Remember your mother's warning: There's no such thing as a free lunch.

On the Internet these days, that's increasingly true.

Free Internet access is essentially gone. So are such goodies as free phone calls over the Web, free shipping for e-shopping and free access to premium content.

At a time when advertising revenues are way down and investment capital has dried up, an increasing number of sites are demanding that users pay for content or services in an effort to generate some money to pay the rent and keep the lights on.

Baseball fans can no longer tune into free radio broadcasts of games from around the country over the Web. Major League Baseball is now demanding $9.95 for the privilege of listening.

Salon.com, the online magazine, is offering an ad-free subscription for $30 a year. That includes daily peaks inside the Bush White House and the magazine's gallery of erotic art and photography. TheStreet.com, a financial news site, is once again charging for access to its top analysts, including James Cramer, who founded the website. Those willing to pay even get a sneak peak into his personal portfolio.

Even Yahoo, which pioneered a number of Internet-based services that many consumers have come to love -- and initially got for free -- is now demanding that users pony up a few dollars to use them.

It charges for about 15 services, including increased storage space for e-mail. And Yahoo has introduced four for-pay premium services: Yahoo by phone, auction listings, phone calls through Yahoo's instant messenger service and a market tracker service.

Yahoo co-founder Jerry Yang was an early proponent of the free Web. He has changed his tune and says today's fees for content are just the tip of the iceberg.

``The first revolution, the free marketplace, continues to develop,'' Yang recently told the San Jose Mercury News. ``But the second marketplace of paid-for content has different dynamics. It's going to take a few years.''

Michele Pelino, director of Internet marketing strategies for the Internet research firm Yankee Group, agrees. ``In the bigger picture, fee-based content and services make a lot more sense.''

Pelino thinks consumers would be willing to pay for timely, accurate and unique information that's conveniently accessible from one site, rather than having to hunt all over the Web for it.

Gary Arlen, an interactive services consultant in Bethesda, Md., sees a comparison to cable television, where consumers have been quite willing to pay $15 to $20 a month for movie channels such as HBO and Showtime. He thinks the shift on the Internet will take place.

``The reality is that information does have value,'' he says.

But how much are Internet users willing to pay for that valuable information?

Last December, Forrester Research asked more than 5,000 Internet users what they would pay, at most, per download. The results: 48 cents for a news story, 51 cents for a song, 52 cents for financial information or adult material. Monthly subscriptions might cost about $3.

Jupiter Media Metrix forecasts these seemingly small amounts can add up to real money when hundreds of thousands of users hit the download key. The New York firm estimates that paid content revenue will grow from about $1 billion this year to nearly $6 billion by 2005. It is still a small amount compared with the $30 billion Americans spend annually for cable TV.

Collecting a fee can put off some users.

Pelino notes that when The Wall Street Journal began charging for access to its online edition, it lost some traffic but has regained it. WSJ.com costs $59 for an annual subscription.

Morningstar.com, the Chicago-based firm that tracks the mutual fund industry, began charging a fee for premium content on its site three years ago. It has 75,000 paying users and about a million active free members.

Morningstar has created new content for its premium service, including in-depth analysis of 1,000 stocks and 2,000 mutual funds.

And it's not just websites that are charging more -- the cost of Internet access is also on the rise. AOL recently announced that it is raising its rates from $21.95 to $23.90 a month, and several major cable and telephone companies have increased their prices as well.

Of course, a few companies are going the other way.

CBS SportsLine.com, based in Fort Lauderdale, has stopped charging fantasy league users a $99 annual fee last fall. Since then, the number of users has jumped tenfold to 1.3 million.

SportsLine.com's thinking was to forsake the upfront revenue and boost its traffic, which would let it increase its ad rates.

Despite the slowdown in online advertising in recent months, SportsLine.com has no regrets -- so far, says a company spokesman.

Friday March 30, 2001

Gateway phases out its ISP, Canada stores

Gateway, the first major computer maker to aggressively bundle Internet access with PCs, is phasing out its branded ISP in favor of America Online.

The San Diego-based PC maker will effectively terminate Gateway.net by July 31, the company said Friday. The company will still act as an Internet service provider to a very limited number of people but will discontinue service to mainstream customers, said Marty Walsh, senior program manager in Gateway's Internet services group.

In a separate development, the company said it will shut all 10 Gateway Country stores in Canada, a cost-cutting measure that will affect about 220 employees. Earlier this week, the company shut 27 of its 326 stores in the United States. A Gateway spokesman said the company will evaluate what to do with its 45 stores in Asia and 27 retail outlets in Europe.

Meanwhile, Gateway is encouraging its roughly 160,000 ISP subscribers to shift to AOL. AOL actually serves as the underlying backbone of Gateway.net, and the fundamental differences between the two services are fairly small. The two companies are close allies on a number of projects, a relationship that dates back to AOL's $800 million investment in Gateway announced in October 1999.

"We're trying to make the migration as easy as possible," Walsh said. By eliminating its own ISP, Gateway will be able to rid itself of some marketing and administrative tasks.

Subscribers who shift to AOL before May 31 will qualify to get its service for $19.95 a month--$2 less than the typical AOL service--through July 2002.

Gateway.net subscribers can keep using their current e-mail addresses through the end of the year, when they will receive AOL addresses. In many cases, the only change will be that the address suffix will change from "Gateway.net" to "AOL.com," he said.

Gateway was the first major PC company to trot out its own branded ISP. Service kicked off in 1997 and became an integral component of the company's strategy to bring in revenue through financing, software, training and other "beyond the box" sources.

Before Gateway's shift, consumers typically signed up for Internet service only after they bought a PC.

The strategy of a simultaneous sale led to one of the marketing techniques that lead to an explosion of PC sales in 1999: the ISP rebate. PC makers, ISPs and retailers began to work in conjunction to offer $400 rebates on hardware purchases or to throw in a six to 12 months of free ISP service.

Although "beyond the box" revenues accounted for the vast majority of Gateway's profits at the end of last year, the company has decided to reverse itself and begin to focus its primary energies once again on PCs.

Gateway's new executives have said they aren't philosophically opposed to "beyond the box" revenue. Rather, they have emphasized that the company needs to first revive its share of the PC market.

Sunday March 18, 2001

Dot-coms pull back on Net freebies

By David Streitfeld and Ariana Eunjung Cha
THE WASHINGTON POST

Last year, Jim Reardon was able to equip a home office from the freebies he got off the Internet. A free color printer from Estamps.com and a free scanner from Insight.com. Unlimited Internet access through Netzero.com. Free voice mail from Ureach.com. Free subscriptions to Wired and other magazines from various sites. Free digital photo prints. Even a free yellow-and-black lava lamp from Lavaworld.com.

These days, the Illinois college student is hard pressed to find a free digital postcard. NetZero has started making him stare at movie ads before the service boots up. The company has also told him that if he spends more than 40 hours a month online, he'll have to pay a $10 fee. And his voice mail now costs $5 a month.

"I think the Internet's going to pretty much be, 'If you want something, you're going to have to pay for it,' " Reardon said. "You might find free junk, but nothing like the free services and cool things you might have taken for granted these last couple of years."

A GOOD THING GONE

Reardon is one of millions of people who had a good thing going. In the Internet's brief history as a commercial enterprise, both entrepreneurs and established firms have focused on building an audience by giving things away. Later, once they had a huge base of fans, they would figure out how to make money off them.

Later has now arrived. The crash in technology stocks has prompted Wall Street to demand profitability from Internet ventures - immediately. Web companies that had been hoping to survive with advertising, such as the Yahoo portal or the Encyclopedia Britannica Web site, are furiously trying to develop subscription services. Companies that didn't previously bother their users with advertising, including the retailer Amazon.com Inc. and the e-mail program Eudora, now make full use of it.

"The Internet used to be a little like a 1968 Haight-Ashbury commune, where essentially everything was free," said Charles Ardai, chief executive of Juno Online Services Inc., an Internet service provider. "Now it's becoming more like Manhattan in 2001, where you have to pay for the things you most want to do."

Juno customers get a free Internet connection in return for agreeing to view advertisements. In a quest for more revenue, Juno will soon ask users to keep their computers running all the time so the company can use special software to harness the collective processing power of those 3 million computers and sell it to third parties. The more successful the project is, the more likely Juno is to make participation mandatory.

FEE FOR SERVICE

The deal might strike some as fair. But in general, trying to make customers pay for value received has been a tricky notion on the Net.
"When 50 companies are giving things away for free, it's hard for one to charge," Ardai said. "When 40 of them go out of business and the other 10 are looking at each other nervously and thinking, 'We all need to find some way to make more money,' I think the environment is suddenly more conducive."

That's what Britannica.com, the Web site of Encyclopedia Britannica, is hoping. Since 1999, Net users have had free access to the 32-volume set, which retails in the physical world for $1,250. Last week, however, Britannica.com fired a third of its U.S. workforce and said it would "accelerate the marketing of pay services" in ways it declined to explain.

DOT-COM WOES

Yahoo Inc. is trying to do the same thing with its 185 million users. In a conference call earlier this year, Yahoo President Jeffrey Mallett said the company's "biggest priority is to convert visitors to members." In an interview, Mallett added that while such core services as search, e-mail and bulletin boards will remain free for the foreseeable future, "I don't know about free forever."

One of Yahoo's first steps to get money from users came in January, when it instituted modest listing fees for its auctions. It wasn't a huge shift; market leader eBay has always charged. But the number of listings on Yahoo quickly dived as much as 90 percent.

Despite this disappointment, tapping its users' checkbooks has recently become an even more urgent project for Yahoo, as online advertising has slowed dramatically. Yahoo, which gets more than 80 percent of its revenue from ads, announced earlier this month that its first-quarter revenue will be little more than half its initial projections.

Amazon, too, is hurting financially. The online retailer's search for new forms of revenue has led to the development of its Sponsored Results program, which allows for ads to be placed alongside search results. A new horror novelist, for example, could run an ad alongside all searches that use the words "Stephen King," to encourage readers to give his book a try.

"It's an experiment," said Amazon chief financial officer Warren Jenson, adding that it was too early to tell how much Sponsored Results would help the bottom line.

MICROSOFT FOLLOWS SUIT

It's not just struggling dot-coms such as Amazon, Yahoo and Britannica that are exploring these new revenue forms. The Internet company with the deepest pockets of all, Microsoft Corp., is just as eager to make money off the tens of millions of users of its free MSN sites.

"We've started to evaluate customers based on their level of engagement with our network," Microsoft group product manager Bob Visse said. "Do they come back one, two, three, five, a hundred times a month? Do they use Money Central or [the free e-mail service] Hotmail? The more engaged these users are, the more likely they are to purchase additional services. They are the low-hanging fruit."

Visse is quick to add that Microsoft will do this without violating any individual user's privacy. But the marketing, at Microsoft's sites and many others, will soon become intense. "The business model now is, 'What can you do incrementally to really make more money?' " Visse said. "It's something none of these companies should be shy about."

TOO GOOD TO LAST

A decade ago, before the first ad was sold on the Web, before the Web itself even existed, the Internet was about one thing: communication. This was the full flowering of the bulletin boards, discussion forums for everything from science fiction to tech problems to sex. Commercialization was unthinkable and impossible.

Vint Cerf, who helped create the Internet's predecessor 35 years ago as a government communications project, said he knew the communal nature couldn't last - and what's more, it shouldn't.

"It was never my expectation that the Net be solely public in all of its aspects," Cerf said. "I was quite concerned that the network couldn't grow to scale if it didn't have a commercial, money-making component."

When dot-coms began taking over the global network in the late 1990s, everyone envisioned big money but no one seemed sure how to go about making it. One popular approach was to try to attract "eyeballs" to a site by any means, the idea being that each viewer represented a certain amount of future advertising and e-commerce revenue. More often than not, that meant giving something away.

It certainly got people's attention. More than half of U.S. households are connected to the Internet. "Now it makes sense to start monetizing that access," venture capitalist Tim Draper said. "This was always the plan."

IN TELEVISION'S FOOTSTEPS

Whether people will appreciate the shift is another matter. After all, it didn't help the e-commerce sites when they started charging real-world prices for their goods instead of giving them away. Many lost their customers and promptly went out of business.

"Consumers are smart," said Bob Kagle, another venture capitalist. "Some may be disappointed but more will be resigned. They know that if they're getting something of value, there has to be some way to pay for it."

Figuring out what people will put up with is the chief challenge facing many companies. To watch movie trailers on Film.com, for instance, you have to sit through an ad for NBA.com before you get to the film preview, which is itself essentially an ad.

Nader Tavassoli, an associate professor of marketing and entrepreneurship at MIT, said the Internet is shaping up like television, with its free network channels surviving alongside cable subscription services.

"I think people would rebel if they suddenly had to pay for network TV, but those same people will gladly open their wallets for cable," Tavassoli said.

Some companies are offering users a choice of features. Eudora, a popular e-mail service owned by Qualcomm Inc., is marketing a free version with ads (corresponding to network television), a $50 version without ads (cable) and a "light" free version without ads but with fewer features (a hybrid).

TALK NO LONGER FREE

As the medium changes, even talk is no longer always free. The casual banter and advice that were the foundation of the online world now compete with such for-profit sites as Keen, ePeople, ExpertCity and HotDispatch.

These sites are basically virtual trading places for advice. The curious post questions, and the authorities answer them - except that, in this case, the inquirers have to pay $5 for the simplest query up to thousands of dollars for more complex projects. The sites take a commission off the fee.

Joel Peach, 22, of Columbus, Ohio, answers questions for free and for pay. He is known for the helpful counsel he often provides free on message groups for Java programmers, but he has also become a well-paid specialist on HotDispatch, which focuses on technical solutions.

"A lot of people are basically using cash to speed up a process and get an answer they would normally get for free through a news group or through a buddy," said Peach, who recently picked up $700 for about 10 hours of work.

NO CHARGE FOR PAT BOONE

The sites most directly affected by the diminishing supply of free Internet goodies are naturally those that specialized in listing them.

If you looked on FreebieDirectory.com site a year ago, you'd find a virtual bonanza - personal computers, online access services, digital music files, even free gift certificates.

Today, the pickings are leaner.

"Well, there's a free CD offer," FreebieDirectory.com founder Marc McDonald said. "It's called the Pat Boone CD, but it has various vintage artists: Sha Na Na and George Jones."

In true never-say-die entrepreneurial fashion, McDonald thinks the current economic downturn can only help his site. "A free tube of toothpaste or free instant coffee - in a recession, these things become even more appealing," he said.

Jim Reardon, who loves giveaways so much he started a Web site named Freecenter.com to list them, hopes the Internet freebie will come back.

"As companies figure out how to make money off of online ads and realize what they can give away and and still make money, we'll see free stuff come back," he predicted.

At the moment, though, the trend is firmly in the other direction. One of the sites promoted last week on Freecenter as the Freebie of the Week was Driveway, a Web site described as "the best place to organize and store your files online."

Last month, Driveway announced it was "repositioning" itself. Most of the staff was laid off, and the storage space shut down.

Monday March 12, 2001

Forbes.com
No Free Lunch
By Lisa DiCarlo

By now it's clear that the concept of free unlimited Internet access was flawed beyond belief. Providers were completely dependent on mercurial advertising revenue for sustenance. Users had to tolerate spotty service and ever-present banner ads hogging their computer screens.

What's less clear today is how Internet service providers will fare in making the transition to a paid subscription model. NetZero (Nasdaq: NZRO) is the latest to make the move. The company has been battered by the falloff in Internet advertising, with sales last quarter down sequentially to $16 million from $16.4 million.

Like other free ISPs, including Juno Online Services (Nasdaq: JWEB), NetZero's resources were being sucked dry by some customers who stayed online for an unusually large number of hours.

``We have a very small group of people who are like the 400-pound guy at the $1.99 buffet,'' says Mark Goldston, chairman and chief executive at NetZero. He says that 12% of their subscribers were eating up 53% of NetZero's telecom costs, costing them $50 million to $60 million a year.

So in early February, NetZero started offering paid subscription service called NZ Professional--$9.95 per month--for users who go over 40 hours a month online. A persistent ad banner is still present in NZ Pro. At the end of this month, NetZero will start offering another $9.95 service, called NZ Platinum, where users have unlimited usage and are not subjected to viewing ads.

That's cheap compared to the $21.95 that tens of millions pay to use AOL Time Warner (NYSE: AOL). Some believe it's so cheap that it won't offset the steep drop-off in advertising revenue, on which NetZero has been almost completely reliant.

``They won't generate enough of a paying subscriber base,'' says Youssef Squali, who followed the ISP market for ING Barings until he left that firm last week. ``In the long run, they'll continue to struggle [because] their model is ad-driven. Clearly, the Street doesn't believe the model is working. If they did, they'd at least give it cash value.''

NetZero traded below cash at 59 cents in late-morning trading today, a new 52-week low and down 97% since March 2000. In December, cash stood at $182 million.

Goldston counters Squali's theory, citing NetZero's low cost of customer acquisition, low marketing expenses, low overhead and lean structure. He says it costs them 15 cents an hour to offer Internet service--telecom costs have dropped about 50% a year--and they don't spend a lot, about $7, to acquire customers. He says NetZero has spent a cumulative $60 million in marketing since July 1997. The company has no in-house customer support. If users need help, they pay for it, which is provided by a third party. NetZero will also outsource the billing that will become necessary as it offers paid service.

While NetZero claims that 30,000 have already signed up for its paid service, it's too early to tell if the moves will have a positive impact on NetZero's business. More numbers will be available when NetZero reports its third fiscal quarter, which ends March 31.

Hypothetically speaking (Regulation FD, you understand), Goldston says that if they got 25% of their 8.4 million registered subscribers to sign up for a paid service, that could mean $239 million per year in revenue, less about $100 million in telecom costs. That's assuming 30 hours of monthly usage per customer, with telecom costs of 15 cents per hour.

Despite its subdollar stock price, NetZero has enough cash to sustain its lean business model for at least another two years, even if its paid services fail to attract millions of subscribers. That's assuming its costs don't rise significantly.

``The online ad market stinks right now but it's not nonexistent,'' Goldston says.

The bad news is that the ad market is far worse than anyone predicted, with a rebound nowhere in sight. Witness the carnage at Internet bellwether Yahoo! (Nasdaq: YHOO). If NetZero isn't able to snag a few million paying subscribers within about 18 months, net zero will be about what this company is worth.

Friday February 16, 2001

Juno CEO Open to Mergers, Acquisitions

NEW YORK (Reuters) - Internet service provider Juno Online Services Inc. (NasdaqNM:JWEB) is open to buying a competitor or being sold to one as the market consolidates and reevaluates the free Web access model, Chief Executive Charles Ardai told Reuters on Friday.

Many industry analysts have said companies like Juno and EarthLink Inc. (NasdaqNM:ELNK) could be targets for an acquisition amid the continued consolidation.

Like many of its peers, Juno has been trying to migrate its subscribers to premium, billable services as running a free Internet access model becomes more difficult as online advertising spending decreases.

``I think yes, in a sense, (the free model is dead) and there are no stand-alone free ISPs,'' Ardai said. ``Some got out of the business or expanded into billable services like us.''

Earlier this month, Juno said it will move into the supercomputing business as it looks for ways to diversify its revenue mix. Ardai said the move is by no means a quick fix, but is another business line the company could go into with its current assets.

The supercomputing initiative aims to harness unused processing power from the computers of its free subscriber base so that biomedical companies, for example, can execute computationally intensive applications.

While Juno is also dabbling in broadband, or high-speed, services, its primary focus is its basic Internet service, which targets people who are just getting onto the Internet. Many of them are not likely to be interested in high-speed service for a while, Ardai said.

``We see broadband as an important part of the future,'' he said, ``but it's not the centerpiece of our business.''

Juno is still negotiating a long-term agreement to offer high-speed services over AOL Time Warner Inc.'s (NYSE:AOL) cable lines, Ardai said.

Juno started talks with Time Warner last year, before leading Internet company AOL completed its acquisition of the media giant.

Federal regulators, as a condition to approving the $106.2 billion megamerger, required Time Warner to open up its high-speed cable lines to AOL's Internet rivals. So far, the combined company's cable group has signed deals with EarthLink as well as AOL's Internet service.

Friday February 2, 2001

Microsoft dropping $400 MSN rebate

update Microsoft announced Friday that it will discontinue its $400 rebate to new subscribers of MSN Internet service, a deal that drove PC buying but also created a financial crimp for the company.

The Redmond, Wash.-based software giant, which is battling America Online for subscribers, will instead offer one free year of MSN to buyers of new personal computers.

Microsoft is not specifying which new computers will come with the one-year free service. Instead, the company is letting retailers pick which computers it will attach to the offer. One retailer may include the offer with all PCs in the store, while another may only include PCs from Compaq Computer or IBM.

So far, only RadioShack and Best Buy have agreed to participate in the program, but Microsoft representatives said other outlets are likely to sign on soon.

The $400 rebate deal began in November 1999. With some exceptions, it applied to people who purchased PCs and committed to three years of MSN service. The deal will end in the first week of March. The one-year free service will begin in the spring, possibly as soon as the current offer expires.

The idea for one year of free service is not entirely new. In November, Microsoft and Dell Computer said they would offer buyers of Dell consumer PCs one free year of Internet access through MSN.

MSN, which has more than 4 million subscribers in all, added 500,000 in the fourth quarter of 2000. By comparison, AOL has nearly 27 million subscribers.

Despite a massive slowdown in PC sales, Microsoft expects the new offer to attract at least 500,000 new subscribers in each of the next several quarters, said Bob Visse, lead product manager for MSN marketing.

"I don't see any end to it, and I think we'll actually be able to accelerate it," Visse said of the goal. "The service and the products are being so well received that we think we can continue growing the business based on those things."

Foreshadowing
Analysts had been anticipating some change in the rebate structure for MSN because Microsoft executives complained in a Jan. 18 earnings conference call that the $400 offer was eating into the company's bottom line.

MSN service costs $21.95 per month, so the one year of free service is worth $263.40 to subscribers. Visse would not say whether the new offer and its associated ad and marketing campaign will cost the company more or less than the $400 rebates, but he said the company's guidance for earnings and revenue won't change because of the new promotion.

"As far as the bottom line for Microsoft, this will not have any change to the guidance announced in the Jan. 18 earnings call...There was already an adjustment made at that time," Visse said. "Overall, I can't give you real clarity as to 'Will this cost less or more to the business?' in that it's not an apples-to-apples comparison."

Although Microsoft doesn't want to compare the two promotions, analysts are eager to do just that. IDC analyst Roger Kay speculated that the new program will be more economical for Microsoft, but he wondered whether the company was shifting programs exclusively to cut costs.

"Does that mean they have enough (subscribers) or does it mean they can't afford it?" Kay said. "I've got to believe it's more the latter than the former. You can't give away the store forever."

The advent of the $400 rebates in late 1999 led to a boom in midyear PC sales in 2000. However, Kay said, the rebates have probably run their course as far as convincing people who don't own a PC to buy one.

"I would say the (PC industry) has ridden it about as far as they can," Kay said.

Retailers: A reason to grumble
The new promotion is likely to elicit grumbles from retailers, who relied heavily on $400 MSN rebates to sell PCs during the first part of 2000. Microsoft also extended the rebate to other non-PC products. Retailing giant Best Buy, for example, sold 200,000 MSN subscriptions and gave $400 instant rebates on anything in the store.

Compared with a $400 discount, consumers may have a more difficult time determining the value of the new program or may not consider it at all when trying to decide whether to buy a computer, said Matt Sargent, industry analyst for ARS.

"To be honest, customers don't put a whole lot of value in it. They just see it as a free trial," Sargent said. "It's a smart move for Microsoft, but I don't think it's going to help retailers at all. If it's just a free year of service, where's the carrot here?"

Microsoft would not say whether it was giving a cut to participating retailers or divulge any information about how the new promotion will affect retailers.

The company also announced Friday that it will kick off other promotions in the spring. The company will offer a $200 rebate for two years of MSN Internet access, as well as a $75 rebate on a nine-month subscription.

Both of those promotions are independent of the new one-year offer, and Microsoft will not require customers who want to sign up for the two-year or nine-month subscriptions to purchase a new PC.

News.com's Ian Fried and Joe Wilcox contributed to this report.

Wednesday January 3, 2001

Upside Today

Bye-bye, free ISPs

You have to admit that when the first free ISPs appeared, you at least thought about canceling your America Online (AOL) account.

Of course there are drawbacks to the freebies. You have to use a dial-up connection (something that now seems so 1997) and your connection speeds top out at about 56 kps. Remember when a 56K modem was seen as the next Holy Grail of the Internet?

Well, what a difference a little time and lot of market punishment can do. In under a year, companies that offer free Internet services have gone from being the high school football captain to that kid who hung out with the school janitor. Some of the stock prices of these firms are so low you can now get four shares for the cost of a latte.

The start of the year is a prime time for resolutions and predictions, so here it goes: By this time a year from now the free ISP market will be dead -- not just the companies that offer the service, but the concept itself.

There will probably be one or two hangers-on, still trying to make a go of it, but free Internet access has one foot on the proverbial banana peel and is about to fall into the Rio Grande Gorge.

Want evidence? Look at what the current players are up to.

NetZero (NZRO) just sent an email to its free customers saying that from now on they will get 40 hours of usage a month for free. Anything above that and they start paying for connection time. The company estimates it has 6 million service users.

NetZero's main competitor, Juno Online Services (JWEB), which has close to 4 million free- and fee-based subscribers, has launched a series of restrictions on heavy free-service users, including a connection hierarchy whereby paying customers get better access to the Juno network.

In late December, Kmart's (KM) BlueLight.com announced it would limit free Internet access to 25 hours a month and that in the future it may only give free service to people who purchase something from the company.

There's even more trouble behind the scenes. BlueLight began suffering service failures in early December because Spinway, the company that provided service to BlueLight, closed its doors. BlueLight got control of some of Spinway's assets, but then got into a scuffle with service provider Genuity (GENU), which claimed Spinway owed it $8.7 million.

As a result, Genuity cut off its connection with BlueLight, which had to go to PSINet (PSIX) to get the online capacity it needed to keep the free service running.

It's not so difficult to see how this is all going to play out. The technical problems are becoming greater to manage, and with the advertising dollars that largely support free Internet access drying up, the ISPs' operational prices have to be getting too high to keep the service running. Their only remaining option is to charge consumers.

These free ISPs are also going to have trouble competing with the high-speed connections that everyone wants now. Think back to that 56K modem. Just a few years ago, people drooled over getting one of those. Today that same modem is standard in just about every new computer and many people don't use it, instead favoring a DSL or cable modem, warts and all.

Free is great, but it can't last forever. If someone isn't paying for something, can you really expect a company to keep offering that product? Maybe the whole thing will start all over again when enough people sign up for DSL. We can only hope.

Thursday December 7, 2000

Upside Today

Free ISP market in turmoil

A year later, the free ISP market is still around, but its viability is in question. On Tuesday, search and information portal AltaVista announced it would no longer offer free Internet access due to the closing of its ISP partner, CMGI's (CMGI) 1stUp.com. When the service shuts off Sunday, some 3 million users will have to find another way to get online.

Just one day before AltaVista's announcement, Kmart's (KM) online counterpart, BlueLight.com, acquired most of the assets of Spinway, the ISP that had been supplying BlueLight's 5.2 million users with Internet service. Spinway closed shop Dec. 1.

What's happening?

What has been happening to the free ISP market? Two factors are growing competition and revenue models that analysts say leave little room for growth. As a result, companies offering free Internet access are finding the partnerships drying up and are having to explore charging customers for service.

"The reason these companies go down is that they have no upsell model," said Robert Lancaster, an ISP analyst with The Yankee Group. "Once a customer has access, the provider has nowhere to go."

The marriage between a free ISP and the company that puts its name on the service can be a bit confusing. Typically a company that wants to offer Internet access will partner with an ISP through a revenue-sharing arrangement. The ISP often will get its network costs paid for by the company contracting the ISP's services. The company buying the service also may give the ISP a share of advertising or e-commerce revenue that comes through the site. In exchange, the company puts its name, and not the ISP's, on the Internet access.

But sometimes those deals aren't even enough to pay the ISP's bills. Jim Shissler, an AltaVista spokesman, said his company's deal with 1stUp.com was "revenue neutral." AltaVista's name was on the service, but the service wasn't costing the company anything. So, Shissler said, AltaVista "was not losing anything" as a result of 1stUp.com being shut down.

"We didn't own the pipes," Shissler said. "I wouldn't say we're surprised at what happened, but we are disappointed. If 1stUp hadn't gone out of business, we would still offer the service."

Shissler said AltaVista couldn't find another ISP that could provide service at an acceptable cost. He added that AltaVista Internet customers will be given the opportunity to sign up for three free months of Microsoft's (MSFT) MSN Internet service before having to pay for online access.

Spinway was another example of a free ISP done in by a competitive market and thin revenue streams. Among the companies that use Spinway for free ISP access are Yahoo (YHOO), NBC Internet (NBCI) and Hewlett-Packard (HWP), which began offering Spinway's services with some of its computers in October.

However, the future of Spinway remains up in the air as BlueLight is said to be considering dropping its free ISP access after the holiday buying season.

"Spinway was a major company in the private-label access market," said The Yankee Group's Lancaster. "And now it's going to be difficult for companies to pick up a free provider partner."

Lancaster said it is likely that many free service providers will have to find other ways of bringing in revenue, such as going to discount pricing models and, possibly, prepaid Internet access.

Look to Juno

But Lancaster estimates that the free ISP market will continue, albeit with fewer competitors. He said those that do survive will need to adopt methods such as those of Juno Online Services (JWEB).

Juno, which has 3.7 million active subscribers, offers free and billable dial-up Internet access and broadband service. About 3 million subscribers use the company's free service, and Gary Baker, Juno's media relations director, said the majority of its paying customers started as free subscribers. The company's premium dial-up service costs $9.95 a month, and high-speed access runs $49.95 a month.

Baker said more than anything else, having 3 million free users gives Juno a significant base for marketing its other services.

"It's a logical way to go. We've found that a customer is likely to start up for free, then get more interested and move into the billable services. And after that, they are ready for broadband," Baker said.

Juno even has taken steps lately to reduce network costs by putting restrictions on free customers who are considered "heavy" online users. The company already has started pushing more advertisements to those customers and has created a connection hierarchy of priority for its subscribers.

Baker said the steps are necessary as about 5 percent of Juno's free subscribers use half of the company's telecommunication hours.

"Billable customers get first priority, then free customers and heavy users are third. This helps us expand our services where the most revenue is," Baker said.

Tuesday December 5, 2000

AltaVista to End Free Internet Service

PALO ALTO, Calif. (Reuters) - Internet search engine AltaVista Co. said on Tuesday it would terminate a service offering consumers free Internet access because 1stUp, its affiliate company that had provided the service, is going out of business.

AltaVista, which is owned by CMGI Inc (NasdaqNM:CMGI), had signed up 3 million customers for the free service, which provides customers an Internet connection at no cost, in exchange for placing a permanent advertising window on their screens.

Several free access providers were thriving earlier in the year, even causing concerns they could displace big fee-based services like America Online Inc. (NYSE:AOL). But they have suffered recently with the downturn in the Internet advertising market and new questions over the viability of the business concept.

As the Internet industry reconsiders the value of banner ads overall, many say that the ads delivered as part of a free service have some of the lowest click-through rates of any form of online advertising.

``We think that free Internet access as a business model is under siege,'' an AltaVista spokesman said.

1stUp is also a division of CMGI, the Boston company that incubates young Internet businesses and is now in the process of restructuring. Last month, CMGI said it would close 1stUp, along with some of its other holdings.

AltaVista has told its free Internet subscribers that the service will be terminated on Dec. 10, and has made arrangements for them to transfer to Microsoft Corp's (NasdaqNM:MSFT) MSN Internet service, which will offer then a free connection for three months.

AltaVista's spokesman said that while the free service had helped drive traffic to its site it never generated any revenues. The closing of the free service should not affect AltaVista's plans for an initial public offering some time next year, he said.

Wednesday November 22, 2000

Forbes.com

The Beginning Of The End For Free ISPs?

When free Internet service providers first came on the scene a few years ago, Wall Street analysts scoffed at the notion that any business could give away free Internet access and cover the costs by selling advertising.

But privately, analysts worried that free ISPs would endanger for-fee services like America Online (NYSE: AOL) and EarthLink (Nasdaq: ELNK). There were whispers that AOL could be forced to drop its prices, or even do the unthinkable--roll out its own free service.

Now news coming from free ISPs is grim enough to put AOL investors' concerns to rest. Freei Networks and WorldSpy have closed shop, CMGI's (Nasdaq: CMGI) 1stUp is up for sale, and wholesale provider ZipLink (Nasdaq: ZIPL) announced last week that it would suspend operations.

The company ``was influenced by a recent default on payments to ZipLink by its second largest customer, Spinway.com, and general market uncertainty regarding the future of providers of free Internet access,'' a ZipLink company statement said.

Spinway was one of Lowell, Mass.-based ZipLink's largest wholesale customers and another provider of free Internet service. It accounted for 21% of ZipLink revenue during the quarter ended Sept. 30, according to a document ZipLink filed with the Securities Exchange Commission last week. 1stUp, another of ZipLink's wholesale customers, represented 19% of the company's revenue during the same quarter.

The free-ISP business model isn't likely to go away entirely, says Dylan Brooks, a Jupiter Research analyst in New York.

``A shakeout in the space may have a positive effect on the industry, by reducing the supply of free-ISP banner ads, which could help drive prices up,'' says Brooks. ``It's a healthy cleansing that could make the handful of survivors a little healthier.''

Part of the problem, however, is the same domino effect that hurt stocks of media and advertising companies like DoubleClick (Nasdaq: DCLK) and 24/7 Media (Nasdaq: TFSM). The Internet shakeout created an overall decline in advertising sales, and an overall decline in advertising sales hurts the free ISP, whose business model is wholly dependent on advertising sales.

Mark Goldston, chief executive of NetZero (Nasdaq: NZRO) in Westlake Village, Calif., says his company will be one of those survivors. Goldston argues that because NetZero is not a ``private label'' ISP--that is, because it does not offer a packaged free service to media partners--it is entitled to keep its advertising sales revenue. Players such as 1stUp and Spinway must share advertising dollars with partners such as Excite and AltaVista.

``This is not an indictment of the free-ISP space--it's an indictment of the private-label free ISPs,'' says Goldston. ``I get no joy out of seeing companies fail. But having said that, I feel that nothing could be better. These companies intoxicated the consumer on free access...it will work out well for our company.''

There's still cause for concern, says Jeff Sadler, FAC Equities analyst who covers both ZipLink and NetZero.

``The whole consumer end of the ISP market has a giant question mark. There's no doubt that ad sales have hurt free ISPs. And aside from AOL, it's not even clear that paid ISPs' business model is working out.''

Wednesday November 8, 2000

NetTrends: Best things on Internet may not be free for long

By Andrea Orr

PALO ALTO, Calif., Nov 8 (Reuters) - Internet users were stunned last week when Napster, a company whose name has become synonymous with free music online, adopted a plan to charge money for its popular service.

They are likely to have to start paying, or paying more, for a lot of other Internet services as well.

Goodbye to the free Internet. In the face of a softening advertising market that appears incapable of supporting the entire Web, and the launch of several sophisticated services like free long-distance calling that save consumers serious money, several of the most popular online sites are saying they are considering a shift from a free to a fee-base model.

``People will have to realize that free doesn't last forever,'' says Dan Campi, chief executive of Punch Networks, which makes a software to let consumers share files over the Internet and has discovered they are willing to pay.

``There's no free lunch on the Internet.''

Unlike Napster, which agreed to add a fee to its service mainly to settle litigation with music companies over lost royalties, many other companies from Yahoo Inc. (NasdaqNM:YHOO) to America Online (NYSE:AOL) may decide to add new fees simply because they can.

``The days of solely relying on advertising are numbered,'' says Bob Visse, lead product manager with Microsoft Corp.'s (NasdaqNM:MSFT) MSN.com Internet portal. ``It's clearly not going to be our only revenue model.''

``We've done a great job of building a large customer base. Now, the question is how do we convert our 210 million users into a subset of customers who will actually pay? It is crucially important to us.''

Like MSN, which says it sees potential to charge money for a host of services from online music to gaming, and long-distance calling, other companies say they suspect they can get away charging at least a nominal amount for their most valuable services.

For example:

-- Yahoo, which last month unveiled several free voice features from Internet content over the telephone to voice mail and long-distance calling, said it saw ``plenty of potential'' to charge for some services, such as international calling.

-- AOL is offering similar phone services for free but has advised its customers they will have to start paying $4.95 per month in January.

-- The auction site eBay Inc. (NasdaqNM:EBAY) has added a premium fee of $19.95 on top of its modest listing fees to sellers who want to reach a larger audience, by listing items for sale in two different merchandise categories on the site.

-- The online payment service PayPal, which lets people transfer money from one bank account to another, has started imposing a fee on some of its high volume customers. The company took the move after discovering that a lot of people were using its service to help run small businesses and other money-making ventures like auctions.

-- Internet grocer Webvan (NasdaqNM:WBVN) has just informed customers it will add a delivery fee of $4.95 on all orders under $75, which it had been filling for free.

In fact, one of the main reasons these companies see fit to charge money is because they believe they are helping their customers make money, or at least save it elsewhere, especially on some of the new voice services that offer long-distance calling.

``If you look at the minutes of usage a company like Yahoo gets for its phone services, and multiply that by 5 cents a minute, that's a big number of long-distance bills that are being avoided,'' says Lanny Baker, an analyst who follows Internet media companies for Salomon Smith Barney.

``Would consumers be willing to pay for a service that offered unlimited email storage, instant messaging on cell phones, long-distance calling and a voice-activated address book? They probably would.''

If it does not seem especially notable that companies might start charging for such valuable services, it marks a dramatic departure from the Internet of a year or two ago, when everyone was offering everything for free.

Starting with free Internet browsers, the bulk of content on the Internet became free after companies such as the TheStreet.com (NasdaqNM:TSCM) that tried to charge money had trouble signing up customers. Some consumers got free PCs to display all the other freebies and some Internet retailers even toyed with the idea of selling merchandise at or below cost and making all their money from advertising and promotions.

Meanwhile, free Internet service has swept the country. A host of companies from NetZero Inc. (NasdaqNM:NZRO) to K Mart Corp. (NYSE:KM) are signing up millions of customers with services that so far have been supported by advertising.

NetZero Chief Executive Mark Goldston insists that the outlook for the free model remains ``very bright,'' but even this head of a company whose name essentially means free says he may some day charge money for premium features.

``If we found something that was very compelling as a service -- say something that connected a wireless phone with a personal digital assistant and a laptop -- then we would research our user base and we might consider giving it to them for a price. If enough people said they'd pay for it, then that is something we'd have to consider.''

(The NetTrends column appears weekly. Comments or questions can be e-mailed to andrea.orr(at)reuters.com.)