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Qualcomm invests with an eye for free wireless future

The wireless technology company takes a $144 million stake in free Internet service provider NetZero, in a move to push the free Internet access model into the wireless realm.

Qualcomm has taken a $144 million stake in free Internet service provider NetZero, in a move designed to help bring the Net company's free Internet access model to the wireless Web, the companies said today.

The link-up marks a new level of ambitions for the two companies, neither of which have experience in the others' business. The deal also points to what could be a new realm of low-cost wireless data options for consumers.

But the investment has taken the wireless and Internet access community by surprise, leaving analysts scrambling to find an economic rationale for the two companies to work closely together.

"In terms of leveraging Qualcomm's business model, this makes no sense at all," said Ed Snyder, a Chase H&Q analyst who follows the wireless technology company.

The announcement meets a market that has fallen in love with the idea of Internet access over wireless phones or Palm-like handheld computers. Though the industry is still young in the United States, it is growing rapidly overseas. Some analysts predict that as many as 1.3 billion people around the world will be tapping into the Net on wireless devices by 2004.

At the same time, free Internet access has moved in the last six months from the margins of the computer business to the mainstream, with offerings from Yahoo, Kmart, Excite@Home and most other major portals, as well as a host of smaller players. Millions of consumers have signed up to try out one of the various services, though analysts say only about half of those people stay with the free companies.

NetZero was one of the first free services to hit the market and has taken a lead in pushing the idea of free Net access into the mainstream. But in recent months, competitors have begun moving into new areas, such as offering free high-speed Internet service. Newcomer Broadband Digital Group is already offering free DSL service in a few markets.

"The next step in our evolution involves executing on our vision to become a leading provider of universal Internet access across a wide range of connectivity platforms," said NetZero chief executive Mark Goldston in a statement today. That means reaching computers, mobile phones and handheld devices using high-speed, wireless and ordinary service, he said.

But the potential for NetZero's advertising-based model in the wireless world remains clouded at best, analysts say.

"The commerce and advertising potential of the cellular phone is lower than the personal computer," said Bruce Kasrel, an industry analyst with Forrester Research. "There are some goods that people might buy on the phone. But are they going to initiate enough purchases of goods and services to support a free ISP infrastructure? I don't think so."

Moreover, Net access over wireless phones simply works much differently than dialing up the Web over a regular telephone line. Phone companies like Sprint or AT&T charge their customers a nominal fee for the Wireless Web service, averaging about $10 a month. But they're also charging by the minute for the time their customers spend online.

That makes an ad-supported model difficult, analysts note. NetZero could potentially offer its own free wireless Web service, but the phone companies' airtime charges aren't going away. Consumers will still have to pay these fees, making the NetZero "free" option less attractive--or NetZero itself will have to subsidize them, blowing a huge hole in the company's bottom line, analysts say.

Despite the initial skepticism, the two companies are convinced that by working together, they can apply NetZero's experience to the wireless data market.

Qualcomm will see an initial gain as NetZero adopts its Eudora email service. But the wireless firm says it's convinced that NetZero can help boost the adoption of wireless data one way or another, even if the details aren't yet set in stone.

"Part of our strategy to drive the wireless market is to invest in carriers where it supports that strategy," said Christine Trimble, a Qualcomm spokeswoman. "That's what we're going to work together on."

The investment will give Qualcomm a 10 percent stake in the ambitious Internet service provider, which has seen its fortunes decline on Wall Street in recent months.

Even before the market-wide decline two weeks ago, NetZero's stock had begun a precipitous slide in early February. The shares closed last week at a little more than $8, after reaching a high of $40 earlier in the year. Today's news jump-started the stock, pushing it up more than 40 percent to $11.70 in midday trading. Shares closed at $11.44.

Qualcomm was not so fortunate, however, falling close to 10 percent to $98.50 at midday. Shares closed at $99.63.