Author: Mathew Ingram

There’s an old joke about the business manager for a retail company who admits his company is losing money on every unit it sells, but insists he can “make it up on volume.” This isn’t really a joke any more — in fact, it’s the business model for any number of Internet companies. The latest twist to this “give away the store” model comes from a group of companies hoping to prosper by providing Internet access for free.

The company that has made the biggest splash is NetZero, based in Westlake Village, Calif. It went public last September and almost instantly had a market value of about $3-billion (U.S.) when its stock climbed to $30. At that point, its market value was almost the same as the second- and third-largest Internet service providers (ISPs) in the United States — Earthlink and Mindspring — combined.

That’s not bad for a company that gives away its major product, and lost $40-million on revenue of $20-million in six months last year. The thing that really drew the market’s attention, however, was the rate at which NetZero was signing up users: more than 1.7 million in 1999, making it the third-largest ISP in the United States. It has since jumped into second place nationally with three million subscribers, behind America Online’s 20 million users.

NetZero’s stock has fallen back from its early highs. After getting up to $40, it has dropped below $30, although that still gives it a market value of about $2.8-billion. The company recently got a major boost when it said it had signed a deal with General Motors to link subscribers directly to the car maker’s on-line buying site — a deal that could provide NetZero with about $100-million in revenue in the next four years.

The other free Net access company that has steamed up the stock pages is Juno Online,which saw its share price soar more than 130 per cent on a single day in December, after it said it would offer free Internet access. The stock got as high as $80 before plummeting to $25, which still gives the company a value of $1-billion. Juno, which started as a free e-mail company, lost $55-million on revenue of $50-million last year.

Both stocks have stopped their climb up the charts in part because industry watchers still have doubts about whether free access can be a viable business. Providers such as NetZero and Juno make their money using banners that bombard users with ads, and can’t be stopped — though hackers have apparently broken NetZero’s system, and some users have an old-fashioned method of blocking the ads: strategically applied pieces of paper.

Free Internet access doesn’t really have a great track record in the United States or Canada: two companies that tried to make a go of it in the United States were FreePC — which gave away entire computers as well as Net access — and Bigger.net. The latter went bankrupt in 1997 after signing up 40,000 users, while FreePC was bought by discount PC maker eMachines, which ended the free Internet idea. In Canada, Cybersurf Corp. has tried to push the idea of free access but so far hasn’t made much headway.

There are free Internet providers in other countries, including Freeserve in Britain (owned by electronics chain Dixon Group PLC) and several companies in Brazil. However, the Internet market is a different beast in these countries: Users pay charges for all their phone calls, even local ones, and that has meant far lower rates of Internet usage. In other words, companies almost have to offer “free” access just to get people interested.

In the United States, companies such as NetZero and Juno face the problem of eating all the Internet access costs, and then paying for them solely by advertising — analysts say it costs ISPs about $6 a customer to get a telco to provide them with local calling numbers. And then there are those who question how much the advertising carried on such services is really worth — especially when research shows that barely half of NetZero’s three million users log on to the Internet in any given month.

In an interview with CBS Marketwatch, analyst Drake Johnstone of Davenport & Co. said if free-access companies can’t grow quickly, “they’ll be losing pots of money. . . . It’s like they’re running in front of a speeding bus and they hope they don’t trip and get run over. You hope the market is going to be supportive [but]it’s like playing with a loaded gun.”

The market is also getting crowded. AltaVista, the Web site owned by Internet holding company CMGI, is now offering free access, provided by another CMGI company called 1stup. The latter is also the engine behind ‘s free service, called FreeWorld, which the company says is designed so people can graduate to the company’s high-speed cable product.

Another recent example is Bluelight.com, a joint venture between Yahoo and K mart designed to get users on-line and then steer them in the direction of e-commerce sites.

This may be the future of free Internet access: a freebie provided by Wal-Mart, so you will come on-line and shop at their Web site, or offered by the phone company in return for a certain amount of long-distance activity or a package of other services. But the survival of stand-alone providers such as NetZero and Juno remains a big question mark. Readers can reach Mathew Ingram by fax at (403) 244-9809 or at

People seem compelled to believe certain things, regardless of the evidence to the contrary. For example, people insist that hospital emergency rooms fill up when there’s a full moon, even though research shows no such thing. Some people believe that the moon landing was faked. Others are convinced that gasoline prices are the product of a vast conspiracy, despite the fact that repeated investigations have found nothing of the kind.

The latest uproar takes its cue from the fact that gas prices at the pumps are on average higher than they have been since the Persian Gulf crisis in 1991. How much higher? About four-tenths of a cent. Try this little exercise: Think of any other commodity — one that you use daily and in large quantities — whose price you are aware of changing by a few tenths of a cent. Try to think of one where you even noticed a change of several cents.

Thanks to carefully controlled cartels involving such common household items as milk, cheese and eggs, you pay several times what it actually costs to produce those commodities — but no one boycotts the grocery store because the price of cheese went up by 200 per cent. Very few people can track the cent-by-cent changes in the price of bread and then correlate that with the world price for a bushel of spring wheat and conclude that they are being gouged, even though the Canadian Wheat Board has a monopoly that oil companies would never be capable of constructing in their wildest dreams.

So gas prices are as high as they were before war broke out in the Persian Gulf. And where is the price of crude oil at the moment? It’s north of $30 (U.S.) a barrel, which just happens to be right about where it was before war broke out in the Persian Gulf. That won’t satisfy the conspiracy theorists, however — who now include in their number the Premier of Ontario. A gaggle of Ontario MPs has been traversing the province holding hearings to get to the bottom of this crime against the driving public.

It would be a lot easier — not to mention cheaper — if these MPs just sat in a boardroom somewhere and looked at the stacks of paper that have been prepared on this issue over the years: six investigations by the Competition Bureau and its predecessor agency, and a series of inquiries by other provinces. Not a single one has found any evidence of conspiracy, including the most recent one, which released its report just two weeks ago.

In fact, several have said that by any conventional measure, gas retailing is among the most competitive businesses going. The key issue is not whether prices go up, or even whether they all go up at the same time — it’s whether they stay up. And they invariably don’t. But maybe a stable price would be preferable to all that up-and-down activity. Maybe the federal government could rebuild its stake in Petro-Canada and then help control the gas retailing industry that way — or even create a kind of Canada Gasoline Board that would set quotas and prices. Wouldn’t that be great?

Ask someone fuming at the pumps why they believe in a conspiracy and they will tell you several things: pump prices always go up faster and farther than they come down; they always go up on weekends and holidays; and they are higher than they have ever been. The first two of these things are often true — prices do tend to go up faster than they come down. All that shows is the desperation of oil companies, whose profit margins at the retail end of the chain are measured in pennies per barrel. So does the tendency to push prices up on summer holiday weekends, when you know people will be driving.

No one believes this, of course. How could they, when prices are so high? Most people can tell you how much they paid for gas 10 years ago or even 20 or 30 years ago, or how much their cousin in the United States pays for it. But can they tell you how much of that price is tax, or how much that tax component has risen in the past 10 or 20 or 30 years? Not likely. Could they tell you that — adjusted for the effect of inflation — gas prices are lower than they were 40 years ago, even after you include higher taxes? Probably not.

One more piece of ammo in the gas price conspiracy is the fact that gas stations all put their prices up at the same time. How obvious could it get? Cigarette-smoking figures in dimly lit boardrooms are clearly making a call on the secret phone (shaped like a gas pump), and telling everyone what the price is. Or, they could just be watching each other. “It is not against the law to watch what your competitors are doing and then match their price movements,” says deputy Competition Bureau commissioner Harold Chandler.

Oh sure — as if that’s going to explain it away. No one expects the government to find evidence of price fixing, do they? They’re probably all in on it too. And here’s another thing to think about next time you’re at the pumps: How come the price of gas always goes up when there’s a full moon?

Ted Rogers’ acquisition of Groupe Vidéotron Ltée for $6-billion or so makes it clear that the race for ownership of the information pipeline is heating up. Mr. Rogers and other cable companies see the coaxial cable snaking into most homes as the premier route for high-speed Internet access, phone service and digital TV. Telephone companies like Bell Canada, meanwhile, see advanced telecom technologies such as digital subscriber line (DSL) as the Holy Grail.

In some cases south of the border, companies are hedging their bets by buying into both sides of the issue: for example, last year telecom behemoth AT&T bought Tele-Communications Inc., one of the country’s biggest cable providers. Ma Bell also owns a stake in Excite@Home, which operates a high-speed cable service — a service that both Rogers Communications and Shaw Communications of Calgary license and offer over their own networks.

In the early days of high-speed Internet access, it was assumed that cable would dominate the market. Phone companies didn’t have a great track record with new technologies, being more focused on selling high-margin business lines. In the past year or so, however, companies in Canada and the United States have stepped up the pace of their high-speed offerings.

Although both sides like to get into heated arguments about whose service is a) faster and b) more reliable, most analysts agree that DSL (Digital Subscriber Line) and cable access will probably continue to co-exist. Some feel DSL will likely be adopted faster by businesses because they already have the phone lines, while cable has been accepted more quickly by consumers because most — especially in Canada — have cable at home.

When it comes to investing in this market, you’re probably better off staying away from the actual cable providers such as Rogers and Shaw and going after the so-called “plumbers” — the companies that make the cable modems and DSL routers and other equipment that Rogers and Shaw and other companies use. This market is rapidly becoming neither cable- nor telecom-centric but rather fusing into a single networking equipment market.

Many of the existing telecom equipment companies are involved, such as Lucent Technologies, Motorola and Nortel Networks. There are also younger players such as Juniper Networks — whose stock is up 460 per cent since last July — Sycamore Networks, Efficient Networks and Copper Mountain. The latter two specialize in DSL equipment, while the others are trying to become suppliers of choice for either fibre-optic or coaxial cable, or both.

When it comes to cable, Motorola and Nortel are two of the leading makers of older-style cable modems, along with General Instrument (now part of Motorola) and 3Com Corp. But they are not as big a factor when it comes to the newer modems, which can be used with any cable service, that are seen as the future of the industry. In that end of the market, the stars include two smaller and lesser-known companies: Com21 Inc. and Terayon Communication Systems.

Terayon has done deals with Rogers and Shaw, and as an incentive has given both an equity stake. Network equipment giant Cisco Systems also owns a stake. The explosive increase in Terayon’s stock price since it went public in 1998 — up more than 850 per cent to $140 (U.S.) — has helped boost Shaw’s results, because it sold shares last fall for a healthy profit.

Another fast-growing network equipment maker is Redback Networks,which went public last summer at $30 and has climbed more than 600 per cent. Redback recently bought a networking technology company called Siara Systems for $4.3-billion, even though Siara had no revenue whatsoever. Redback is building systems that can handle either cable or DSL, and speed up Internet traffic by sorting the bits of data and routing them more effectively.

Next Level Communications,a General Instrument spinoff, is selling technology in partnership with USWest that it says uses a variation of DSL to provide enough bandwidth for full-motion video broadcasts, as well as high-speed Internet access and telephone use, on a single copper phone line — although a user has to be no more than 3,000 feet from a phone company switch. Its shares have climbed to about $120 from about $50 last fall.

A California company called Jetstream Communications,meanwhile — which is expected to go public in the near future — says its equipment will allow users to have up to 16 virtual phone lines as well as high-speed Internet access using a single copper phone line. Its main competitors are a company called Accelerated Networks,also said to be planning an initial public offering (IPO) soon, and another privately-held equipment supplier called Coppercom.

While the big U.S. phone companies focus on selling DSL in large centres, there are a whole series of smaller companies that are focused on smaller areas. These companies — who install their own DSL equipment in the central switches belonging to the phone company and then lease phone lines — include Covad Communications (whose stock has climbed to $80 from less than $30 last year) and Northpoint Communications,as well as privately-held New Edge Networks,which is expected to do an IPO soon.

If that helpful neighbour in the movie The Graduate were to whisper one word to the young hero today, it would probably be “fibre” instead of “plastics.” Not the kind of fibre you get in cereal, but the kind that is made from spun glass and buried in the ground — optical fibre, the kind every telecom and computer networking company wants a piece of, so they can beam Internet data, voice and digital TV around the globe at high speed.

Every few days there seems to be another fibre-related deal: JDS Uniphase, for example, said last week that it is merging with fellow fibre company E-Tek Dynamics of San Jose, Calif., in a $15-billion (U.S.) deal. JDS Uniphase — itself a product of the $6-billion merger of Ottawa’s JDS Fitel with Uniphase Corp. just a year ago — is already one of the largest fibre-equipment companies, and well on its way to becoming what analysts call the Intel of fibre (referring to Intel’s dominance of the computer chip market).

The comparison with Intel could be apt. Just as the battleground of the past was the personal computer — a war Intel and Microsoft have won — some industry watchers feel that the battle of the future will be over who has the biggest and fastest and most agile network, able to offer the best route for high-speed, intelligent Internet traffic, voice and digital entertainment. Companies such as JDS Uniphase won’t have their names on the product, but like Intel, they will be providing the underlying firepower.

Another company trying to marshall its artillery is Nortel Networks. Using its high-flying stock, Nortel has been buying its way into the business: Last month, it paid $3.2-billion for Qtera Systems, whose technology boosts the carrying power of fibre. Its competitors aren’t standing still, mind you: In August, Cisco Systems paid $7-billion for an optical startup called Cerent, and Lucent Technologies paid $1-billion for Nexabit, a company with no sales.

Nortel and its larger cousins also have to move fast because some of the industry’s small fry are growing so quickly that they are pricing themselves out of reach even for the big guns. A small fibre-optic company called Sycamore Networks now has a market value of more than $23-billion, while the formerly unknown Redback Networks has grown to the point where it is now making billion-dollar acquisitions — such as last month’s $4.3-billion purchase of Siera Corp., a fibre-equipment company with no revenue.

Another Canadian company trying to position itself at the forefront of this industry is little-known Worldwide Fiber Inc. of Vancouver, a privately held unit of a construction company called Ledcor Industries. Worldwide Fiber became a lot less unknown earlier this year, when it said it had convinced Microsoft’s chief financial officer, Greg Maffei, to join the company as CEO. This was a fairly major coup — like an unknown bar band convincing Keith Richards of The Rolling Stones to join the group as lead guitarist.

What helped Mr. Maffei make the decision was revealed last week: He got a loan of $77-million from Worldwide Fiber to buy 31 million shares of the company, which has said it will file later this year for an initial public offering. But despite the inducement, the fact is that a senior executive of the world’s most valuable company decided to join an unknown in Vancouver.

Worldwide Fiber is currently in a race to wire the globe with fibre-optic cable. The company, which began laying cable as an offshoot of its construction work, has bundles of fibre — each strand of which can carry 320 gigabits, or the equivalent of 5.7 million Internet connections — stretching across the country, and is halfway through a similar network in the United States. It is also building an undersea cable to join North America and Europe, and recently acquired fibre linking 11 European cities.

The Vancouver company isn’t alone: Its strategy is similar to that of a U.S.-based company called Global Crossing, which turned an undersea fibre cable into a multibillion-dollar market valuation — allowing it to make a $35-billion offer for US West (it lost out to a higher bid from Qwest Communications). Tyco International, the U.S. company that is laying the undersea cable for Worldwide Fiber, also recently announced that it plans to lay its own fibre network at the same time and go into the networking business.

Cementing the impression of fibre as the pipeline business of the future, U.S. energy giant Enron — which made its name with old-fashioned gas pipelines — also has a sizeable fibre-optic network it acquired when it bought a regional utility. The company rents it out to other companies, and says it is developing a trading network that will allow companies to buy and sell capacity on fibre-optic networks the same way companies trade capacity on natural gas pipelines. One of its first customers: Global Crossing.

If you want to build an information superhighway, you’ve got to have a road — and fibre, it seems, is the road-building material of choice.