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Industry Standard

No-cost Net access returns with a vengeance

July 23, 1999
Web posted at: 1:45 p.m. EDT (1745 GMT)

by Jason K. Krause

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(IDG) -- It was an idea before its time. In 1998, a half dozen "free" Internet-access providers, such as Tritium and CyberFreeway, jumped from the gate only to fall flat on their faces. But with the phenomenal success of NetZero this year, no-cost Net access has returned with a vengeance.

One upstart riding the new wave of free ISPs is Brand 3, which plans to launch in the next couple of weeks. Unlike NetZero, Brand 3's business model does not rely on banner ads, but instead will focus on branding the desktop. The idea is that the ISP will strike a deal with, for example, a carmaker, which would give away Brand 3's software with the purchase of a new car. The software would install on a desktop an icon of the automaker's logo. Clicking on the logo would launch a browser, where there would be links to ads and information about the car company.

The entire software package, from e-mail to browser to messaging application, would be branded by the company. "Our ad model ought to be a lot more attractive to advertisers," says CTO Mark Gibbs. "We've made profitability and revenues [our] prime motivation."

Another entrant is Y-Pay, set to launch this fall. Y-Pay believes better ad technology will be the key to success. The ISP worked with push company BackWeb to develop multimedia and streaming ads that the firms hope will be more attractive to potential advertisers. Of course, Y-Pay is still mindful that the ads are the most annoying feature of the free-ISP model in the United States. "We're going to try not to cross that line from merely being obtrusive to becoming obnoxious," says Y-Pay CEO Mike Sheriff.
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But all of the new companies which also include startups FreeI and Brigadoon will have an uphill climb to match industry leader NetZero, which last week filed to go public. NetZero launched last October, offering free Internet access to consumers willing to disclose personal information and put up with banner ads along the bottom of the browser.

NetZero is the first free ISP to prove that the concept can work. According to Forrester Research, it is now the 9th biggest ISP in the country, having garnered its first 800,000 subscribers in just over 6 months. Today, it claims more than a million subscribers; Forrester projects that number will increase to 2.3 million by 2003.

But NetZero is also proving that the free Internet-access model is not always an easy sell. The company lost $4 million on revenues of $903,000 in the nine months ended March 31. NetZero's S-1 registration statement reveals that it has been unable to sell its much-touted targeted banner ads effectively; the company's revenues are "primarily from nontargeted banner advertising."

NetZero also has not managed to cut any groundbreaking distribution deals. Its biggest such contract to date, whereby NetZero software is included on Compaq Presario computers, is no sweetheart deal. Inked last month, the deal prohibits NetZero from making similar distribution agreements with other PC makers until next year. The ISP also gives up 10 percent of the advertising space on the Presarios to Compaq, and surrenders more than 8 million of its shares to the hardware firm.

Last but not least, it remains to be seen how much advertising and marketing consumers will abide. A search for NetZero on the Usenet discussion boards reveals that a popular activity among techies is figuring out how to disable the company's ads.

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