Free Internet Providers Are Making Inroads
Note to America Online, currently riding high in the wake of its proposed merger with Time Warner:
Connie Acton is planning to dump you.
It’s not that Acton, a 61-year-old schoolteacher in Walnut Creek, is dissatisfied with AOL’s service. In fact, she appreciates its simplicity and freedom from technical jargon.
On the other hand, she doesn’t see any point in paying $22 a month for the service when it’s now so easy to find an Internet connection for free.
“I think all the plans charging $20 and up should be looking over their shoulders,” she said recently.
Offers of free Web service are mushrooming. In the last several months, they have become a powerful come-on to both novice and experienced Net surfers willing to cede some privacy and convenience. Many free services place an advertising window over as much as a fifth of the user’s computer screen while connected; some subject their customers to a steady stream of marketing promotions and e-mail and sell customer information--including Web surfing habits--to outside marketers.
The trend is not likely to undermine AOL’s merger plans--in fact, the merger is partially a response to the same market conditions giving rise to free service. But it does suggest that fee-based Internet service providers, or ISPs, will face continuing price pressure that may put some of them, particularly smaller ones, out of business.
Dozens of such services are already up and running, including free providers affiliated with such blue-chip Internet brands as Yahoo and Excite@Home (which launched its service earlier this month).
Other free ISPs are “affinity” services marketed to members of discrete groups, such as the elderly or gays and lesbians. And a few are regional, backed by local philanthropies or government agencies.
Enthusiasts say the emergence of free services is an unsurprising response to the cost of traditional access, which at $20 to $22 monthly may be hard for lower-income families to afford. Free Internet access may even help address the troubling “digital divide” between computer haves and have-nots.
Many free services say they are already signing up thousands of users a day. The oldest, Westlake Village-based NetZero, early this month said it passed the 3-million mark in registered users--allowing it to claim to be the second-largest ISP in the world after AOL, which has about 22 million users.
The proliferation of free service providers leads some to wonder whether they will be able to attract sufficiently large audiences to put a dent in AOL, MSN and other leading subscription services such as EarthLink and AT&T; WorldNet.
Any erosion of subscription prices in the ISP market threatens to do serious financial damage to the traditional service providers. EarthLink, which has never turned a profit since its founding in 1994, relies on subscriptions for 95% of its revenue. AOL’s profit would be all but wiped out if it had to drop its $21.95 monthly fee by as little as $3.
But the jury is out on whether the free ISPs can attract the large and loyal subscriber bases commanded by the traditional services. For one thing, users of the free services may be inclined to switch among them at whim.
Independent surveys suggest, moreover, that the users of free ISPs tend to be, in the aggregate, less desirable to advertisers than Web surfers as a whole. Those earning $25,000 a year or less are more heavily represented among free-ISP users than in the general Web population, as are those who achieved only a high school education or less, according to NetRatings Inc.
The rise of free ISPs underscores what many Internet services already know: that “narrowband” access over relatively slow dial-up connections is destined to become a low-profit commodity. One key reason AOL is merging with Time Warner, in fact, is to gain entree to the latter’s Road Runner broadband service, a high-speed connection that enables users to enjoy video and other multimedia material over the Web--at a premium price.
The latest breed of ISPs are “free” only in a financial sense, of course. Most of the services require users to make compromises that some may find irksome.
NetZero, for instance, requires users to fill out a 40-item questionnaire eliciting personal data as well as marketing habits and buying predilections. Whenever users log on, the company tracks their meanderings all over the Web and sells that information to advertisers, whose pitches appear in an on-screen window, the “ZeroPort,” that users cannot close as long as they remain connected.
“Every time they log on, we register what they do,” NetZero Chief Executive Mark Goldston said. “We know, the minute they sign on, who they are and where they go. We archive their entire ‘clickstream’ and send them [marketing] messages based on it. That’s all part of our contract with them.”
And it’s the key to NetZero’s business plan, which offers advertisers the opportunity to target consumers with a vengeance.
The company’s ultimate advertising device, for which it charges a stratospheric “cost per thousand” rate of $300--more than 10 times the cost of a conventional banner-type Web ad--is what it calls an ad “missile.” These are specifically designed as counterpunches to whatever a user is viewing on the Web: “If you went to the Ford Web site and looked at the Ford Explorer [sport-utility vehicle],” Goldston said, “we’d show you an ad for a GM Suburban. If you’re on Amazon.com, an ad for Barnesandnoble.com will run in the ZeroPort.”
Goldston maintains that users become accustomed to the ZeroPort, which also displays applications like stock and news tickers. “People love it,” he said. “We took something that could have been a nuisance and made it something you become dependent on.”
Not everyone is persuaded. “I don’t think we know yet how much consumers are going to be willing to give up of their personal information or blanket their screens with commercials,” said Tom Wolzien, an Internet industry analyst at Sanford C. Bernstein & Co.
Others believe the cost of providing phone connections and marketing a service to consumers will keep the free ISPs from succeeding.
“It costs $12 to $16 a month to service a dial-up account--to buy the bandwidth, track it and supply customer service,” said Larry Gerbrandt, an analyst at research firm Paul Kagan Associates. “It’s difficult to generate that much in ad revenue per month.”
Critics also note that customers complain about slow connections via the free ISPs, repeated busy signals and a tendency to lose connections in mid-session.
“Customer service is a huge issue [among ISP users],” said Kristen Hamling, vice president for investor relations at Pasadena-based EarthLink. “A free service is something that people might use as a backup, but nothing that professionals would use day to day.”
“Think I had more fun during my last root canal,” groused a user of one free ISP to an Internet review page after running into trouble uninstalling the service’s software.
What would truly rattle the ISP establishment, some observers say, would be a decision by a large existing provider to go gratis and rely on advertising income. The best candidate for that, some believe, is Microsoft’s MSN, which offers a range of content and services that might compete more effectively with AOL if it could raise its user roster beyond the roughly 2 million it currently claims.
MSN has toyed with cut-rate pricing in the past, but “at this time there are no plans to make MSN access free,” said Diane McDade, an MSN spokeswoman.
Free-ISP executives contend that quality differences between their services and the subscription services will eventually vanish, if they haven’t already.
“If you’re a paid ISP, you should be scared of us,” said Sharon Rothstein, chief executive of WorldSpy, “because we are providing quality service that is truly free.”
Several factors underlie the recent emergence of free Internet service. One is the rapid decline in telephone connection costs.
That trend has made the Internet connection cheap enough for companies to employ as a kind of loss leader. Most of the current crop of free ISPs, such as NetZero, hope to make their money the same way portal sites such as Yahoo do: by selling space to advertisers and keeping a percentage of retail transactions its members make online.
Other services hope to entice nonusers onto the Web as novices and “upsell” them to more sophisticated and costly services as they become acclimated to the new medium. That’s the approach of Excite@Home, which operates a high-speed Internet service over cable television lines for $40 a month.
FreeWorld, Excite’s newly launched free ISP, will introduce novices to the Internet in the hope they’ll be inclined to move up to its @Home cable Internet service in the future, like young Chevrolet owners moving up to Buicks as they mature into middle-aged prosperity.
