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Connection is king

After years of mocking America Online as hopelessly "old media," Web portals are reviewing the subscribed service in an effort to salvage their own businesses.


Stubborn AOL may have last laugh

By Jim Hu
Staff Writer, CNET
June 6, 2001, 4:00 a.m. PT

In the brief history of the Internet, the death of America Online has been predicted countless times.

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 MSN to AOL: You've got competition
Bob Visse, group product manager, Microsoft Networks

After the Web's mainstream explosion in the mid-1990s, pundits said consumers would outgrow the closed, training-wheel environment of an online service like AOL and graduate to direct dial-up connections that catapulted them to the wilds of cyberspace, using portals like Yahoo for navigation.

While Web portals chased traffic in a strategy based primarily on advertising for revenue, AOL plodded along with far smaller numbers, but its customers provided steady monthly income through paid subscriptions. So when the ad market froze last year, AOL became the proverbial tortoise that beat out the hare.

"What Yahoo is going through is no different than what AOL went through four or five years ago when we had to change our business model, when Wall Street was putting pressure on us," said Barry Schuler, now the chief executive of AOL Time Warner's America Online unit. "And we figured it out; we made it work."

Today, Web rivals that banked on free services are desperately trying to figure out if they can change course and follow AOL's strategies without undermining their original businesses.

Most of the portals long ago abandoned the idea of getting into the Internet access business because it was so expensive to maintain and would severely limit the potential to attract as much traffic as possible for ad dollars. Internet service providers that sold dial-up Web access without portal features were never able to catch up to AOL's membership, which it grew largely through an unparalleled marketing juggernaut, even after the largest ISPs merged and began to make money.

"AOL was saying when no one else was onboard that it was important to marry access with a content service. They were hurt by that because they didn't have a 'pure-play' Internet company," said Andrea Williams Rice, an equity analyst with Deutsche Banc Alex Brown. "In the end it doesn't matter. They were right."

Perhaps most perplexing, Web companies know that others have tried to beat AOL at its own game--including vaunted Microsoft, with its own subscriber service--with little success. The few portals that have tried to follow AOL's model of tying Internet access to content programming, such as Excite@Home and Terra Lycos, have stumbled badly in those attempts.

At last count, AOL had 29 million subscribers who purchased $20 billion worth of goods and services through the online service last year, according to the company. That formidable membership will now be exposed to all manner of promotions from Time Warner's global empire of magazines, cable service and entertainment studios.

To be fair, few outside the company predicted that it would become the powerhouse it is today as AOL Time Warner. In fact, the access business nearly destroyed AOL in 1997, when the company experienced massive service blackouts after changing its pricing plan from hourly charges to a flat rate--a move that drew so much traffic that it overloaded the networks.

The outages led to lawsuits by dozens of states representing angry members who complained about the poor service, giving other companies even more reason to avoid the ISP business. AOL was seen as having "this dirty, nasty access business with low margins," Rice said.

Yet those margins, which widened just days ago with a surprise rate increase, are precisely what allowed AOL to weather the economic tumult that now threatens competitors that pursued a free strategy.

Massive media
Yahoo's ad ache
As taxing as it was at the time, the outage fiasco was a blessing in disguise, company executives now say. It forced them to turn to other types of revenue to offset the increased network costs, and AOL became a media company that made money through advertising and e-commerce, as well as dial-up connections. Last quarter, advertising and commerce revenue for the AOL unit hit $721 million.

"We didn't know exactly how the flat-rate model would work out, but we did feel we had to have other revenue streams as well," Schuler said. "It ended up causing us access problems and caused us to scramble to expand capacity. We all took a blood oath that that would never happen again."

Others took vows of their own to stay out of the network business altogether.

The competition's conundrum
For AOL's competitors, the way to success appeared obvious at the time. Web portals such as Yahoo attract millions of people every month and earn their dollars through advertising and e-commerce. But the portal market imploded, leaving AOL, Yahoo and Microsoft's MSN to share the bulk of advertising dollars.

Of all the leading online companies, Microsoft has probably experimented the most with the portal and ISP strategies. It has fervently tried to take out AOL since 1995, when it launched MSN as a proprietary online service. That effort failed to attract enough consumers, and the company soon split its access and Web content businesses.

Microsoft has since refashioned MSN into a portal and branded its other Web properties under the MSN moniker. The company shifted again last year, launching MSN Explorer, a software product that links many of the company's Web efforts into one service:, its Internet Explorer browser, MSN Hotmail and its Windows Media Player. Consumers using MSN Explorer can also get Internet access.

Microsoft is opening an attack on the pricing front as well, trying to lure AOL subscribers irked by the service's recent rate increase. But MSN, which is believed to be hemorrhaging red ink, plans to increase revenues in other ways, such as charging fees for multiplayer games, music services, video on demand and Internet phone calls.

"It's hard to raise the price from free to a paid price. That is a difficult transition to make," said Bob Visse, MSN group product manager. "We want to add additional services beyond what people expect they can get for free."

Yet all of this may be too little and too late to topple AOL, which has littered the portal landscape with its conquests.

When @Home acquired in 1999, the company envisioned a service that would combine high-speed access over cable with a popular Web portal as its start page. Consumers, however, did not flood Excite@Home with requests for cable modem service.

Terra Lycos has had difficulties pursuing this route as well, through services with standard household speeds. The company earlier this month slashed its 2001 revenue forecast to $624 million to $650 million after initially expecting $900 million.

Of the portals, Yahoo remains the one to watch as the ultimate bellwether for the free-Web industry. Some believe it's not too late for the company to fight AOL on its own turf, with Internet access.

"If anyone wants to compete with AOL--and I'm looking at it more from the

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Connecting the dots in new society
Steve Case, chairman, AOL Time Warner
access standpoint--then they're going to have to buy EarthLink," Frank Gristina, an analyst at Robinson-Humphreys, said of the leading consumer ISP. Yahoo is "clearly trying to generate premium services, and access is the ultimate premium service for the Internet."

Experimenting in portal land
None of this is to say that AOL has always been immune to the lure of the free Web. Only a few years ago, Yahoo, Lycos, and Infoseek put tremendous pressure on AOL to compete against them for traffic at a time when Wall Street was rewarding those numbers with skyrocketing stock prices.

In 1998, AOL told Wall Street it would use the recently acquired ICQ instant messaging service as one element in the company's multi-brand portal strategy, along with and its CompuServe subsidiary. AOL then acquired Netscape Communications later that year, adding that company's Netcenter portal to the list.

"Much like the strategy of Yahoo and its ilk, AOL used those types of free services as a way to lure people into its Web sites," said Mark Mooradian, an analyst at Jupiter Media Metrix.

For the most part, however, those portal initiatives appear to have been largely defensive moves to prevent coveted members from leaving the online service for the competition., which has largely remained an offshoot of the subscription service, has since been renamed "AOL Anywhere." Instead of highlighting Web searches and other portal functions, the site's primary mission is to offer AOL members a way to use their e-mail or chat services on the Web.

AOL "didn't create a huge portal brand, but I don't think that's what they set out to do," said Abhishek Gami, an equity analyst at William Blair. "They referred to any non-AOL brand as a 'flanker' brand. They fight on the periphery of the battle and very selectively pick off elements of the enemy."

In the end, much of AOL's success can be attributed to values that are distinctly Old Economy, lessons learned from established media such as newspapers, magazines and cable television.

No one knows this more than Bob Pittman, the co-chief operating officer of AOL Time Warner and former MTV executive whom many believe is the heir-apparent to lead the media conglomerate.

As he put it in a recent speech: "The good news is once you have a subscriber, it's hard to lose him." Once considered a beachhead against the Web portals, the site, now referred to as "AOL Anywhere," has become an extension of AOL's proprietary service. AOL once extended portal functions to, such as news headlines and free e-mail. Now it's just an offshoot for users of AOL's proprietary service surfing the Web.

CompuServe: The rival online service acquired by AOL has become the company's "value brand," meaning it charges less for a service that's similar to AOL's. Subscriber growth was boosted by a $400 rebate program for PC buyers who agreed to a three-year subscription. Membership has remained relatively stagnant.

ICQ: Acquired in 1998, the instant messaging service recently announced its 100 million registered user milestone. AOL has tried to turn it into a business by adding portal features and opening the door for advertising and commerce. So far people have been resistant, though, and the commerce plans have not unfolded. Since acquiring Netscape in 1999, AOL has tried to use this property as a way to reach daytime users accessing the Net from work. The site was once redesigned to target small businesses but has since become a hub for Time Warner content. The site is profitable, according to AOL.


Free ISP concept too good to be true

By John Borland
Staff Writer, CNET
June 6, 2001, 4:00 a.m. PT

Some poetic justice lies in the news that free ISPs, once seen as a threat to America Online's market dominance, have instead taken AOL's place under the scrutiny of federal regulators.

Underscoring how far the once-ambitious free companies have fallen, the Federal Trade Commission this month warned consumers against taking free offers at face value, settling complaints against computer maker Gateway and one-time highflier Juno Online Services.

"These so-called free Internet access offers were anything but," said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. "Information about fees was hidden in the fine print."

The federal actions are just the latest indignity heaped on a business model that has suffered much in the past six months. A year ago, free Internet connections were offered by all the major portals and by smaller sites, and even free high-speed connections were coming to market.

Today, most of the companies offering free service have gone out of business, almost independently prompting the first-ever decline in the number of people on the Internet, according to one recent study. Companies that remain still have millions of subscribers but are working hard to persuade them to start paying for services.

The market has shown clearly that free services supported by advertising are not financially feasible, analysts say. While their services may be offered well into the future, they will be far more limited than at the peak of last year's mania for all things free.

"It'll still be the hook that gets people in the door," said Jupiter Research analyst Dylan Brooks. "But the days of free, unlimited service are a thing of the past."

Always a difficult business
At first glance, the sheer number of subscribers would seem to indicate that free ISPs are still in the game. NetZero, the largest of the companies, says it has more than 8.4 million registered users. In its last quarterly results, Juno reported more than 3 million active registrants on its free ISP services, despite a recent campaign to drive people to its paid products. Kmart's says it has more than 2.6 million active dial-up subscribers.

However, those numbers have helped drive all but the most well-funded companies out of the business and continue to cloud the futures of NetZero, Juno and BlueLight. Providing access requires expensive physical infrastructure that gets even costlier as more people use the service: ISPs must pay for modems, servers and bandwidth from companies that own networks, such as Level 3 Communications or WorldCom.

The early idea of most free ISPs was to defray these expenses with advertising. To tap into the free connection, surfers would be required to keep a window about the size of a banner ad open on their computer screen at all times, showing a rotating stream of often distracting advertisements.

The early companies were well aware that customers seeking a free service weren't necessarily in the most desirable consumer category for potential advertisers. But they added enticements: Because they could track precisely where their subscribers were going online, this information could be used to target ads far more specifically than was the case for ordinary Web sites. A subscriber visiting, for example, would be more likely to pay attention to ads for car companies.

The most innovative companies also developed new advertising strategies, painting themselves as primarily advertising conduits as opposed to ISPs. NetZero offered its advertisers the ability to pre-empt their competitors, allowing Ford Motor to buy space on a subscriber's ad window whenever a surfer visited Chevrolet's Web site, for instance.

At the height of the idea's success, many began questioning whether industry leaders needed to react. Microsoft publicly toyed with the idea of free or discounted ISP service, and analysts asked whether AOL would be forced to lower its prices.

The giants stayed firm, though AOL's CompuServe and the Microsoft Network each pursued a parallel strategy of offering $400 rebates on computers for new subscribers, effectively subsidizing newcomers' ISP fees for several years.

"One of the mistakes the industry made is somehow convincing itself that the

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Desperation or innovation?
Charles Ardai, CEO, Juno Online Services
Internet and the New Economy were not subject to the laws of business physics," America Online CEO Barry Schuler said. "We looked at the free ISP model upside down, left and right, and could never see how that could turn into a profitable business."

The plunging market for online advertising proved to be the companies' undoing. ISPs began falling by the wayside by the middle of last year. Independent companies including Freewwweb neared bankruptcy, and many sold themselves to Juno. CMGI's, a wholesaler that provided service for AltaVista, Excite@Home, Lycos and others, was closed after executives cited "insurmountable" capital costs for the business., which provided service for Yahoo and Kmart's BlueLight, was bought outright by BlueLight.

Competitors in the traditional ISP market are on a death watch, hoping the no-cost alternatives will disappear so they can step in with discounted alternatives or remind subscribers of their own relative stability.

"There is a place for the discounted ISP," EarthLink Executive Vice President Michael Lunsford said, but "the free alternatives have to disappear completely first."

Not dead yet
The free ISP business isn't dead yet, even if many of its most visible proponents are gone and the stocks of those remaining have plummeted.

What has happened is consolidation around three main companies and their decision to concentrate on finding revenue. NetZero, Juno and BlueLight have cut back on their focus to offer free service, and in most cases the companies are trying to discourage extensive use of those connections. But they are still available.

NetZero, the first and largest of the free providers, has intensified its longtime concentration on marketing. It continues to find new ways to slice, dice and deliver its subscribers to advertisers, and analysts say it has done so fairly effectively.

Juno is heading down the path of high-speed, or broadband, connections. Once its subscribers get a small taste of the Web, Juno hopes they'll want larger, faster doses and will be willing to pay for them.

BlueLight, which last week announced its CEO was leaving and it would transfer much of its operations to corporate parent Kmart, has targeted Kmart shoppers in an effort to keep its subscribers close to home.

In common, the companies have acted to minimize their biggest threat: the subscribers who use their services for many hours a month, consuming expensive bandwidth.

"We took a close look at how people were using (the service) and found that the top sites were porn, Napster and games," BlueLight spokesman Dave Karraker said. "So what we did was say, 'If you're not using the ISP to shop, you can find another free ISP.'"

BlueLight limited use of its free service to 12 hours unless subscribers started shopping at its e-commerce site. Juno imposed more ads on its subscribers who weren't paying and kicked them offline more often. NetZero limited its free subscribers to 40 hours of surfing per month, stopping a little short of the others.

Each has also instituted a pay plan, charging between $9.95 and $14.95 for unlimited use. Analysts say this will quickly become the largest component of revenue, as it already has for Juno.

Whether that will be enough to help the companies succeed is still open to question. Aside from AOL, none of the large ISPs turns an unambiguous profit even though each charges nearly $20 a month. Analysts say the free or discounted ISPs may have more financial thinking to do.

"Looking at $9.95 a month, I think we're still within our rights to ask whether they can make a profit at that level," Brooks said.

Nevertheless, most analysts believe free access will survive if it is slimmed, limited in time, and used almost solely as a marketing tool. Access to the millions of free ISP customers remains valuable for those who can use it correctly, they say.

The companies "aren't yet out of danger," said Rob Lancaster, a Yankee Group analyst. "But they won't get rid of the free services. It's been the heart and soul of their operations." 


April 1996
Juno Online Services launches free e-mail service.

January 1997 offers free lifetime service after $59.95 fee.

December 1997 seeks Chapter 11 bankruptcy protection.

July 1998
Juno adds paid ISP service to free e-mail product.

October 1998
NetZero launches.

June 1999
Dell says it will offer free ISP service in Europe.
NetZero crosses the 1 million user mark.

July 1999
NetZero files to raise $115 in IPO.
AltaVista is the first big portal to confirm a free ISP plan.
Dell says it will give one year of free ISP service to computer buyers.

September 1999
NetZero IPO shoots up 82 percent on first trading day.
CMGI buys free ISP network wholesaler

December 1999
Yahoo, Kmart announce co-branded free ISP service.
Juno adds free ISP service to free e-mail products.

January 2000 announces plans for ad-supported broadband service.

July 2000
Juno buys assets of Freewwweb, one of several bankrupt free ISPs it has acquired.

November 2000
CMGI says it will close wholesaler 1stUp, which served several portals.

December 2000
BlueLight buys wholesaler's assets.
NetZero sues Juno, charging patent infringement for ad technology.

February 2001
BlueLight sharply limits free access, starts charging fee.

May 2001
First decline in U.S. Net usage blamed on disappearing free ISPs.


Speeding toward another revolution

By Corey Grice
Staff Writer, CNET
June 6, 2001, 4:00 a.m. PT

Only a few years ago, Excite@Home seemed to have all the makings of a New Economy powerhouse: cutting-edge technology, high-profile financial backers, and relatively little competition in the high-speed Internet market.

There was only one problem: The broadband technology at the core of its business remained years away from replacing the standard phone modems typically used for Internet access. More recently, the struggling company has seen its stock price plummet and announced layoffs twice since January.

Yet the strategy behind the creation of the company is strikingly similar to what industry visionaries are saying may represent the future of the Internet. As more companies charge for online content, a service like Excite@Home--a Web portal that provides high-speed cable connections for a monthly fee--seems a natural fit.

"The way the Web started, there was so much easy money available that it blurred the necessity of content being truly compelling. In an interactive medium, that's a dubious game," said Strauss Zelnick, former chief executive of Bertelsmann record label BMG Entertainment. "The world is coming back to normal."

Regardless of which companies succeed in creating this content, few disagree that the need for high-speed services will only rise as people seek more multimedia entertainment and other features on the Web that require broadband connections. That could give rise to a whole new industry of middleman companies needed to license, collate and feed material that requires large pipelines to deliver online.

Because the major broadband providers probably will be unwilling to strike alliances with hundreds of smaller content companies, some suggest the industry will begin to see new clearinghouses of multimedia content.

"Whoever could aggregate the content but also deal with all the rights issues could take that market by storm," said Steve Jones, professor of communications for the University of Illinois at Chicago and founder of the Association of Internet Researchers, an online academic group. "I don't see anyone positioned right now to do that. It's getting far more confusing every week."

Yet there's no reason for all this business to go to any one player. It could be divided among many of today's portals and other companies that need to adopt new business strategies to survive.

For example, a company such as RealNetworks, which has struck licensing deals for professional sports Webcasts--or even Yahoo, through technologies acquired from its merger with do more hosting and aggregation of multimedia content behind the scenes for AOL Time Warner and other portals with paying customers.

"The average consumer doesn't know who TCI and Liberty Media are but does know who HBO and MTV are," said Curt Marvis, chief executive at CinemaNow, a Marina del Rey, Calif.-based Internet video-on-demand service. "But HBO couldn't exist if it didn't have the ability to get its signal to consumers. HBO also couldn't exist if it didn't have the content producers. I see it following the same path with broadband Internet."

If that's true, some tectonic changes may be ahead for the Internet industry and its leading players. As seen in cable television, the balance of power can shift easily depending on which entity has the most sought-after services at any given time: the distribution vehicle (cable services), the delivery pipes (networking companies), or the content creators (Hollywood studios).

Already, AOL Time Warner is preparing a high-speed Internet service and will combine it with the company's treasure trove of movie, music, television and magazine content, all for a flat cable TV-like monthly fee. Others certainly will follow, but AOL's unrivaled access to content gives it an important advantage from the outset.

Some industry analysts believe the only true challenge will be the creation of another powerhouse that bridges old and new media--such as a combination of Excite@Home, which is controlled by AT&T, with the software and services of Microsoft and the content of Disney.

Within a few years, consumers tired of being nickel-and-dimed for what once was free on the Web may turn to their high-speed Internet provider for a $75-per-month package of music, movies and online content--potentially changing the balance of power in the media business. Excite@Home already charges a flat fee of about $40 to $45 a month.

"As content becomes more costly to produce, you'll be paying for it, but just up front. You're already seeing it with DSL and cable rates going up," said Emily Meehan, program manager for market research firm The Yankee Group. "It's like with TV, you get three stations if you don't pay anything. But if you pay for a package of cable, you get all sorts of channels. That tips the scales in favor of the cable or DSL providers because they own the billing relationship."

For clues to how the broadband Internet will evolve, industry veterans say one needs look no further than the history of earlier media. Today's mass media is the product of complex but symbiotic relationships between content producers, licensees, distribution companies, and the carriers that directly reach and bill consumers.

Not surprisingly, those who come from the distribution side of the business believe that broadband service providers will become a dominant force--at least in the near term--because they control what is carried over the pipes.

"Historically what's happened is the pipe has been commoditized very rapidly by vertical, well-programmed content. So the balance of power has been with the content programmers because the actual delivery mechanism was not very differentiated," said George Bell, former chief executive of Excite@Home. "Now along comes broadband, and I believe that for the next five years, at least, that's going to change. Now the pipe is going to have a lot more say about differentiating the content."

That would mean broadband companies such as AOL Time Warner, Verizon Communications, SBC Communications, AT&T and Excite@Home would hold more influence over Internet content than the broadcast networks and cable TV operators have had over video and film.

Even if that is true, however, a consensus must be reached on many digital rights issues and payment models before the broadband Internet and entertainment industries can operate efficiently. "You're going to need to see some meeting of the minds between the pipe guys and the content guys and the middlemen," Meehan said.

That is easier said than done, given the enormous stakes involved--not to mention the monumental egos.

"On one hand, we hear about convergence between mediums. On the other hand, we see divergence of interests among the media," Jones said. "It's a huge mess, and there will be millions more spent on attorneys."'s Jim Hu contributed to this report.


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Content will make or break broadband
Marc Liggio, VP broadband research, Allied Business Intelligence


Attention consumers: Prepare to pay for the broadband era.

Already, high-speed Net connections cost more. And a lot of online content and services cost money even if fast Net connections aren't required to use them. The only thing that remains uncertain is how charges will be imposed.

Will we pay a monthly subscription fee, an annual rate, or a separate bill for particular shows similar to today's pay-per-view cable offerings? The answer will determine which players emerge as the dominant forces in a broadband future.

Some executives and industry analysts say customers will be billed for their "bandwidth consumption"--the portion of high-speed pipelines they use--and are likely to see some pay-per-view sorts of premium packages.

"You're likely to be charged on a per-bit consumption basis, right down to the household," former Excite@Home chief George Bell said. "If you download 10 feature-length films per month, you should be charged more than me."

But others say consumers won't pay for Internet services on this kind of metered basis. Instead, the charges may be similar to the "buckets of minutes" that many cell phone companies sell to customers, often on the order of 1,000 minutes for $29.95 per month.

"People are willing to pay for different tiers, but they're not real crazy about being charged per minute on the phone," said University of Illinois at Chicago's Steve Jones. "As a country we're not used to paying per bit. We're not used to metering for media."

Regardless of which payment system evolves, analysts say, consumers will treat the Internet more like broadcast media when they get broadband access, especially once these connections become more common and entertainment studios create programming to take advantage of the high speeds.

"People will leave it on, just like radio or TV," Jones said.