Companies that charge for Internet access say free Internet service providers are a flawed concept offering advertisers little incentive to shell out valuable ad dollars. America Online, the pre-eminent paid service provider, is quick to itemize free ISPs' foibles -- and quick to debunk speculation it will try out its own free service.
Although free ISPs have yet to prove viability as an ad vehicle, the race to win ad dollars -- their lifeblood -- is heating up.
BOTH CAMPS UP PRESSURE
No-cost services are one aspect of the tumult that's under way. ISPs' standard product -- a $20 monthly flat-rate dial-up service -- may be an endangered species. It is under attack from free services, rampant discounting by paid services and falling prices of cable and DSL broadband providers. It adds up to a free-for-all in the ISP market, the subject of a series of stories starting in today's issue.
Free ISPs have 26.7 million registered accounts, based on Advertising Age calculations of top 10 data (See chart on Page 24). The most relevant figure for advertisers is active users -- a far smaller number estimated at 9.7 million.
For example, Juno Online Services, which has free and paid ISP services, last quarter had 11.1 million registered users. Only 31% were active users.
Free services claim to deliver a mass audience to marketers, but it's unclear whether that audience is worth reaching: Some experts said people rarely use free ISPs or use more than one service. Others contended such users are a lower-income audience little inclined to buy things online.
A recent shakeout casts more doubt on free ISPs' staying power: WorldSpy.com and Freewwweb ran out of money and folded recently. While registered users of NetZero, a leading free ISP, increased 66% this year, its stock crashed 87% amid concern about its long-term prospects.
Low-price, branded alternatives to free services are becoming more prevalent; AT&T Corp.'s AT&T WorldNet introduced a $5-a-month service in July that's supported by ad revenue.
But more consumers are signing up for free services. BlueLight.com, created by portal Yahoo! and free ISP developer Spinway for Kmart Corp., has close to 3 million registered users. Spinway and Yahoo! also teamed on an ISP for Spiegel.
Free ISPs are convinced consumers will view targeted ads in exchange for free service.
PAID ISP DAYS NUMBERED
The days of paying for ISPs are numbered, said Lori Stutsman, VP-marketing and customer service at Freeinternet.com. In the Internet world, "people are used to free."
Charles Katz, CEO of CMGI-owned 1stUp, which provides free ISP services to AltaVista Co., Britannica.com, Excite@Home and Lycos, said 1stUp aims to develop branded free ISPs for as many companies as possible to sell advertisers on its massive reach. The company has 4.2 million registered users.
"The idea is that in order to make this business successful, you have to have tremendous scale," Mr. Katz said. Marketers "can potentially advertise to every single consumer that uses 1stUp technology," he said, adding that 70% of AltaVista's free access users move from AOL.
Unlike 1stUp, which helps companies develop branded free ISPs, NetZero itself is a consumer brand that offers free access in exchange for viewing ads. Advertisers include General Motors Corp. and Pharmacy.com.
"Ninety percent of our users came to us from another ISP," said Mark Goldston, chairman-CEO of NetZero. Costs to provide access usually are higher than free ISPs' ad revenue, but Mr. Goldston said NetZero's ad revenue for the quarter that ended in March exceeded connection costs for the first time. "The Internet has proven that it delivers an audience that absolutely will view ads. Mass consumers . . . are the people that mass brands want."
NetZero, whose stock last week traded near a 52-week low, said it expects to be profitable by December 2002.
To build revenue, even free ISPs are diversifying. NetZero and Freeinternet provide hosting services for businesses.
Meanwhile, 1stUp launches a paid dial-up service this month and broadband service this fall.
AOL doubts consumers will view ads to get free access.
"I think the willingness of consumers using free ISPs to actually get any information from advertisers is remote," said Myer Berlow, president-interactive marketing at AOL, who also questioned advertisers' willingness to "subsidize people's usage of the Internet" by paying the entire bill. "We've got a higher-value consumer, a higher-value proposition and a fair price to the advertisers."
"You can't sell advertising without users, and the free ISP model demands that you give away something before you get any income, so it's doubly difficult for anyone to be in business."
As for the possibility of AOL offering a free ISP, "I would never say never," Mr. Berlow said. "On the other hand, it would not be something I would recognize as a proposition I would want to do."
Peter Krasilovsky, an analyst at consultancy Kelsey Group, said: "Free ISPs don't work in the U.S. because AOL had such a head start and a very appealing model for advertisers." He said free ISPs spend $7 to $15 a month servicing each user.
AOL in its most recent quarter had about $8 a month in ad and commerce revenue on top of subscriptions, which averaged $15 a month per customer, an Advertising Age analysis shows.
SPENDING LAGS REVENUE
In a recent report, Jupiter Communications analyst Dylan Brooks said: "Ad revenue does not yet cover the costs of providing dial-up Internet access, much less broadband access. The number of Internet commerce commissions and channel deals will rise dramatically, helping to cover Internet access costs, but will not cover other operating expenses in the near future and will therefore fail to create a profitable business model."
Who will win the free ISP war for consumers and advertisers?
"It will come down to service -- who provides the best service, the best connections, the best e-mail, is the easiest to use," said Freeinternet's Ms. Stutsman. "We're not just resting on the fact we're free. It's about retention vs. acquisition."
Contributing: Alice Z. Cuneo, Patricia Riedman