FWIW...Free Internet Services Begin To Change Face Of Web-Access Industry
Dow Jones Online News, Thursday, August 12, 1999 at 15:46
By Peter Loftus and Joelle Tessler, Staff Writers
NEW YORK -(Dow Jones)- When Internet-service providers, or ISPs,
first began doing business earlier in this decade, the only way they
could effectively generate revenue was by charging subscription fees to
users.
But Internet users, growing more savvy by the day, now are being
courted by start-ups offering free service - challenging the ability of
old-line (more than a few months old, that is) ISPs to compete in the
medium they helped define.
Will free Web access become the norm? Many industry executives and
analysts doubt that free connections will replace today's standard of
unlimited access for a subscription fee anytime soon.
Steady revenue streams from these fees have helped build industry
leaders such as America Online Inc. (AOL), Earthlink Network Inc.
(ELNK), MindSpring Enterprises Inc. (MSPG) and the Internet-access units
of AT&T Corp. (T) and Microsoft Corp. (MSFT). Together, these five
companies provide access to about 25 million customers. Microsoft,
however, recently said that it is considering offering low-priced, or
even free, Internet access.
However, low-priced or free services from online upstarts have
already shaken the ISP industry, leading many established players to
retool their price structures in ways that lower the cost of getting
online.
"The whole mood toward the Internet is shifting toward lower prices
in the access market," said Mark Grote, marketing manager for Freei.Net,
another upstart provider of free, advertising-supported Internet access.
In response, ISPs old and new are offering different ways of giving
the customer the perception of something for nothing, or at least a
little less than something might ordinarily cost.
The largest and best-known of the free, advertising-supported
Internet service providers is NetZero, which has filed to go public. The
company, launched in October 1998, currently offers its service in more
than 1,100 cities and had signed up about 1.17 million registered users
through the end of June.
NetZero makes most of its money from advertisements that appear on a
15-second cycle in its "ZeroPort" ad window, which travels wherever the
user goes on the Net. The company lets advertisers target their messages
using demographic, geographic and other data.
Freei.Net, a NetZero competitor, currently has about 250,000
subscribers and hopes to have 2.5 million by the end of the year. The
company is in the midst of rolling its service out in about 60 cities
across the country.
Other players in this area include Surfree.com, which plans to roll
out a service that will let its users reduce their access charges by
viewing ads, and Compaq Computer Corp.'s (CPQ) AltaVista, which will
offer an ad-supported access service using technology from 1stUp.com
Corp.
The real goal of these companies, according to Forrester Research
analyst Chris Charron, is to get to "the pot of gold of advertising and
electronic commerce," since that is where the money is at a time when
Internet access is turning into a tight-margin, commodity-like business.
ISPs in Britain have found a different way to generate revenue
without charging monthly fees. But unlike the advertising-supported
services in the U.S., these plans aren't truly free.
United Kingdom users end up paying for Web access because the local
phone calls required for dial-up connections are billed on a metered
basis. ISPs offering free access partner with local telephone companies
to share in the increased local calling revenue driven by Internet
usage.
The biggest free ISP in Britain is Freeserve, which was launched last
fall and has grown to about 1.3 million subscribers. Freeserve gets a
"small percentage" of local-phone-call tolls and also gets revenue from
advertising and e-commerce, said Freeserve spokeswoman Justine Moon.
Dulles, Va.-based AOL, the leading ISP, is also moving into the
U.K.'s free ISP market. The company is currently launching Netscape
Online, a free service that will receive a portion of the local calling
tolls required for dial-up access.
Many consumers in the U.S. get free access when they buy a computer.
In February, Gateway Inc. (GTW) began offering a year of free access
through its Gateway.net service with the purchase of a PC. The company
has also rolled out similar offerings in the U.K., France and Ireland,
and is in discussions with several local-phone companies in those
countries about potential partnerships.
Gateway hasn't decided whether to begin charging its subscribers once
their year of free access ends. The company won't reveal whether the
cost of a year of Internet service, valued at $129, is bundled into the
price of a PC. But those who don't want the year of free access will pay
$75 less for the PC.
Last month, Round Rock, Texas-based Dell Computer Corp. (DELL) began
bundling in one year of access through its Dellnet Internet service with
the purchase of a PC. Spokesman David Dix explained that Dell sees
Internet access as a standard feature that should be part of a computer
purchase.
In Dell's case, the full cost of Internet service - $129 a year - is
included in the price of a PC. Customers who don't want the service -
which includes 150 hours of access a month - can subtract that amount
from the PC's price.
However, some ISPs offer PC rebates to customers who agree to buy
access for a certain length of time. Those who agree to subscribe for up
to three years can often bring the price of a machine down to zero.
AOL's CompuServe service, which has been repositioned as a value
brand, has signed numerous deals to offer PC rebates of up to $400 for
buyers who agree to subscribe to the service for $21.95 a month for
three years. CompuServe's partners include International Business
Machines Corp. (IBM), eMachines Inc., Hewlett-Packard Co. (HWP) and
Compaq.
FlashNet Communications Inc. (FLAS) and Prodigy Communications Corp.
(PRGY) also offer PC rebates to customers who sign up for several years
of access.
All of these new, innovative access-pricing deals appear to be good
news for consumers. But analysts are divided on which of these business
models will succeed. The most controversial is probably
advertising-supported access.
Forrester's Charron pointed out that ad-supported ISPs operate in two
very different businesses.
Providing access, he said, is about marketing, providing customer
service and operating a network. Driving advertising and e-commerce
revenue, on the other hand, is about creating editorial content and a
seamless experience and selling advertising. Few companies, with the
notable exception of AOL, have succeeded at doing both, he said.
BancBoston Robertson Stephens & Co. analyst Rick Juarez also
questioned whether an ad-supported business can support the high capital
costs of building and running an Internet-access network.
Even industry leaders like AOL generate only about $4 to $5 per user
each month in advertising and e-commerce revenue, while network costs
alone can range from $5 to $9 per user each month before marketing
costs, said Ladenburg Thalman & Co. analyst Youssef Squali.
"Even AOL can't offer access for free," said Earthlink spokeswoman
Kirstin Kappos.
Whether or not free ISPs survive over the long haul, they could drive
down pricing for the access industry overall, said Ryan Jacob, chairman
and chief investment officer of Jacob Asset Management, an
investment-advisory firm focused on Internet companies.
Responding to the threat of free access, established ISPs could start
to offer more service choices, such as an option that would let
customers pay less for access if they agree to accept less customer
support, said Yankee Group analyst Emily Meehan.
FAC/Equities analyst Jeff Sadler sees numerous pricing structures for
Internet access on the horizon, including free service, $20 monthly fees
and everything in between.
Of the newer pricing models sweeping the industry right now, the one
that bundles access with the purchase of a machine will likely be the
most successful, analysts agreed.
According to Squali, Internet access will eventually resemble the
cellular phone model: users will receive the equipment for free and pay
monthly service fees. Service providers, he said, may eventually have to
subsidize some of the hardware costs.
In the future, Internet-access services will be tiered, much as the
television is today, predicts Patrick Griffin, Compaq's manager of
desktop marketing products.
Griffin believes "narrowband" access in the future will most likely
be supported by advertising, much like network television. But consumers
will pay extra for premium services with fatter bandwidth, such as
"broadband" access, just as they do for cable service.
Copyright (c) 1999 Dow Jones & Company, Inc.
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