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In the original vision of a wired Utopia, computers were to be cheap and ubiquitous, and everyone would connect for free to the Net from home, work, or wherever. Utopia may still be a year or two away, but free access to the wired world is already here: The Internet can be yours at no charge -- provided that in return for free access you're willing to divulge personal information and put up with a steady stream of advertising targeted at little you. Millions of Web visitors have decided to accept such intrusions rather than pay $250 or so a year for Web access, and so free or nearly free Internet service providers (ISPs) are proliferating -- and signing up customers at unprecedented rates.
On Jan. 6, Alta Vista announced that it has attracted 1.5 million customers to its free service in just five months -- about a year and three months less than it took America Online to grow to 1 million subscribers. NetZero announced on Jan. 10 that it has registered 3 million users of its free service in 15 months and proclaimed itself the No. 2 ISP to AOL. At least, it has surpassed the roughly 1.5 million subscribers each that for-pay ISPs EarthLink and MindSpring -- which are soon to merge -- took years to attract. In early January, Excite@Home also added a free dial-up access plan. It won't release numbers yet, but the service's general manager, Vijay Krish, says "we're doing far better than any free ISP from a growth-rate perspective." (For an overview of the ISP landscape, see the accompanying table, "An ISP Sampler.")
"All of the free ISPs are targeting the AOL user base in hopes that many will convert"
To some observers, the strongest proof that free ISPs are gaining traction came on Jan. 10, when America Online announced that it would acquire Time Warner. Although AOL didn't mention competition from free services in announcing the deal, at least a few Internet analysts believe the merger was motivated in part by AOL's need to keep several steps ahead of free ISPs. The idea is that if AOL is to motivate 20 million customers to keep paying $21.95 a month for its flagship service, it will need to offer the kind of compelling content that it's gaining through Time Warner.
"All of the free ISPs, including us, are targeting the AOL user base in hopes that many will convert," says Excite@Home's Krish. AltaVista says 20% to 30% of its customers are coming from AOL. About 60% of Alta Vista customers say they'll use it only as a backup ISP. But this "means that 40% are dumping their previous ISP," says Ross B. Levinsohn, vice-president for new media at AltaVista. "Give it a couple of months and put some serious marketing behind it, and six months from now you'll see a significant dropoff [in the business of] for-pay ISPs," he predicts.
HOLDING OUT.
Maybe. The fact is even though free ISPs are growing fast, the vast majority of Internet visitors still don't seem to mind paying for access. AOL attracted a record 1.8 million new customers in the most recent quarter. And while many analysts think for-pay ISPs will eventually be pressured to offer free service, for now these providers are loath to give up their income stream. AOL, for instance, still gathers about two-thirds of its revenues from access charges. The portion that comes from marketing and advertising deals is growing, but "we need those subscription revenues to run the business," says Tricia Primrose, an AOL spokesperson.
The ever-pragmatic AOL has changed its mind in the past, though. In Britain, when free services started to give AOL fits, it offered a free ISP under the Netscape brand. While the business model in Britain is different, since "free" Internet users must still pay per-minute telephone charges (and ISPs get a share of those revenues from telecom companies), what happened there could portend what will happen in the U.S., says Eric Kintz, a project manager responsible for the e-commerce practice at global management consulting firm Roland Berger & Partners.
Already, both AOL and Microsoft are experimenting with low-cost offerings in partnership with retailers. For example, Costco is offering MSN Internet access for three months for $35.97 (roughly half off the regular price of $21.95 a month). And Circuit City sells computers with a $400 rebate to customers who agree to sign up for CompuServe (AOL's value-oriented brand) at $21.95 a month for three years. AOL also plans to launch a lower-priced service co-branded with Wal-Mart. The theory among those who think that AOL is starting to adapt is that it may cast its AOL service as a premium brand that carries a charge, then create a more generic -- and plain -- free ISP.
Lots of free ISP startups would be crushed if AOL or Microsoft decided to move in
For now, AOL, like other large, nationwide for-pay ISPs, isn't really at risk. "The free ISP model has yet to be proven," argues Kirsten Hamling, a spokesperson at EarthLink. If it does work, she adds, her company, not to mention AOL, will have the scale to implement it.
In fact, one of the biggest risks faced by independent free ISPs -- especially the startups that are just now trying to build an audience -- is that behemoths such as AOL and Microsoft could come out with free ISPs that would crush them. NetZero, which analysts say has already built enough critical mass to put it out of immediate danger, swears that it doesn't feel vulnerable. CEO Mark Goldston argues that as larger players start free ISPs they will validate the business model. He points to Excite and Yahoo! (which launched a free Kmart-branded service in December), as positives for the company. "We hoped that major players would get into the space," he says. "Hertz needs Avis, and Nike needs Reebok to create a benchmark."
TANGLED MIX.
In truth, free ISPs don't need to dominate the market to survive. They only need to persuade enough consumers to switch, plus gain a high enough percentage of the millions of people expected to come online this year, to make their business models work. Free ISP businesses, while hard to untangle, usually involve a mix of advertising, sponsorships, and e-commerce revenues.
A previous generation of free ISPs, including BOSnet, USFreeway, and CyberFreeway, all folded. This time around, connectivity costs are lower and technology has gotten better. And ad spending on the Web is rising. "We're at a great point now, and it is only getting better," says Charles Katz, CEO of 1stUp.com, which provides technology and services to companies that want to offer free Internet access. For instance, it provides the backbone for AltaVista's and Excite@Home's services.
Net researcher Jupiter Communications thinks free ISPs that already have a customer base will survive, even though it may take them years to turn a profit. For larger players, making a profit near-term is perhaps less important than finding a cheap way to acquire new customers. For offline retailers, setting up a free ISP is a way to create an instant e-commerce strategy. For online businesses, it's a way to bring in the next group of customers, says Katz. Excite@Home will be announcing several partnerships that pair free ISP service with offline businesses, Krish says. Roland Berger's Kintz expects stockbrokers to offer free ISP service, for example, as will e-commerce players such as online shopping malls.
"A significant segment of the population likes free stuff regardless of what they have to put up with to get it"
Excite@Home hopes that free access will build traffic to its Excite portal and expand the reach of its ISP service beyond areas served by cable modem so it can eventually migrate customers from free dial-up to paid broadband, says Krish. He sees the chance to sign customers for free dial-up service as a "short-term" opportunity that eventually will plateau. "Everyone will not be willing to give up personal information," he says.
Marketers think demand could level off at a higher point, though. "There is a significant segment of the population that likes free stuff regardless of what they have to put up with to get it," says Jim Meskauskas, a media manager with ad agency Mediasmith. At one point, he bought ads for a client on NetZero that targeted women age 25 to 54. Those were a limited success, but he's still trying out the services. "You never know what works until you try it," he says.
HOW MANY USERS?
The brains behind free ISPs think it's just a matter of time before Web visitors figure out that the advertising delivered by free ISPs isn't any more distracting than the ads the paid services lob at them -- and that the network connections of free ISPs are as reliable as the connections of those that charge a fee. (A sampling of free ISPs by both Jupiter and BW Online shows that the quality of most free ISPs isn't up to snuff, however.)
The reliability of the free services will almost certainly have a major impact on the size of the market. Jupiter predicts that only 13% of the total online population (including 17% of dial-up users) will be using exclusively free services by 2003, the vast majority on ad-supported sites. Zia Daniell Wigder, principal analyst for Jupiter's September, 1999, report entitled "Free Access Services: Deriving Revenues from No-Cost Access," concedes that her numbers "may prove conservative," however. Emily Meehan, a senior analyst at research firm Yankee Group, is at the other end of the spectrum: She predicts that by 2002 "at least half of the dial-up ISP customers will have experimented with, or will be using" a free ISP.
Will free ISPs create two separate and unequal Internets -- one low quality, the other high?
One promise of free access is that it'll open up the Internet to a new group of Web surfers who have been either unwilling or unable to pay for monthly service. That includes senior citizens, students, immigrants, poor families, or people who don't have a credit card for buying things online. Free ISPs are one way to solve the looming "digital divide," well documented by U.S. Commerce Dept. research, that threatens to leave great swaths of the U.S. public out of the Internet Age.
One problem free ISPs may create is two separate and unequal Internets -- a "low quality," dial-up Internet and a high-end broadband Internet. "There will be two Internets," says Kintz. Not only will the poor be relegated to the low quality Internet, they'll be required to trade their privacy for access, points out Paula Y. Bagasao, president of information services consulting firm Global Knowledge Services and a frequent commentator on the digital divide. Free ISPs "can open up access, but they aren't the solution to equitable access," she says. "The question is, how do you get the message out to this disconnected group of people?"
That's where partnerships between online and offline companies come in. Kmart and Yahoo!'s bluelight.com Web shopping site, which comes with free access, is one example. Beginning in February, disks for the free ISP will be distributed in more than 2,000 Kmart stores nationwide. Internet visionaries weren't imagining a day when free Internet access would become one of Kmart's bluelight specials. Yet in the context of their egalitarian plan, it makes perfect sense.
Amey Stone in New York with reports from Margaret Popper and Mica Schneider in New York, Catherine Yang in Washington, and Larry Armstrong in Los Angeles
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