Another stab at free access in U.S.

The idea of offering free Net access to U.S. consumers in exchange for detailed demographic data for use in targeted advertising is not new, but NetZero is giving it another go.

Paul Festa Staff Writer, CNET News.com
Paul Festa
covers browser development and Web standards.
Paul Festa
3 min read
The perilous business of giving away Internet access may be turning a corner in the United States.

The idea of offering free Net access to U.S. consumers in exchange for detailed demographic data for use in targeted advertising is not new. Nor is it proven, however, and the free ISP landscape is littered with the corpses of those who have tried and in most cases failed outright.

In Europe, by contrast, the trend toward free ISPs is accelerating, with Dell Computer launching offers in the United Kingdom and Germany, Britain's Freeserve mulling an IPO, and AOL publicly pondering a free service in Europe.

In the United Kingdom and elsewhere in Europe, "free" Net access often comes attached to a pricey string: the phone company charges users by the minute for local telephone calls, including calls to ISPs. That puts even free Internet subscribers in Europe in a position analogous to early U.S. Internet subscribers, who typically were billed by the minute in contrast to today's widespread flat-rate pricing.

In addition, firms offering free Net access in some European countries typically receive a payment from the phone company for the time their users spend online. In that way, "free" access providers in Europe are still getting paid per user, per minute.

Not so in the United States, where a new wave of free Net access providers is rising out of the ashes of previous failed attempts. The most successful so far has been NetZero, which has signed roughly a million subscribers since its launch less than a year ago.

"I believe they are the fastest ISP in history in signing up new users," said Steve Jurvetson, managing director of venture capital firm and NetZero investor Draper Fisher Jurvetson.

Jurvetson attributed NetZero's early success to a number of factors differentiating it from its predecessors.

NetZero has been more successful in recruiting subscribers because it is completely free, in contrast to others that impose one-time set-up charges. It also has been able to roll out a nationwide service from the outset by partnering with wholesale access providers across the country rather than building out its own network community by community, as others had done before the wholesale market was mature.

On the revenue front, NetZero has developed ad-targeting technologies that will let it serve ads in what Jurvetson calls "ad missiles" and "missile defense systems." If the user clicks on the Barnes & Noble site, for example, Amazon could serve its banner on the persistent NetZero ad banner window offering the same product at a better price. The "missile" could even be targeted to the check-out page. "Defense" ads let companies buy all the ad space for users visiting their own Web site.

Ample funding from Jurvetson's firm is another advantage that sets NetZero apart from its predecessors.

NetZero is due for competition: Another player with a similar business model is expected to announce its entry this week, according to a source familiar with the company who declined to name it.

Some analysts are optimistic that NetZero and other players can make a go of it, but they note the hazard inherent in the enterprise.

"I have yet to see anyone make money on the advertising model yet," said Jeff Sandler, analyst with FAC Equities. "There are more dead of these than alive."

Others see the business model in which free Net access is bundled with computer hardware showing more promise.

"The most interesting portion of the market is the hardware manufacturers that provide subsidized access and hardware along with the advertising," said Rob Enderle, analyst with the Giga Information Group. "One of the difficulties you've got with coupling access and advertising is that you don't have control over how the machine is set up. If you can ship the hardware preconfigured, it helps solve the problem."

Another reason NetZero and newer entrants to the free Net access space may fare better than their predecessors is simply that they can learn from those early ventures' mistakes.

"Very often the first people to try at something will fail as they define the model," Enderle said. "As more people try to do this, we'll learn more and more about what works."