ARCHIVE
January 20, 1999
Giving It All Away
By Tiernan Ray
EVERYONE WANTS something for free, don't they? On Tuesday, OnSale (ONSL), the Internet auctioneer, said, "Damn the business plan," and announced the company would be selling computers at prices only Crazy Eddie would have thought possible. The other big deal of the day, the announcement by cable-modem impresario At Home (ATHM) that it intends to buy Internet portal Excite (XCIT) was an indication that Internet access, too, will soon be free, and that many telephone companies will probably follow At Home in acquiring major Web properties.
On its face, the Excite deal seems simply like the latest step in the Internet's attempt to kill off America Online (AOL) and replace the giant with me-too services. When it launched the online service Snap! over a year ago, computer news site C|Net (CNET), which is part owned by NBC -- a unit of General Electric (GE) -- made up T-shirts which read, simply, "Hello Snap!, Goodbye AOL." The Excite deal looks like more of such Internet snobbery. At Home already acts like a Web portal: It has signed up content partners such as Amazon.com (AMZN), privately held Bloomberg and the National Basketball Association, and its latest quarterly filing claims the company has 40 advertisers.
But the fact that At Home is part owned by AT&T (T) and TCI (TCOMA), which are merging, reveals a deeper meaning: For the telephone companies, the looming specter of overcapacity is the prime motive for such deals. After spending billions over the past several years to build out their data networks and upgrade their facilities to handle the exploding Internet traffic, telephone companies such as Sprint (FON) and MCI WorldCom (WCOM) are scrambling to find ways to attract and retain new customers for all that capacity. If they don't, they face the unpleasant prospect of having thousands of miles of fiber-optic capacity in the ground not generating revenues.
We're not saying that At Home intends to give away its prized high-speed Internet access. Rather, Internet service will break down along the lines of pay television (cable) and free television (advertiser-supported network programming), with slower telephone Internet access following the advertiser-supported route. The driving factors? Overcapacity and the corollary notion that the phone companies can make more money from those who want to sell products and services over the Net rather than the Web surfers themselves. David Smith, with consulting firm Technology Futures of Austin, Texas, says there may be more capacity in the near term than anyone can use, and more than anyone can sell.
While your experience with the Internet from home may seem slow, things are different deep within the phone networks at the core of the Net. Data pioneers like WorldCom and Qwest Communications (QWST) have thousands of miles of captive "dark fiber," says Smith, which is capacity on their networks that isn't even accounted for. Today, only some portion of Qwest's network is sold, with the rest lying unused.
As Qwest finishes construction of its 18,000 mile, coast-to-coast network and brings the full capacity online, the challenge in paying off more than $2 billion in debt financing will be to quickly get customers for that network. As a result, the company has been entering into strange marketing deals: Providing discounted long distance to Web surfers on Netscape Communications' (NSCP) Netcenter, for instance. Then, in December 1998, announcing a partnership with Microsoft (MSFT) to host access to Redmond's applications through the Internet. Merrill Lynch's Dan Rheingold writes of the Microsoft deal that it will generate branded, high-margin Internet traffic on Qwest's phone lines totaling upward of $1.7 billion in the next five years.
And free Internet access may be the next gimmick in store from Qwest and the phone companies. Retail Internet accounts are a low-margin business, so they're not the real goal. The real appeal for Qwest and WorldCom is to get lots of traffic onto their networks, and then leverage that valuable traffic to really big customers who will pay lots to reach them. That includes online retailers, like Amazon, who want a private road to the most customers, and regional Internet service providers who want to guarantee their subscribers access to the most desirable Internet destinations.
Buying portal sites and giving away free access to the Net to the great unwashed is one way for the phone companies to get there. Today's portals will likely be tomorrow's private Internets, plural. In a recent report on At Home, prior to the merger announcement, Merrill Lynch analyst Lauren Rich Fine said AT&T and At Home are doing just that, building a private Internet capable of transporting five million cable modem users. The pressure to compete with such aggressive moves will probably cause Bell Atlantic (BEL) and others to step up portal site acquisitions, rapidly decrease the cost of access and push the brand -- hard. "Long term, there's gonna be a lot of competition" in the data-networking market, says Smith, "and a lot of consolidation. And the only way to avoid bruising price competition may be to have the brands and the Internet eyeballs to gain leverage in that market."
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