Posted at 5:50 p.m. PDT Sunday, September 12, 1999
Why pay for Internet service?
More providers offer Net service at the most
popular price: free
BY CHRIS O'BRIEN
Mercury News Staff Writer
STEPHEN Nichols of Campbell decided AltaVista's free Internet
access wasn't worth the price after he repeatedly failed to get a
response from customer service.
But even as Nichols switches to a provider that charges $14.95 a
month, Justin Martinkovic can't wait to jettison his old
$21.95-a-month SlipNet account. He loves his new AltaVista
service and doesn't mind all the ads he's required to watch.
''I would think most people would be interested in the trade-off of
$21.95 a month just to watch some ads,'' Martinkovic said. ''I
definitely think this is the wave of the future.''
So does Compaq Computer Corp.'s AltaVista and other
companies lining up to provide free Internet access. They are
betting that for every Nichols, there are many more users like
Martinkovic who will gladly give up strong customer support and
other features provided by most ISPs in exchange for a free
Internet connection that requires them to watch a parade of ads.
Though the concept is a few years old, free Internet access has
picked up momentum in the past few months with AltaVista
announcing its service and NetZero filing its initial public offering of
stock, now expected within the next two weeks. Last month,
Surfree.com introduced a hybrid service where customers can
reduce their monthly bills by watching ads. And a handful of
companies are making it possible for just about anyone with a Web
site to provide free Internet access.
Plenty of users seem willing to bite. Though America Online is still
the dominant ISP with 18 million members, both AltaVista and
NetZero expect to have enough customers this year to rival the 1.8
million users of Microsoft Network, the second largest ISP.
But free Internet access remains a risky proposition. Several
companies have tried and failed. And while the latest contenders
believe they've done enough tinkering to make the concept work,
they all have yet to prove they can make a profit.
NetZero ISP service lives up to its free billing
''They need to develop an advertising model that supports them,''
said Kathey Hale, a Dataquest analyst. ''The only places supported
purely by ads are radio and TV. On the Internet, no one's cracked
it.''
A quick visit to the graveyard of free Internet access companies
shows tombstones for firms that thought they had the right equation.
There was Cyberfreeway of San Francisco, which died in 1997. A
year later, @Bigger.net of San Jose filed for bankruptcy about the
same time Tritium Networks of Cincinnati shut down. Each failed to
persuade advertisers to spend enough to cover their costs.
But the ISP market remains tempting. The number of U.S. Internet
users is expected to swell from 63 million in 1998 to 177 million in
2003, according to an International Data Corp. study. There are
plenty of companies convinced they can lure a significant chunk of
these users with the offer of free service.
These free services come in several flavors. There are the truly free
ISP companies like NetZero, AltaVista and Freei.net, which
require you to watch ads in exchange for a free connection.
Then there are the hybrids like Surfree.com, which allows users to
reduce their monthly bill from $14.95 to zero by watching ads.
NetGenie and webCOMBO charge $99.95 and $179.95,
respectively, for setup and software and promise lifetime Internet
access at no extra charge to people willing to watch ads.
In most cases, users must provide certain personal details and have
their online activities tracked for ad targeting.
Providers' costs falling
The free ISP movement is being helped along by a significant drop
in the cost of running the networks. Just as long-distance rates are
falling, increased competition among phone companies to sell
network services and evolving technology are cutting the back-end
cost for ISPs.
In addition, the free ISP companies are cutting other costs to the
bone and outsourcing most of their operations. Except for
Surfree.com, customer support for most of these sites essentially
consists of steering customers to lists of frequently asked questions
on the Web site or providing automated e-mail responses. After 30
days, NetGenie customers must pay to speak with customer
service.
''We don't think you sacrifice anything in terms of customer
support,'' said Bill Keenan, AltaVista's director of computing
strategy.
The big ISPs disagree. They believe customer support is at the heart of their relationship with users.
Folks at places like AOL and MindSpring think the majority of users will pay for better customer
service and a more reliable connection.
Still, the large ISPs aren't completely ignoring the phenomenon. Last weekend, MindSpring began
airing its first television commercials to gain market share from its bigger rivals and also to fend off
competition from free ISPs.
This summer, AOL began forming partnerships with computer companies to offer deals on its
CompuServe service, which usually charges $21.95 per month. Buyers of a Compaq computer
who sign up for CompuServe for three years get a $400 rebate. Microsoft Network offers a similar
rebate.
''What we see is market segmentation,'' said Tricia Primrose, an AOL spokeswoman. ''There is a
segment that is much more value-conscious.''
If the big ISPs aren't sweating, it may be because they've seen NetZero's financial statements. A
look at the documents the company filed with the Securities Exchange Commission this summer for
its IPO shows the difficulties the company and other free ISPs face.
The company hopes to raise $115 million to expand marketing and upgrade its network. With the
IPO pending, the company is in a ''quiet period'' and declined to be interviewed for this story.
In building its business, NetZero has venture capital from sources such as the Pasadena-based
idealab, Draper Fisher Jurvetson, of Redwood City, and Compaq.
Window always open
The service started in October 1998 and since then has signed up 1.6 million people, though the
company isn't sure how many are regular users. To use the service, a window -- dubbed the
''ZeroPort'' -- must always be displayed. Besides showing ads, ZeroPort has a series of buttons
that take the user to Web sites for subjects such as music, sports or a search engine that pay
NetZero a fee.
The company's IPO filing said the majority of its revenue comes from companies that provide the
search engine and other tools on the ZeroPort window. It also has deals with Compaq and Xerox,
which have agreed to bundle NetZero software with various products.
As NetZero grows, it hopes to be able to sell more ads at higher rates. But the company
acknowledges that the number of Web sites dependent on banner advertising is growing rapidly,
causing ad rates to drop.
Other risks include hackers who try to disable the ZeroPort window without cutting off the Internet
connection, though the company says it has fended off most attacks. The company also
acknowledges other potential problems, including past concerns about the reliability of its networks,
the limited support frustrating users and privacy concerns among users who don't like their online
moves being tracked.
Red ink
So far, the bottom-line results are grim: NetZero lost $8.2 million in the most recent quarter and
$15.2 million in its first year.
Of course, those kinds of numbers aren't stopping people from entering the free ISP game. In fact,
providing free Internet access is getting easier.
There are several companies that provide the necessary equipment, technology and customer
support for other firms to offer free ISP service from their Web sites. These back-end providers
get paid by the Web sites that offer the service to their customers. For instance, AltaVista hired
1stup.com to provide all the network and customer support for AltaVista's free service.
Companies such as 1stup.com want free ISP service to become a standard offering of any
self-respecting Web portal in the same way that free e-mail, search engines and news currently are.
Under this scenario, free Internet access becomes just one more way to attract people to a site and
keep them there longer.
''We see ad-supported Internet access as the next logical stop on the services that Web sites
offer,'' said Charles Katz, president and CEO of 1stup.com.
The partnership with AltaVista was the first for San Francisco-based 1stup.com, which expects to
announce a series of new partners in the coming weeks. The company faces competition from
Fanz.net, a Seattle-based company that focuses on providing free Internet access for regional Web
sites. Fanz.net bought many of the assets of @Bigger.net in its bankruptcy auction.
In the Bay Area, Fanz.net has a partnership with radio station KOIT to offer free Internet access.
Bill Parker, the Fanz.net president and CEO, said his company has plans to build similar
partnerships with everyone from television stations to sports teams.
New York-based MicroPortal is taking this all one step further by allowing Web sites to offer free
Internet access that doesn't require users to watch ads or pay fees. MicroPortal provides the
network and customer support and uses software that searches for the cheapest bandwidth
available.
Last Wednesday, MicroPortal announced its first partnership with WorldSpy.com, a Web site that
sells consumer electronics. Alan Clingman, chairman and CEO of WorldSpy.com, said users will
get a customized browser that includes the WorldSpy.com logo. Though he won't say how much
he's paying MicroPortal, he said offering free Internet access is a valuable way to drive customers
to his Web site.
''We think the economics are lining up to allow us to give this away,'' Clingman said. ''What we're
banking on is that this will be an efficient way to buy customers.''
Contact Chris O'Brien at cobrien@sjmercury.com or (408) 920-5464.
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