Divvying up
Everyone’s gotta get paid.But how? We examine billing for future Internet services.
Erik Sherman, Contributing Editor

Of course, all those feature come at a cost. Much has been written about how much (and whether) consumers will pay for such services. But here's a more practical question: Who's going to bill for all this? And how?

Unlike built-in features in an automobile, refrigerator, or VCR, new services on the Web may come from a range of different sources—including ISPs, specialty service providers, and content creators. Consumers will complicate matters by moving around from place to place and accessing the Internet by a variety of means. Therefore, disparate entities will have to interact to track usage, present charges to the customer, collect payment, and split the proceeds. Now for the bad news. Virtually no one is ready for this level of cooperation.

Billing blues

Once upon a time, online billing entailed considerable intricacy. For example, when CompuServe ran a proprietary network controlled by a mainframe, the company maintained a complex system in which different customers paid varying rates, and certain content carried surcharges. The company split the resulting payments in appropriate proportions among its various content and service providers.

Then came the Web, and with it a loss of such central accounting within a closed system. On one hand, life is easy for ISPs because they either charge customers a flat, monthly access fee or they bill by the amount of time used. If customers want special content on the Internet, they complete a separate transaction with the provider of that content. The Internet community has developed ways to carry out such transactions, mainly using credit cards. Which is lucky for the ISPs, because they probably wouldn't be able to handle such exchanges themselves.

"Today, ISPs' billing systems are not sophisticated at all," says Laura Mellow, senior director of product management and new service development for GRIC Communications, a Milpitas, CA, firm that lets ISPs provide global Internet access to their customers through a network of cooperating service providers. Such rudimentary billing systems account for the existence of companies like GRIC—clearinghouses and settlement service providers. Such firms are finding a market, just as analogous firms in the cellular-telephone industry have for years.

Fine, you might think, we've got a workable model from which to build. But cellular clearinghouses work on a simple system. Carrier A only has to track how many minutes Carrier B's customer racks up using Carrier A's network. Unfortunately, future Internet services may demand far more complex billing measures.

Jeff Gordon

While Byram knows of no ISP that has such capabilities today, he already feels the pressure of customer demand for new sorts of services. MegaPath offers voice-over-DSL, buying the service from CLECs and reselling it to customers.

"I can see where it's going to get tricky when we give people who are perhaps on the road access to a phone elsewhere, and we have to start paying back AT&T when our customer was on the phone," Byram says. "It makes our billing systems very complicated."

Boggling

Complicated may be putting it lightly. Aside from needing to measure various factors, many ISPs also have Byzantine combinations of services, special pricing packages, and demographically segmented markets. The total number of combinations of pricing plans can run to astonishing levels.

"Some of our largest customers have more than 10 million subscribers in production today," says Jeff Gordon, vice president of Atlys/IP Development at Convergys, a Cincinnati company that markets ISP billing systems. "Some have 50,000 active pricing plans. If ISPs become, in effect, a storefront for consumers and businesses using the Internet, [they] have to offer a huge range of products and services." That range of products and services quickly becomes a dizzying array of price plans aimed to satisfy different types of customers. ISPs also have to forge and manage the business relationships necessary to provide all that content, which is a significant added expense.

"If they want to get into this space and they want to collect revenue from it, they will have to build the capability to do so, or buy the capability to do so," Mellow says.

Ironically some companies could actually make more money, without new services, by improving their billing systems. Instead of charging flat rates to customers, they could bill for the actual use of content or services, which could result in higher fees. But even large companies are locked into lower revenue models because of unsophisticated billing mechanisms, according to Bill Snowden, vice president of operations for Hydrogen Media, a St. Petersburg, FL, firm that provides e-business services for Fortune 1000 companies. "I don't think any of [our clients] are comfortable enough to charge for [actual] usage," Snowden says. "They are looking at flat rate because it's easier to handle and less to worry about." In other words, inflexible systems force Hydrogen Media's customers to pass on potentially lucrative pricing models.

Internal billing packages may fall short of ISP business needs. "None of those have the billing or back-end capabilities to be flexible on demand," says Jim Boyce, president of the Internet solutions group at Convergys, which, remember, makes ISP billing software. "None have the scalability to grow with the number of subscribers. The CIO doesn't want to let go because the CIO became the CIO by creating systems. It's a tremendous blind spot." Then there is the unanswered question of how much more capable third-party software might be.

Specialty service and content providers are not exempt from the need to examine billing systems and consider business partnerships. For example, Nagaraja Srivatsan, vice president of SeraNova's Digital Vision Labs, a digital content creator and consultancy, predicts that any company with content will have to look beyond its own boundaries to a broad use of the Web.

"Please don't think of content just as [though] it's going to feed your Web site [only]," Srivatsan says. "Don't expect all your customers are going to come through your portal." A company that offers special content to boaters, for example, might find prospects coming directly to its Web site or through links from pages devoted to water recreation. Billing systems cannot assume that a customer will come directly to a single Web s"The reason they're bundled [with Internet service] is because they're subsidized appliances," said Roland Van der Meer, a partner in ComVentures, a venture-capital firm specializing in communications. "It's like the cell phone business. They lose money on the device and make it up on the service." Such captive-audience schemes are necessary to offset the costs of design and manufacturing. "If you know what you're doing, just to design and build something decent would cost you $20 million easy," Van der Meer says. "You're losing money on every device you're shipping, and that's hard on start-ups."

Bills bills billsn ComVentures, a venture-capital firm specializing in communications. "It's like the cell phone business. They lose money on the device and make it up on the service." Such captive-audience schemes are necessary to offset the costs of design and manufacturing. "If you know what you're doing, just to design and build something decent would cost you $20 million easy," Van der Meer says. "You're losing money on every device you're shipping, and that's hard on start-ups."

Bills bills bills

However, consider this kind of scheme from the consumer point of view. If each appliance requires a separate ISP account, consumers who are inclined to use the devices will also need to be inclined toward multiple bills. This flies in the face of past experience in telecomunications.

"Models like that might work in the short term, but in the long term, will they work?" Van der Meer questions. Given historic evidence, customers are likely to want a single bill for various services delivered over the Internet, which in turn demands more flexible back-office systems for ISPs. In addition, the kind of interaction that the single-bill ideal would entail opens the door to other cans of worms (see sidebar, "Blame games").

“You may technically be able to deliver the product, but if you can’t bill for it, you can’t really sell it.” Adriam Byram, MegaPath Networks

It's not clear whether major telecommunications companies that also act as ISPs currently have the billing wherewithal to tackle business relationships on the Web. "Frankly, the telcos are probably the most sophisticated because they've been in it for so long," Mellow says. RBOCs provide dial-tone service, options such as voicemail or call forwarding, and connections to long-distance carriers, in some cases actually billing for those carriers. And yet, the telecommunications companies still typically bill only for time increments. At least they have experience with creating business agreements with many partners, especially in the cellular space.

Adriam Byram

But from Byram's view, the greater knowledge of customer billing does not necessarily prove a valuable asset. "Part of what we see with the RBOCs is that they're so slow to react," he says. "They have the systems in place, and that's good, but it's also bad because they have so much legacy stuff that it's hard for them to react."

Those legacy systems, designed for simpler business models, cannot provide the flexibility that will most likely be necessary. Even the most significant telecommunications bilIn this case, "adequately" is a deceptively mild word. Such systems can't rely on central processing alone, according to Byram, but have to start with all the servers on an ISP's network, because that's where much of the customer activity will occur. An ISP will then need to distinguish between its own customers and those using other ISPs, but gaining access to a given hosted service. Service providers will also have to know what exactly end users are doing—whether directly using a browser or receiving services through an Internet appliance—by examining packet headers. The data might then need to be packed up into some recognized format and copies shipped to the ISP's business partners. ISPs will finally need to present bills to and accept bills from partners for reconciliation (see sidebar, "Desperately seeking settlementut gaining access to a given hosted service. Service providers will also have to know what exactly end users are doing—whether directly using a browser or receiving services through an Internet appliance—by examining packet headers. The data might then need to be packed up into some recognized format and copies shipped to the ISP's business partners. ISPs will finally need to present bills to and accept bills from partners for reconciliation (see sidebar, "Desperately seeking settlement").

"At the moment, again I'd say we're at the beginning stages of that," Byram says. "We're now only starting to get electronic bills from our vendors. There's an awful lot of work that's got to go on before we have that kind of true electronic intercommunication."

Part of that work will involve more sophisticated security. In the estimation of Warwick Ford, CTO of VeriSign, a security service provider, the Secure Socket Layer (SSL) security in current browsers can protect about 80 percent of Internet transactions. "But on the wireless Internet," Ford says, "that type of model maybe will satisfy 50 percent of these functions." Public-key encryption might work, but that would mean everyone involved, from end users to ISPs to Internet appliances, would need a way to exchange and use the encryption keys.

Intermediary anyone?

Such demanding conditions suggest three strategies open to ISPs, as well as other Internet-related companies working with them: enhance existing in-house systems, modify and install off-the-shelf applications, or completely outsource the work. "There are probably a bunch of different levels of involvement between those...extremes," Mellow says. Companies will have to balance whether they have the technical ability to write or modify systems against the cost of obtaining talent that can.

Currently, some businesses, such as GRIC and iPass, have at least a foot in the door. They create networks of ISPs that will recognize each others' customers, giving consumers international access to the Internet. These virtual networks have some basic, necessary business agreements in place, and are already in the business of clearing and reconciling charges among ISPs. On the other hand, they currently aren't capable of the types of billing work the future will call for.

"Today there's no clearinghouse that's quite ready for everything that we can talk about coming up, particularly when you start talkingAnd so, the ISPs, carriers, and content and service providers are left without a clear answer to how they will do business. "This whole industry is changing so rapidly that it's very difficult to see more than six months or a year ahead," Byram says. "You can lay out some broad things, but it's hard to say, 'Eighteen months from now, this is what we'll be doing.'"

One can only hope that when the companies know what they need to do, enough time will still be left to get it done.s.

And so, the ISPs, carriers, and content and service providers are left without a clear answer to how they will do business. "This whole industry is changing so rapidly that it's very difficult to see more than six months or a year ahead," Byram says. "You can lay out some broad things, but it's hard to say, 'Eighteen months from now, this is what we'll be doing.'"

One can only hope that when the companies know what they need to do, enough time will still be left to get iBill Snowden, vice-president of Operations at Hydrogen Media, just thinks of his local telephone carrier, a traditional RBOC. "They can't even get a bill straight between their ISP division and their local-phone division," Snowden says. "This is on a corporate level, and you would think they would have it together there before they took it to the consumer. Now they're throwing TV into the mix, and it's scary."

Add multiple unrelated vendors who have to interact, and the picture could get decidedly unpleasant. Forget performance issues, for a moment, and follow the money. Collections become an issue. A customer that fails to pay a bill may have a direct relationship with the content provider, but indirectly through an ISP, for example. To take action, the content provider must now work through the ISP, making recovery of money more complicated.onsumer. Now they're throwing TV into the mix, and it's scary."

Add multiple unrelated vendors who have to interact, and the picture could get decidedly unpleasant. Forget performance issues, for a moment, and follow the money. Collections become an issue. A customer that fails to pay a bill may have a direct relationship with the content provider, but indirectly through an ISP, for example. To take action, the content provider must now work through the ISP, making recovery of money more complicated.

"It creates issues. In terms of giving our services to a third party that is bundling them and reselling them, I suppose they'd have to perform front-line collection," says Craig Apatov, chief operating officer of ePicNetz, a service division of Hypercom, a Fortune 500 provider of electronic payment systems and telecommunications equipment. Such issues—Beyond issues of brand and image, lurk bottom-line costs. "We've seen scores of ISPs whose economic model is a non sequitur because they have, on average, three customer calls to set up a new account," relates Jim Boyce, president of the Internet solutions group of Convergys. In partnerships, the costs would presumably be borne by all, suggesting that billing solutions might cause more problems than they solve, unless companies find a way to include customer contact management.