Ad-Supported Sites Take Hit
The recent failures of two more companies that provide free Internet access to millions of consumers is casting an even deeper shadow on the future of “dot-coms” that are heavily dependent upon online advertising revenue.
San Francisco-based 1stUp.com, which provided free online access for millions of AltaVista users, said Monday it would go out of business early in 2001. Sunnyvale, Calif.-based Spinway Corp., which provided service for Kmart Corp.’s Bluelight.com site, abruptly shut its doors Dec. 1.
The companies hoped to generate enough advertising revenue to cover operating costs. But the lack of revenue prompted investors--including 1stUp.com financial backer CMGI Inc.--to stop pouring more money into the ventures.
“This definitely does not bode well for the free-access sector,” said Christopher Todd, an online analyst with Jupiter Research. “It demonstrates the difficulty of trying to make a viable business model that depends solely upon advertising revenue--and doesn’t have compelling content to back it up.”
The latest failures are part of a brutal shakeout in the business of providing free Internet access. Two free access providers filed for bankruptcy earlier this year, sparking debate on whether no-fee providers can compete with America Online, EarthLink and other companies that charge monthly access fees--and therefore aren’t dependent solely upon advertising revenue.
During the past year, 1stUp.com signed agreements to operate free Internet service programs carrying the brand names of 130 corporate partners, including Lycos and Excite. The ventures attracted 5.5 million users, including 3 million at AltaVista.
Though 1stUp.com created “a quality Internet access program,” the company wasn’t able to derive revenue from advertising, said Allison Huffman, public relations manager for Andover, Mass.-based CMGI Inc. “They faced changing marketing conditions and a very competitive landscape.”
The latest failures leave NetZero Inc., with 5.7 million registered users, as the clear leader in the free-access sector. Executives at the Westlake Village-based company maintain that their business model insulates NetZero from market forces that overcame 1stUp.com and Spinway.
“This is a tough time to be advertising dependent, and if you can’t deliver targeted advertising to a large-scale audience and some level of support data for who you’re reaching, you’re going to be running ‘going out of business’ sales,” said NetZero Chairman and Chief Executive Mark R. Goldston.
Though 1stUp.com and Spinway acted as behind-the-scenes access providers for better-known brands, Westlake Village-based NetZero hopes to connect with consumers by building its own brand of free online access. Goldston said NetZero will survive because it can better target advertising and provide advertisers with detailed reports on how their money is being spent.
But some Internet observers question whether any ad-supported service provider can turn a profit.
“The answer to the question of whether an ad-supported model will work is a resounding no,” said Peter Stelian, chief financial officer of OurHouse.com, a Web site affiliated with Ace Hardware that had contracted with Spinway. “Basically, the tide that came in with a rush is now going back to the EarthLinks, AOLs and MSNs.”
Spinway and 1stUp.com have been caught in the same rapidly cooling market for online advertising that has sent share prices of many ad-dependent Internet players tumbling. NetZero shares, for example, are down 96% from their yearly high, and CMGI shares are down 90%. Spinway reportedly abandoned plans for an initial public stock offering earlier this year.
“It was basically the trickle-down effect of dot-com financing drying up,” said Bluelight.com spokesman Dave Karraker. “When the dot-coms stopped spending heavily on online advertising, revenue dried up and Spinway ran out of money and closed its doors.”
Bluelight.com acquired “selected assets” of Spinway and will keep its free access program going for existing customers during the important holiday season. Bluelight.com also will make free Internet access available to a handful of other Spinway partners that choose to pay a fee to ensure continued access for their subscribers.
“We will make a decision in January when we come up for air after the holiday season on what to do next,” Karraker said. “It might turn out that [free Internet access] could still be a valuable marketing tool for us.”
AltaVista is offering subscribers three months of free access through Microsoft’s MSN service--but after that, consumers would have to pay $21.95 each month for continued access. AltaVista executives said the 1stUp.com failure won’t hurt the company’s core business.
“It was a great marketing vehicle to expose new Internet users to AltaVista search services, but AltaVista is a search technology company and 93% of our business occurs in that [online] search box,” AltaVista spokesman Jim Shissler said.
