Son of the branded ISP

Following similar announcements from Yahoo and iVillage, this week's unveiling of a Walt Disney-Microsoft partnership to offer a family-oriented Internet access service makes the trend official. After suffering through one wave of failed Internet service provider marriages, content companies again want to take a piece of the action when it comes to connecting their customers to the Net.

It's an arrangement America Online made famous, but that none have successfully duplicated. Remember Excite@Home?

The recent deals from Yahoo, Disney and women's portal iVillage "smack of 1995," said Forrester analyst Charlene Li. But she said there are some important differences that could help these new bets pay off.

The goal--boosting revenue and establishing stronger relationships with customers--remains the same. But customers may now have more incentive to bite into brands, because online content is increasingly walled off behind subscriptions and pay-per-view setups.

Disney said it plans to distribute its content as widely as possible and does not have plans to provide significant exclusives to its ISP subscribers. Still, tying content to access could become an effective way for publishers to build billing relationships and lay the groundwork for selling premium services, Li said.

But Li cautioned that dial-up deals face a timing problem. Subscriber growth has stalled, and telecommunications providers are now hoping to lure away customers to competing high-speed services.

Jupiter analyst Michael Gartenberg agreed that dial-up providers face a tough battle for market share in the near future, but he said branded players such as Disney that offer strong differentiation from rivals could benefit as a result.

"The rules have changed somewhat in terms of what Disney is trying to do," he said. "They aren't trying to go out and become an ISP; they want to target a niche audience with a ready-made product."

Steve Wadsworth, president of Walt Disney Internet Group, agreed that the dial-up market may have entered a slow growth phase. But he said he sees a big opportunity to take market share from rivals that have struggled to hold onto their customers.

Microsoft and AOL Time Warner, the biggest ISPs in the United States, don't disclose so-called churn rates--the rate at which customers drop their subscriptions. Aggressive customer-retention programs, though, are common in the industry, including deals that tempt would-be deserters with months of free service.

The filter factor
Wadsworth said Disney's timing had less to do with market conditions than with the state of ISP technology. The company had been considering the possibility of launching a branded ISP for at least two years, but was uncomfortable with moving forward without adequate parental filters. Those doubts, he said, were put to rest with MSN 8, the latest version of Microsoft's online service, unveiled Wednesday.

"We sat down with (MSN head) Yusef Mehdi last year and said we aren't doing anything until we see parental controls that work," Wadsworth said. Filters in the new service that block out pornography and other unwelcome material were the key factor in deciding to roll out a Disney-branded ISP, he added.

Jupiter's Gartenberg said another factor may have contributed to the timing of the deal: "AOL is now perceived to be in a weakened state, and Microsoft is going to do everything it can to take advantage of that."

Regardless of Disney's motives, analysts said that we are likely to see more branded ISPs soon in both the dial-up and high-speed arenas as providers try to differentiate their services.

"There is going to be a tremendous marketing battle in the coming months," said Gartenberg. "Branding by niche and high-profile companies like Disney is going to decide a big part of it."