I found this Red Herring article on the ELNK thread. Pretty sobering and very logical.
redherring.com
Are ISPs dead?
By Peter D. Henig
Redherring.com
June 26, 1999
Are ISPs dead? Not yet. But they've got one foot on a banana peel and the other foot in the grave.
With free access sweeping Europe, PC makers bundling access into their boxes, and hot new companies like NetZero trading free access for a peek at your demographics and the opportunity to blast you with ads, there are serious threats to the pure dial-up Internet service providers -- and to Net investors.
The ISP community is aware of these threats. EarthLink (Nasdaq: ELNK) is supposedly in acquisition talks with Gateway (NYSE: GTW) (what happened to its deal with Sprint [NYSE: FON]?), and MindSpring (Nasdaq: MSPG) is reportedly in discussions with someone, we know not whom.
In its first three months, NetZero was the fastest-growing ISP in history. Public ISPs have been overvalued, making them poor acquisition targets. Metered telephone charges make Internet access fees untenable in Europe. This news comes quickly on the heels of Gateway's announcement on Thursday that it was launching a free Internet service in France, which itself came just two days after Dell (Nasdaq: DELL) said it was planning to start up a free Internet service for its box owners in Europe in the coming months.
Suddenly, free dial-up access is the dirty little secret of the Internet business. It could knock the bottom out of Net stocks whose heart and soul -- not to mention their valuations -- rely heavily on a paying subscriber base.
And heed this warning: should a major network, like AT&T (NYSE: T), pair up with a major portal, like MSN -- and that combo is not that farfetched, considering Microsoft's (Nasdaq: MSFT) $5 billion investment in Ma Bell -- and offer free dial up access in the United States, it'd be game over for paid subscriptions. However, such an alliance would propel the growth of e-commerce into the stratosphere.
ACCESS WANTS TO BE FREE
"Internet access wants to be free," says Dana Serman, Net analyst for Lazard Frères.
He's not the only one saying so. Other analysts, like Henry Blodget of Merrill Lynch and Keith Benjamin of BancBoston Robertson Stephens have been tiptoeing around this issue as well, although more gingerly perhaps. When it comes to challenging the business models of companies like America Online (NYSE: AOL), the big firms have to consider that many of their institutional clients are up to their portfolios in AOL stock.
Which is why nearly every analyst on the Street has been straining to figure out whether AOL's European subscriber growth will come in below estimates. It's in Europe where free access could do the most damage to AOL; the Internet content provider has suddenly done an about-face, admitting there's a market to be had under the European free model.
Mr. Blodget argues that free access isn't really free at all, since in Europe Internet service providers can extract up to 30 percent of the toll-fees from telephone companies. Nevertheless, the trend is clearly in place for the next-generation ISPs to offer consumers free access in order to reach a critical mass of customers, then bombard those users with e-commerce and ads.
According to Mr. Serman, however, the free access model only works if, one, you own the network; and two, you get to that critical mass with lightning speed.
"If AT&T and Microsoft said tomorrow access was free, within two months, they'd have 10 million subscribers in the palm of their hand and the world eating off their fingertips," the analyst says.
DO THE MATH
Mr. Serman's point is compelling, especially when you consider that Ma Bell spent a cool $100 billion to acquire two of the top cable enterprises in the country. AT&T would theoretically have to spend maybe half a percentage point of that, or just $500 million, to play in the free-access game.
"It's a no-brainer ... just add up the revenues," says Mr. Serman. "E-commerce and ad revenues are a $400-$500 billion pie ... access isn't even a third of that. ... This is simple economics that no one is admitting to."
So what's it going to take for ISPs to admit that dial-up fees are all washed up?
Supply and demand. Once AT&T-Microsoft -- or whatever network-portal combo you choose -- comes out of the router closet and busts the access market wide open, it's good night to subscriber revenues. I can see Gates and Armstrong on the cover of Time now, giving notice that there's a new game in town. |
