Free = Fail?

[Steve]

In Search of a Free ISP

Matt Richtel
NY Times 11/4/98


PALO ALTO -- Dozens of Internet entrepreneurs just can't seem to let
go of the idea that there is a fortune to be made offering free,
advertiser-supported, Internet access. The recipe seems so simple:
offer free access, sign up tens of thousands of eager customers sick
of paying $19.95 a month to their ISP, then sell their attention to
hungry advertisers.

There's just one catch. The idea keeps falling flat on its face. 

In the latest collapse, San Jose-based Bigger.net, one of the most
celebrated attempts to launch a free Internet service, folded its
tent last week. The company was $1.5 million in debt and bleeding
money, and has left at least 18,000 subscribers in the lurch. 

It was not the first cautionary tale; several attempts to offer free
Internet access have failed during the past serval years. And yet,
within hours of Bigger.net filing for Chapter 7 bankruptcy, a suitor
stepped in and offered to buy the company, vowing not just to
resurrect Bigger.net's idea of "unlimited lifetime Internet access"
-- but to expand it nationwide. 

The buyer is a fee-based Internet access provider in Seattle called
Brigadoon.com. Its chief executive, John Hansen, said the company
plans to offer Bigger.net subscribers a tiered service, starting
with no-frills Internet access for free, while charging fees for
enhanced services and higher-speed connectivity. "This model makes
sense," Hansen said. 

Brigadoon is not alone in feeling optimistic about the potential for
advertiser-supported Internet access. On Oct. 19, a partnership in
Southern California launched NetZero, an ambitious nationwide free
ISP that hopes to have one million subscribers within 12 months.
NetZero's chief executive, Ronald Burr, said he is undaunted by past
failures of free ISPs. 

"All the guys who tried it before were under-funded, with poor
technology and they made serious execution mistakes," Burr said,
noting NetZero has signed up 20,000 subscribers in 10 days, has 16
advertisers and is willing to invest "multi-million dollars." 

"These guys took the rinky-dink approach," he added. "We've done it
the right way." 

The concept behind "free" ISP service does, indeed, sound alluring
-- both to consumers, and as a business model. The idea is to offer
Internet access for free, which often involves paying a one-time
startup fee. Once a service has amassed enough subscribers, it can
theoretically turn to advertisers and offer them attentive
"eyeballs," the industry vernacular for selling peoples' attention
to marketers. 

The idea is analogous in some ways to television programming.
Networks pour millions of dollars into creating free programming,
knowing they will recoup their investment through advertising. 

However, Industry analysts, and executives of fee-based ISPs, remain
skeptical that this model can work in the Internet access market.
They say that it simply takes too much time and money to amass the
hundreds of thousands of users necessary to attract advertisers. 

Abhi Chaki, who covers the Internet access industry for Jupiter
Communications Inc., a New York market research firm, said a free
ISP would have to sign up at least 50,000 subscribers before major
advertisers would take them seriously. Other analysts consider that
figure to be too conservative, and note that the most popular Web
sites can offer advertisers tens of millions of page views a month. 

In addition, the analysts note that advertising on the Internet is
not yet a particularly rich source of revenue. That is because it is
not yet fully accepted as a successful advertising vehicle, but also
because there are so many different sites on which companies can
place advertisements that it dilutes the amount any given site can
charge. 

Meanwhile, while an advertiser-supported ISP is fighting to attract
advertisers, it also must attract new Internet customers, and pay to
support access for current subscribers. That can be an expensive
proposition. Greg Ryan, President of ExecPC-Wisconsin, a Milwaukee
ISP with 80,000 subscribers, estimates the cost of supporting an
individual customer at $5 to $15 a month; Bill McCarthy, editor of
Boardwatch Magazine, which covers the industry, puts the cost at $8
or $9 a month. 

"We'd have to take in $800,000 a month in advertising. That's a big
nut to crack," said Ryan. "I just don't know if it's a workable
business model right now." 

Abhi Chaki, from Jupiter, concurred. "There's a lot of money
floating around the country trying to back a lot of crazy ventures,"
he said. "And there's some smart money behind this -- but it's an
unviable model." 

Analyst and industry expectations were more upbeat when Bigger.net
launched in January, 1997. It offered unlimited, lifetime access for
a one-time startup fee of $59.95, plus a $10 annual fee for an
e-mail account. 

The company garnered lots of media coverage and quickly grew its
subscriber base. But behind the scenes, Bigger.net was having a
conflict with one of the suppliers of its T1 lines, the high-speed
data lines that connect callers to the Internet, according to Chuck
Greene, a San Jose attorney who represented Bigger.net in its
Chapter 11 bankruptcy proceedings. 

Greene said that Bigger.net contends that it received delivery of
only 30 T1 lines, when it should have received 60 T1lines. As a
result, Bigger.net could not grow the business at a sufficient rate
to attract advertisers, Greene said. 

Others close to the story have said Bigger.net would have been
unable to attract sufficient advertising regardless of its supply of
T1 lines. "They just sat back," said one source affiliated with the
company. 

In December, 1997, the company filed for Chapter 11 bankruptcy
protection, reorganized and continued to operate. Last month,
investors determined it was too costly to keep the business running,
and they filed to convert the status to Chapter 7, meaning the
company would put into receivership and liquidated. 

Hansen, chief executive of Brigadoon.com, whose bid for Bigger.net
has been accepted by the trustee but not yet by the court, said
there are several keys to making the entity solvent. He said
Brigadoon already has a sales force that will increase the effort to
sell advertising. 

However, he said the more significant change will be the plan to
create a tiered pricing structure. Bigger.net will continue to offer
basic service for a one-time fee, but it also will offer expanded
services, such as higher speed connections and richer features, for
prices ranging from $9.95 to $29.95. 

At the higher prices, there will be no advertising. Hansen likened
the business model to the cable television business, in which premium
pay channels offer no advertising. "One of the problems with
Bigger.net is it only had one product line," he said, adding that
Brigadoon.com already offers similar pricing. "We're already doing
this. That's why the model makes some sense to us." 

NetZero is taking a slightly different tack. The company is offering
totally free service, and believes it can generate enough revenue
from advertising. Burr, the company's chief executive, said NetZero
plans one key change from most other existing free ISPs: rather than
run its own technology infrastructure, NetZero plans to contract out
those services. 

The company will run what is known as a "virtual ISP," meaning that
the modems and T1 lines and other key hardware are owned and
operated by a major telecommunications company. NetZero is just
leasing it. 

Burr said a second key difference with NetZero is that its venture
investors, IdeaLab Capital Partners, know what they are getting
into, and know they must spend "multi- millions of dollars" to get
the project up and running. Eventually, he said, the company hopes to
be able to offer advertisers not just millions of "eyeballs," but
specific demographic information about the audience. 

In general, he said the NetZero concept will prove the viability of
the free ISP. "I use the analogy of the start of the car industry,"
he said. "A lot of guys were building cars in their garages and one
guy got it right. That guy was Henry Ford." 

Copyright 1998 The New York Times Company 




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