Big players pile onto the free ISP bandwagon

Until midway through this year, the free Internet access business had been the subject of considerable skepticism, with a large portion of the online world dismissing it as a money-losing enterprise.

But then AltaVista, Yahoo, Kmart and other big Web players and traditional retailers jumped on the free Internet service provider bandwagon.

In essence, free access has been given brand-name credibility--and that's put Goldston in I-told-you-so mode.

"The best thing that's happened to NetZero is the entry of all these other people," he said. "Now all of a sudden we're not the crazy uncle anymore."

From a virtual standing start at the beginning of 1999, free Internet access has attracted millions of users and has forced powerful companies such as Microsoft and America Online to shift their strategies. The entry of Yahoo, Kmart and possibly Excite@Home into the market has led some analysts to predict rough times ahead for dial-up ISPs that charge the conventional $20 a month for access.

Many analysts are also saying that the circle of free access will keep widening in the next year, as companies large and small begin offering their own free Net services in efforts to cement their relationships with customers.

"We're going to see free take off," said Zia Daniell Wigder, an industry analyst at Jupiter Communications. "I think we're just at the beginning of a whole new wave of players jumping into this area."

Jupiter Communications forecasts that about 13 percent of the online world will use a free service by 2003, either as a primary account or as a standby for out-of-town trips or when another ISP is down. By that time, the number of active users for the services is expected to reach close to 10 million, Jupiter adds.

Those kinds of predictions have helped drive investor enthusiasm, as new companies have signed on to offer free access. Last week, ISP and free email provider Juno's shares jumped 130 percent after it announced it would begin offering free access to its subscribers. NetZero's shares rose 82 percent on their first day of trading in September and spiked again this month, although they have since leveled out at a lower price.

Despite Wall Street's euphoric reaction, however, it's far from clear that free Net access can bring the Midas touch to every company that offers the service.

In all but a few cases, free access is supported by advertisements. Most of the services keep a small window open on their subscribers' computer desktops at all times, displaying a rotating series of banner advertisements.

But because the window is always open, there's a lot of ad space to sell. And as more companies begin offering free service, analysts and insiders predict it will be difficult to find enough advertisers to support every business.

"There is enough banner ad inventory to support free access," said Danny Robinson, CEO of Spinway.com, the company providing free ISP service to Yahoo and Kmart's Bluelight.com venture. "But if the market becomes too fragmented, if there's too many of us with just a few hundred thousand users, it's not going to work. You need reach for this to work."

The companies also are fighting the fact that the demographic seeking free access isn't necessarily the free-spending crowd sought by advertisers. Already, the free ISP companies are scrambling to find new ways to sell advertising to make themselves attractive.

Most of these strategies are grounded in the tight targeting that the free services can do by virtue of tracking users' paths around the Web and then displaying ads based on users' interests. NetZero has even developed a special block of advertisements allowing companies to advertise over competitors' sites. Using that service, Ford could display an ad for its Explorer sports utility vehicle whenever a NetZero user were to look up Chevrolet's Tahoe product line, for example.

The ads are also becoming more like those on television. NetZero and Spinway show or plan to show full-motion video ads during the few seconds when a user is dialing up to reach the ISP. Spinway also shows short ads in the time a graphics-heavy Web page is loading.

That level of ad saturation and online tracking will limit the industry's growth, analysts say. Many users don't want to give up their privacy, nor do they want to watch ads whenever they have a few seconds of downtime. That means that the competitive effect on AOL and the other leading dial-up ISPs is likely to be muted, many analysts say.

"It places some downward pressure on the price of access," Daniell Wigder said. "But it's not going to be too disruptive." AOL customers pay for content they can't get anywhere else, and other ISP users pay for features like quality connections and customer service, she noted.

If nothing else, 1999 has proved that free dial-up Net access is a viable concept for at least the few players at the top of the ladder. NetZero boasts more than a million active subscribers, and AltaVista and Freei.Net each have more than 500,000 active users.

Far from undermining the free ISP model, Goldston said, the entry of the larger brand names actually has helped his business gain the credibility it needs to hold on to its top spot for the long term.

"[Car rental agency] Hertz needs Avis," Goldston said. "If you're by yourself in a space, people wonder why you're there."