Start-ups attempt to push free DSL services
A handful of ISPs are attempting to do for free what some of the largest phone companies are struggling to do for a fee: offer high-speed consumer Net access.
Following the announcement that a small southern California company named Broadband Digital Group would offer a free broadband Net service, a group of ISPs have come forward with similar offers. Small companies such as Staruni, based in Beverly Hills, Calif., and iNYC, a New York-based digital subscriber line (DSL) provider, among others, are working on their own business models to offer free high-speed Net services.
None of these free broadband services have actually made it to the market, however. And despite the interest of potential subscribers, analysts say it's questionable whether these small firms will be able to tap already-scarce broadband-ready telephone lines to serve a growing base of Net users looking for faster Web access.
"The phone company can't even get (high-speed service) to me when I'm willing to pay $60 a month," Forrester Research analyst Bruce Kasrel said. "How are these guys going to do it for free?"
These companies are trying to launch in a market where consumer demand for high-speed services has essentially outstripped the ability of telephone and cable companies to provide it. To meet demand, companies like SBC Communications and AT&T are spending billions to upgrade their networks. The potential for broadband Net services was also a critical part of this week's blockbuster merger between America Online and Time Warner.
The broadband upstarts are also taking a page from fast-growing free dial-up ISPs like NetZero and Freei.net, which have attracted millions of subscribers but have yet to turn a profit. The "free ISP" model has also recently gained enough cachet to attract diverse brand names like portal leader Yahoo, Net-over-cable company Excite@Home and retailing giant Kmart.
All of the free broadband companies want to offer customers free DSL, a technology that allows existing phone lines to carry high-speed Internet traffic and ordinary phone calls simultaneously. Basic DSL service offers data transfer rates more than 6 times faster than that of the fastest dial-up modems.
One business model comes from the Broadband Digital Group, a company started by the same entrepreneur responsible for Net ad companies AdForce and AdSmart, both now owned by CMGI. Under the FreeDSL brand name, the company plans to launch free high-speed Net connections in most major metropolitan areas on April 1.
Like current free dial-up services, the free DSL companies plan to collect demographic information from their users and closely track their online activities. This will allow the firms to tightly target advertising that they hope will subsidize broadband access fees, companies say.
"We don't want to show a male individual advertisements for makeup and perfume," said Anthony Hidalgo, co-founder and director of business development for iNYC.
iNYC's plan is one of the most innovative--yet untested--models to hit the market. Hidalgo and partner Steven Bruno are following somewhat in the footsteps of Web company ClickRewards. Customers will click on advertisements to earn "i-Bates," which can then be applied toward the cost of the broadband connection.
While iNYC executives say they haven't settled on the final value of each ad, Hidalgo says that customers will likely have to click on an average of 16 banner ads each day to subsidize a free DSL connection for a month.
"We didn't like the idea of just giving (the service) away for free and trying to generate ad revenue. That seemed like a risky proposition," Hidalgo said. "But we think advertisers will want to pay for actual results."
The partners say the iNYC venture--built on the back of an existing ISP that claims about 1,000 subscribers--is still closing its first round of private funding. The company plans to launch its free broadband service first in New York City on March 15, with connections provided by local carrier Bell Atlantic and DSL firm Covad Communications.
However, that is just before FreeDSL will go live with its own service on April 1. That company says it has already registered more than 100,000 subscribers on its Web site in preparation for the launch.
Yet FreeDSL has already run into trouble. The company as part of a promotion offered a free DSL modem to anyone who refers 10 potential customers to the site. So far, more than 450,000 people have been directed to FreeDSL. This onslaught has spurred complaints in newsgroups and on the Web about people "spamming" mail lists trying to lure participants in pursuit of a free modem.
Despite the demand, analysts question whether these ISPs will be able to get their hands on enough broadband lines to make their service available in even limited areas. Because DSL technology is new and considerable work needs to be done to upgrade telephone wires and infrastructure, provisioning extra lines for a surge in demand will be difficult at best, analysts say.
And even if the companies can get enough lines, there's no guarantee they can ever make a profit, analysts note. DSL is not cheap--Forrester Research estimates that companies will have to make at least $20 per subscriber to break even, compared to the roughly $10 or so for the still-unprofitable free ISP NetZero.
The demographics of a free market are not favorable to a company with high costs, analysts add.
"The people who sign up for free services are largely casual users or low income users," Kasrel said. "Casual users don't need broadband. And low income users don't spend enough to make advertising to them worthwhile."