SCN: Free ISP

[Steve]

x-no-archive: yes

======================= 

(Laurie J. Flynn, NY Times)---It is official: the era of unlimited free 
Internet service is over, an apparent victim of its own popularity.  

The announcement last week that Bluelight.com would limit the 
number of hours subscribers could spend on its site signaled the 
end of an era, albeit a short one even by Internet standards.  

Over the last couple of years, dozens of companies announced 
unlimited Internet access for no charge, the only catch being the 
barrage of advertising that subscribers were forced to endure.  

But like Juno Online Services and NetZero before it, Bluelight 
announced that it could no longer support the strain that active 
users were putting on its network, with a fraction of its subscribers 
accounting for the large majority of its traffic. Just the week before 
Bluelight.com's move, NetZero, the market leader, announced that it 
would start charging subscribers $9.95 after they reached 40 hours 
in a given month, saying that 12 percent of its subscribers were 
accounting for half of its telecommunications expenses. And earlier 
this year, Juno announced a tiered pricing program, whereby 
customers who pay $9.95 a month receive better service, get more 
reliable connections and view fewer ads.  

"The pure free-I.S.P.-for-everyone experiment is over," said Mark 
Goldstein, chief executive and president of Bluelight, a privately 
held company that is majority-owned by the Kmart Corporation. Mr. 
Goldstein said the timing of Bluelight's announcement was not 
coincidental: his company was trying to head off a migration of 
NetZero's heaviest customers to Bluelight's free service. 
Bluelight.com, he said, did not want them; nor did it want the heavy 
users it already had.  

"It's like having a late-night club with all the drunks - they're the 
ones you're going to kick out of the bar," Mr. Goldstein said. "They 
make the worst customers."  

Mr. Goldstein said that some Bluelight subscribers had been using 
the service to run their businesses, requiring nearly constant 
access. NetZero and Juno have reported the same behavior.  

But while disproportionately active users may have struck the final 
blow to the free I.S.P. movement, the real culprit was the dismal 
climate for online advertising. A year ago, when free Internet service 
providers were just beginning their services, advertising was 
abundant - as was venture financing. Today, there is relatively little 
of either one for many dot-coms.  

Last month, Spinway, a San Francisco-based company that provided 
the underlying technology for Bluelight and free online services 
from Barnes & Noble and Costco, announced that it could not raise 
any more capital and was going out of business, handing many of 
its assets over to Bluelight, its largest customer.  

That announcement followed shortly after the demise of 1stUp, a 
Spinway competitor owned by CMGI, the Net holding company. 
1stUp, based in San Francisco, was the technology behind free 
service from Alta Vista and Excite at Home's FreeLane, along with 
dozens of smaller niche services, like Gay .com, Senior.com and 
Afronet.com. Shortly after 1stUp's announcement, Alta Vista said that 
it was canceling its free service; other 1stUp partners are still 
hoping to find a home someplace else.  

Back in July, Juno gobbled up two competitors, Freewwweb and 
WorldSpy, both of which declared bankruptcy and then began 
referring subscribers to Juno's site.  

That leaves NetZero and Juno still standing as the industry leaders, 
each with 3.7 million active users, along with a handful of 
miscellaneous Web retailers still hoping that sales of merchandise 
will make up for their free Internet services. But even the two 
remaining major free providers are walking on rather thin ice these 
days: like many Internet stocks, shares of both Juno and NetZero, 
which are embroiled in patent lawsuits against each other over the 
way ads are displayed on computer screens, have been pummeled 
in recent weeks. Shares of Juno, which traded at $41.63 in January, 
closed under a dollar last week. NetZero was also under a dollar, 
down from a 52-week high of $36.38.  

Yet rather than disappear entirely, analysts predict that free I.S.P. 
services are likely to continue in some form, for those customers 
who do not overuse them. Many analysts say that tiered pricing 
programs like those announced by Juno and NetZero are the future, 
and the challenge now is to convert users of the free service into 
paying customers.  

Not that long ago, Internet customers bought service by the minute, 
much like long-distance telephone service - for upward of $100 a 
month for active users. But by the late 1990's, most Internet 
providers in the United States had modified their business models, 
switching to flat monthly fees in an effort to gain more revenue from 
advertisers and electronic commerce and less from subscriptions. It 
appeared for some players that eliminating the subscription fee 
altogether was simply the next step. Adding it back now appears to 
be yet another one.  

But it could be that major fee-based services like America Online, 
the Microsoft Network and CompuServe will end up as biggest 
beneficiaries of the free-I.S.P. shakeout. All three already offer tiered 
service, with limited plans priced as low as at $9.95. As more active 
users are removed from free services, analysts say, they may 
migrate to those more established names rather than pay the 
amount to a relative newcomer who might not offer the same level of 
service.  

NetZero, however, has considerable brand recognition these days, 
the result of an advertising blitz that includes television spots 
during N.B.A. games, and the company's chairman and chief 
executive, Mark R. Goldston, says the company is signing up new 
subscribers at a record pace.  

Bluelight, which did not announce tiered pricing but rather that it 
would remove heavy users entirely, is in a category of its own. Nine 
out of 10 of its subscribers got their free Bluelight.com CD-ROM 
starter kit at a Kmart store, meaning that most of its customers are 
already Kmart shoppers and thus potential online customers. "E-
tailing is just another way for a retailer like Kmart to reach its 
customers," Mr. Goldstein said, rather than a service intended to 
exist independently.  

In the meantime, those start-ups that have survived this far are 
simply relieved to still be standing, amid the rubble of their 
competitors. "It started out as a consolidation and evolved into a 
shakeout," Mr. Goldston said. "We didn't want to be the last man 
standing - we wanted to be the victor."  

Copyright 2001 The New York Times Company  





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