the same price or less?

The AOL bundle was just simpler for consumers to get and use.

The disk came in the mail, you stuck it in a drive, and that was it. As you became familiar enough to put personal data into the system, the “switching costs” of leaving went up and up. You were locked in.

Remember, you could already get unlimited use of EarthLink for $2 less per month before AOL’s price hike, and EarthLink’s ads aimed at AOL — emphasizing privacy, speed, and simpler email addresses — haven’t really worked.

Microsoft has boosted the software content of its MSN package and even copied AOL with a price rise to $21.95 per month, but it hasn’t really caught up, either. It’s hoping that bundling MSN with Windows and taking AOL out of the bundle will get the job done.

But I’m no longer certain. Even if a rival ISP offers something like Portalvision, which delivers all of AOL’s software features (and more), there are still those switching costs to contend with.

The best option may be to wean users away slowly. Portalvision’s plan of using churches, colleges, and political parties as affiliates won’t get far with AOL users, unless those users can maintain the AOL “lifeline” rate of $4.95 per month.

Maybe Portalvision’s affiliates can start with their own “lifeline rate” of $9.95 per month for, say, 5 hours of monthly use and gradually convince their AOL “friends” to switch plans. But if many AOLers switch to the lifeline, you can bet its cost will rise sharply.

Besides, there’s little money out there with which rival ISPs can compete on marketing. Many are probably hungry enough for cash that they’ll match AOL’s hike, especially in rural areas.

So is there no hope? Is the U.S. Web doomed to become an AOL lake? Not necessarily, but it’s time for me to admit one truth: In the late 20th century, it certainly was one.

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