Hi All,
Interesting article For those who invest in AOL or any other ISP's.
Have a great day!! Bummer but I didn't need to call in rich today. <GGG> But I did see INTC finally make it over 60 so at least I'm on the way there!!
Take Care
Ann
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From briefing.com
No Free ISP
30-Jun-99 21:03 ET
Free Internet service in Europe has ignited fear in the hearts of investors in American Internet Service Providers (ISPs). What happens to America Online (AOL) if it loses the ability to charge $21.95 for monthly Internet access? And how about the rest of the ISP pack -- ELNK, MSPG, PSIX, RMII, LOAX, and many more? At least AOL has revenue streams beyond the access fee. Before you rush out and dump all of your ISP stocks, however, let's consider the possibility that fears of a free ISP movement, and thus of the ISPs' demise, are greatly exaggerated.
Using Europe as a roadmap for the US is a tail-wagging-the-dog scenario. It is far more likely that the US pay-ISP model will not only survive, but will ultimately supplant the free ISP model in Europe.
Metered Or Unmetered?
This tale begins with local phone charges. In the US, local phone charges are flat-rate and so too are ISP charges. Internet use is therefore the same price whether you are online for 1 minute for 1000 minutes. In this regard, the US is very much in the minority. Virtually all of Europe, the UK, and Asia have metered local phone rates, ie you pay by the minute for local phone calls.
The impact of this pricing structure on Internet use and the development of Internet businesses cannot be understated. Internet access in the US is currently estimated at 38% of the population, versus 15% in the UK, 10% in Japan and Germany, and just 8% in France. And though the figures are not available for all of these regions, there is no doubt that average daily usage is much greater in the US than in any country where local phone charges are metered.
Why does this pricing difference matter to ISPs? For two reasons. First and most important, ISPs in countries with metered local phone rates typically get a cut of those phone charges. So the reality is that these ISPs are not truly free -- you are paying for their use indirectly via your payment to British Telecom or Deutsche Telekom, etc. You also pay directly for any customer service -- free ISPs typically charge by the minute for customer service calls (and who hasn't had to call ISP customer service at least once?). Second, metered pricing greatly reduces average usage, thus making per user costs to the ISP far lower in Europe than in the US (because fewer ports and less bandwidth is required to service each customer).
Even with these reasons why ISPs can be free in Europe, note that this business model has not yet won the day. Freeserv, Britain's largest free ISP, has experienced significant service problems as the number of subscribers has exploded, allowing providers with low prices but better service to pick up subscribers.
Why It Won't Work In The US
Because the US has unmetered phone rates, free ISPs will have trouble. Flat local phone rates without any cut for the ISP make the model very challenging to say the least. Not only will the ISP have no direct revenue source, but it will also have a much more difficult task of sustaining service as average usage goes up (at no extra cost to the consumer).
The free ISP crowd argues that the lack of direct subscription revenues can be overcome by increased revenues for advertising and ecommerce. But this argument is not compelling. An ISP is only a connection to the Internet. If AOL offers free access and its users immediately make Yahoo! (YHOO) their home page, AOL loses. The only way for a free ISP to survive in the US is via the forced advertising model. NetZero is currently trying that approach in the US, offering free access in exchange for personal information about your interests and a permanent 1" by 3" ad in your browser.
NetZero has been successful in opening new accounts -- over 500,000 in just its first six months. Whether it ever earns a profit and becomes the dominant ISP business model remains to be seen. Sustaining acceptable customer service as the subscriber base expands will be critical, acceptance of the permanent ads is also unproven, and it is light years behind AOL et al in the brand name battle. Quite likely, there is a niche in the market for the free ISP -- we can certainly imagine using NetZero as an away-from-home option for those who use a local provider -- but nothing more than niche.
Like Cell, Like PC
The more likely ISP model in the US is that of the cell phone. The cell business is driven by the monthly subscription, with the hardware offered as an incentive to lock up the monthly service, which can almost be seen as an annuity given the stickiness of ISPs (customers stick with an ISP because of the inconveniences of switching emails, etc). Granted, cell phones didn't offer the advertising possibilities that Internet browsing does (hard to stuff a 1" by 3" ad down a user's ear), but it's not clear that consumers will accept permanent ads and sub-par service in sufficient numbers to make this the dominant ISP business model.
Ultimately, the key factor which will drive the ISP business in the direction of the cell phone model is consumer demand. For most consumers without Internet access, the barrier is not the access fee, but the lack of a PC. Demand will therefore produce offerings of free or cut-rate PCs in exchange for a commitment to an ISP contract. Computer retailer Best Buy (BBY) just announced a plan to do just that, offering rebates on PCs to consumers who commit to a Prodigy (PRGY) Internet service contract. As is the case with a cell phone, the bet is that the subscriber will stay with the ISP well beyond the one year commitment, and that the service provider will gain an annuity in exchange for the up-front PC subsidy.
Not only should we see dramatic consolidation in the incredibly fractured ISP market, but we should also see consolidation between computer makers and ISPs. For that reason, recent rumors of Gateway (GTW) buying Earthlink (ELNK) and Mindspring (MSPG) being for sale, while not necessarily true, do make sense. If this is the direction that the market takes, you also don't have to worry about AOL. Though they haven't yet established relationships along the Best Buy/Prodigy lines, AOL is second to none when it comes to making deals. Certainly the prospect of establishing relationships with PC manufacturers and retailers is less daunting to AOL than an explosion in free ISP offerings.
Who's Leading Whom?
The notion that Europe is leading the way on free ISPs is flawed. In fact, the notion that Europe will lead the US in anything Net-related is a fantasy. Because of unmetered local phone rates, the US has a two year lead on Europe when it comes to the Internet. All of the leading global brand names on the Internet are US-based, and thus the strongest global growth sector for the next 5 years is dominated by the US -- all because of local phone rates! There will be tremendous pressure on all countries to change regulations to allow for unmetered local phone pricing, and while it might not happen immediately, it will be a blow to the free ISP movement when it does happen. It is the US that is leading Internet trends, and the trend to watch in the ISP industry is not the free ISP, but the PC/ISP consolidation as the cell phone model is adopted.
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