Computer Protection

The market is the toughest regulator of all.

You can almost forgive good-government types for wanting to take credit for the recent settlement offered by America Online to its customers. In the wake of highly publicized problems after switching to a flat-rate, unlimited-access plan--including a lawsuit filed in California by five disgruntled users and the threat of lawsuits from about three dozen state attorneys general--AOL has offered the following terms to its roughly 8 million subscribers: refunds or free time to make up for an ongoing (though improving) dial-up dilemma, a $350 million upgrade of system capacity, a temporary curb on advertising for new customers, and clear wording in promotional materials explaining that customers may encounter delays when going online. Such a settlement seems to vindicate both the need for and efficacy of government oversight of consumer issues.

Illinois Attorney General Jim Ryan summed things up this way: "Cyberspace is a new and exciting place to acquire information. But we must remain vigilant to make sure that consumers have the same protections there as they do in more traditional venues."

Ryan is right that consumers need protection. But he is wrong to assume that such protection comes in any significant way from the government. In fact, the market is a far more efficient--and far less forgiving--regulator than state consumer protection agencies. Because of cut-throat competition with big on-line providers such as CompuServe, Microsoft Network, and AT&T WorldNet--and the literally thousands of other Internet service providers--AOL already had most of the terms of the settlement in the works when the first reports of access problems surfaced in December.

Here are just a few of the ways in which that headless, heartless enforcer, the market, was spanking AOL sore without any help from attorneys general:

? CompuServe, AOL's largest competitor with about 2 million subscribers, ran an ad during the Super Bowl that featured a telephone busy signal and offered a toll-free number sardonically scripted as 1-888-NOT-BUSY. New print ads for the service read: "Busy People Can't Afford Busy Signals," and "Get On With It." AT&T WorldNet--which had its own highly publicized access problems last year--has opened up phone lines specifically for dissatisfied AOL users.

? Headlines such as "AOL's Growing Pains: How Its High-Tech Success Story Became a High-Profile Red Flag," "New Unlimited Access Plan Leaves Customers in AOL Hell," and "For $19.95 a Month, Unlimited Headaches for AOL" ran in newspapers across the country.

? Abusive commentaries flowed freely on Usenet discussion groups alt.america. online and alt.aolsucks.

? On the Tonight Show, Jay Leno joked that AOL subscribers used to cybersex will have to go back to lower-tech phone sex.

? Wall Street Journal columnists Thomas Petzinger Jr. and Walter Mossberg both decried AOL ("the service is now broken," wrote Mossberg) and endorsed the fast-growing Microsoft Network.

AOL's problems are the sort of negative publicity no competitor could orchestrate--and no company can ignore without going bankrupt. And AOL has in fact traditionally been very responsive to market forces. Started in 1985, it grew into a household name (and now pariah) by offering relatively cheap, easy, and dependable access to e-mail, chat groups, proprietary material, and, more recently, the Internet and World Wide Web. Indeed, hardcore Net freaks have always sniffed at AOL because of its user-friendliness and mass appeal.

The climb to the top of the heap has hardly been easy: AOL's cost for acquiring new subscribers is at least $45 per account and at times as much as $270 per account. Keeping those new people is no easy trick, either. Most industry analysts peg AOL's "churn rate"--the pace at which customers join briefly and quit--at somewhere between 25 percent and 40 percent. Because AOL generates over 90 percent of its cash flow from user fees, it must attract and hold more and more customers if it wants to make more money. To accomplish that, it must offer customers good terms and good service. But the flat-rate plan--a response to competition that helped tumble the value of AOL's stock by 60 percent between May and June of last year--is a double-edged sword under the best of circumstances: Even as flat-rate pricing woos new and placates current subscribers, it limits the amount of money AOL can get from any one account.

The same sort of pressures that spur market efficiencies ultimately drive consumer satisfaction and protection. Businesses, perhaps especially in the service sector, do not succeed by ignoring customers' desires and complaints.

Clearly, not everyone understands the process: In an odd and largely unreported moment from last year's Democratic National Convention, both Vice President Al Gore and Hillary Clinton cited government inspectors as the main reason why we have a safe food supply--as if grocers or restaurateurs could somehow profit from poisoning their customers. Luckily, most businesses have a far keener sense of what it takes to both gain and keep a customer.