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New deals take free ISPs mainstream

The free Net access service planned by Kmart and Yahoo marks a coming-of-age for the free Internet service provider (ISP) market, analysts say.

If free Internet service providers were looking for a way to set roots in mainstream America, they couldn't have found any richer soil than Kmart.

The free Net access service planned by the popular discount retailer and Yahoo marks a coming-of-age for the free Internet service provider (ISP) market, analysts say. Even high-speed Net access provider Excite@Home may be considering its own free dial-up offering.

These well-established retail brands will likely attract a new group of potential users curious about free dial-up services, and could prompt more companies to offer similar free services themselves, industry watchers add.

"We're going to see more and more of this over the next year," Jupiter Communications analyst Zia Daniell Widger said. "I think we're just at the beginning of a whole new wave of people jumping into this area."

The free Net access business model has been around for several years, but it wasn't until NetZero took off early in 1999 that the rest of the industry began paying attention. NetZero now claims one of the top spots on the list of leading U.S.-based ISPs.

AltaVista was the first to follow this free ISP lead, linking its popular portal site with its own ad-supported dial-up access service. But until the endorsement by Yahoo and Kmart this week, free services remained largely on the fringe of the Net access industry.

Some larger players have shrugged off the potential competition from free ISPs. Microsoft hinted that it could provide a free version of its MSN Internet service, but wound up raising its prices instead.

America Online--by far the largest ISP in the business with more than 20 million subscribers--has continually dismissed the idea that free services could cut into its market share. It has supported this claim by saying that its customers are looking for something more than just basic Net access, as provided by NetZero and other free ISPs.

But analysts say a flood of smaller companies--from banks to auto firms to retailers--are now likely to jump on the free ISP bandwagon in the coming months. By offering free Net service, businesses could solidify relationships with customers, and use the dial-up connection to push advertising or special deals, supporters say.

Jupiter Communications forecasts that about 13 percent of the online world will use a free ISP by the year 2003, either as a primary access service or a standby for out-of-town trips or other emergencies. And by that time, free ISP subscribers are expected to total more than 10 million, the firm predicts.

See special report: PC free-for-all Still, analysts say this trend is not necessarily a death knell for traditional dial-up ISPs.

Some dial-ups are likely to feel some pressure to lower prices as more people sign up with free services. But the most established players like AOL, and to a lesser extent future merger partners EarthLink Networks and MindSpring Enterprises, have touted other services like exclusive content or high-quality customer service--not just low prices--to maintain subscribers.

Neither is there any guarantee that free services will be able to survive financially over the long term. Most free ISP offerings are ad supported, but no free service has turned a profit yet. NetZero, for example, has pushed back its own expectations for profitability as it spends more to market its service.

"We would stress that offering access, whether paid or not, is extremely difficult and expensive," wrote Merrill Lynch analyst Henry Blodget in a research note on the Yahoo deal. "Do not take it as a given that the Yahoo/Kmart access will be successful."

Other warning signs for the industry are also beginning to emerge. Compaq, which co-markets NetZero's service as one of its several Net access promotions, now says the service isn't as successful as first anticipated.

"We have not seen free take off as we expected," said Trey Litel, marketing manager for Compaq's Internet services. The company has had much more success with $400 rebates provided by ISPs like CompuServe. Consumers can apply the rebates to the purchase of a computer, Litel said.

Compaq's deal with NetZero expires in February, a company spokeswoman said.

News.com's Michael Kanellos contributed to this report.