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Pricing Internet access

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As a rule, economic facts are often the equivalent of a cold shower. The plain fact is that not many internet firms were profitable at any time in the last five years. The list of unprofitable companies (and spectacular investment failures) is embarrassingly long, including Amazon, AT&T Broadband, E-Toys, Dr. Koop, and too many other dot-coms to mention. Indeed, positive profitability was so rare that we all know the names of firms that achieved it: Cisco, Yahoo, E-Bay, and AOL (if you count them as an Internet company). So I am struck by the comparative success of one general class of companies that continues to collect revenue, compete vigorously, achieve mass-market status, and not implode in spite of frequent restructuring. I refer to Internet service providers, or ISPs for short. How in the world can hundreds of these firms survive in this market over so many years-particularly in light of free alternatives, such as Netzero? What pricing mechanisms do access providers use to collect revenue? Why do these mechanisms work? More to the point, what do these mechanisms tell us about the source of sustainable economic value in Internet activity?

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Micro, IEEE  (Volume:21 ,  Issue: 2 )