Are ISPs giving away the store?

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 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, 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

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