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Free ISP claims 500,000 users

Five-month-old NetZero, which provides its users with free advertising-supported Net access, says it reached 500,000 registered users.

After several fits and starts, the idea of free Internet service finally seems to be catching on.

The five-month-old NetZero, which provides its users with free advertising-supported Net access, said today it has reached 500,000 registered users.

If those numbers translate into actual subscribers, it places the company as one of the top 10 ISPs in the country, on track to overtake subscriber figures of $2.5 billion companies like MindSpring and EarthLink in just a few months.

Since NetZero's free service doesn't have subscriber cancellations, it's a little harder than with ordinary ISPs to figure out who is still a user, or what the company's "churn" rate, or subscriber loss, is.

The company does provide statistics on use, however. According to a NetZero spokeswoman, about 65 percent to 70 percent of the company's registered users have dialed up at least once in the last month.

Even this more conservative measure--which would give the company between 325,000 and 350,000 current users--puts the free service on a steep growth path. MindSpring and EarthLink both have a little more than 1 million subscribers each, while AT&T's WorldNet service has about 1.5 million members.

Nevertheless, many analysts remain skeptical that the company can turn popular success into financial stability.

"They have not shown me anything that changes my mind that their fundamental economics are flawed," said Jim Nail, an advertising analyst for Forrester Research.

Traditional ISPs, which charge on average $20 per month, are not turning substantial profits, he noted. Forgoing that revenue stream makes it almost impossible for an ISP to break even.

"There's not enough ad revenue in the market to support them, unless they get a hugely disproportionate share," Nail said.

NetZero's business model is based roughly on the same ad-supported principle as broadcast television. Users can dial up the service free of charge from about 700 points around the country, but the ISP's software requires customers to run a rotating series of advertisements on their monitor as long as they are logged in.

Previous free Net access ventures have not been commercially successful in the United States, although the idea has won more interest in the United Kingdom.

Analysts say that NetZero may have come along at the right time, however. The Internet has finally gained critical mass with a broad consumer audience, and other similar ventures--such as the popular Free-PC.com company--are helping to spread the idea of ad-supported technology.

Both Free-PC.com and NetZero have been partially funded by Idealab, and NetZero provides the default Internet access for that ad-supported computer company.

NetZero says its business model has worked the kinks out of previous free Net access ventures. It says it has sold out its ad space, to companies that include Disney, eBay, and Doubleday books.

Five months into its operations, however, and the company is still losing money. Analysts note that the company's subscriber growth has to stay strong to keep serving up enough ads to make the venture a commercial, as well as a popular, success.

Spokeswoman Janet Daly said the company expects to reach the 1 million user mark by June, and to have 4 million users by the end of 1999.

But even with that steep growth curve, the company still doesn't expect to be profitable until sometime in the middle of next year, she added.