Changing The Cyber House Rules

No-fee Net access is making the old profit models obsolete

To hear Internet investor David S. Wetherell tell it, America Online Inc.'s decision to make a play for Time Warner Inc. was, at least in part, a way to evade a dire fate. With free Internet services cropping up--from companies in which his CMGI Inc. is a major backer, mind you--time is running out for conventional Internet service providers. "It's not clear to me that AOL would have been able to pull off the deal in six to eight months," he says. By then, "the cumulative effect of free access would have been so great, it might have been a drag on AOL's share value. AOL's timing was perfect."

By jumping more squarely into the content business, AOL won't have to rely on what Wetherell thinks is a losing game--charging a monthly fee for basic Net connections. Why? Because too many people are giving it away. One company in the CMGI portfolio,, provides free access to two other CMGI holdings, Net portals AltaVista and Excite@Home, plus a slew of private labels, including and Fox Entertainment Group Inc.'s And new free ISPs--such as Spin Media Network Inc.'s array of private-label sites including,, and Kmart Corp.'s cropping up almost every day.

CONTENT SEARCH. Like other free ISPS, 1stUp provides Internet access to consumers willing to submit personal dem-ographic data and put up with extra advertising on every Web screen. So far, consumers seem to consider it an attractive deal. Free ISP NetZero Inc. just signed its three-millionth customer, making it the country's No. 2 service provider, and AltaVista registered 1.5 million users in just five months for its free Internet service. By contrast, AOL, the largest ISP, which charges about $22 a month, has 20 million subscribers. EarthLink Network Inc. and MindSpring Enterprises Inc., which are expected to merge on Feb. 4 and charge around $20 monthly, will only have about 2.5 million after consummating their deal.

All this freebie business could be bad news for such ISPs as EarthLink and MindSpring that are still charging for Internet access but lack the impressive content advantages of the AOL-Time Warner combination. A company can get away with charging $20 per month for service when users spend as much as 88% of their time at its sites, as is the case with AOL. Pay-ISP services may be forced to cut fees: The other route--adding content--would take too long. Brags Ross B. Levinsohn, vice-president for new media at AltaVista in Palo Alto, Calif.: "Free ISPs are going to make the pay-ISP business obsolete."

The fee-charging Internet services are not about to slink away quietly. "Free ISPs haven't been a significant part of our churn," says EarthLink Chief Executive Charles G. Betty. He contends that people sign up for freebies as a backup service and that many never actually use them. NetZero admits that only half of its subscribers have logged on at least once in the past month; at AltaVista, the figure is 70%.

On the other hand, of the country's 120 million people with Internet access, only about 60% are active in any given month anyway, according to market researcher Net-Ratings Inc. Unlike the early free ISPs, which figured they could replace subscription revenues with advertising and commission deals with e-commerce partners, the newest entrants are offering Internet access as a way to lure subscribers to their sites. It's simply a part of doing business: "It's probably the cheapest way to acquire new customers," says AltaVista's Levinsohn.

Except for marketing costs, that is. Even a free service has to make sure people know about it. And the free ISPs have been swarming the airwaves to put on the pressure. After NetZero started a national TV campaign as the halftime sponsor for the NBC's National Basketball Assn. games in December, EarthLink launched its first national advertising, and Microsoft is promising to spend more than $100 million on promotion when it rolls out a new campaign this spring.

"It's all coming down to marketing, and we can do that as well as anyone," says NetZero CEO Mark R. Goldston, who used to head shoemaker L.A. Gear Inc. And let's face it, when the product you're marketing is a commodity, free is an awfully attractive price.