Free ISPs: A Real Threat?

Some traditional ISPs are quaking in their boots at the prospect of competing with free service providers. Others are dismissing this model as doomed to failure. What's the reality?

by Jason Zigmont HowToSell.net [May 25, 1999]

On the face of it, the idea of free ISPs has got to be threatening to the traditional-charge-for-service ISP. Human nature dictates that if people can get something for nothing—even at some sacrifice of quality-lots of them will take that route.

Will users agree to be subjected to advertising in exchange for free Internet access? Some popular search engines, including Yahoo!, and above all, NetZero, are banking on it!

NetZero's president, Ron Burr says "What we have done is develop a model that defers cost for providing access." Instead of collecting $20 a month from end users, free ISPs make the advertisers pay.

The success of broadcast TV certainly suggests that the scheme is viable. On the other hand, in light of the fact that ISPs—especially nationwide, publicly traded ISPs—by and large have not made a profit, many feel that the Free ISP business model cannot work.

So, how viable is this business model? Is it really a threat to those selling access for cash?

Do banner ads really work?

Among the nay-sayers are many who really don't believe that banner advertising works. While it's true that click-through rates for banner ads have dropped, they can still average 1-2 percent. And with a targeted demographic, 1-2 percent is all you need. NetZero, with its targeted advertising is seeing rates as high as 10 percent with an average of 2-5 percent! From where I stand, banner ads appear to offer the same results as mass mailings-yet at a lower cost.

Another statistic that free ISP doom-sayers like to quote is the fact that CPM rates for banner ads are dropping. While this is true for ads in general, targeted ads, in fact, are maintaining their CPM, or in some cases, going up!

And in this context, NetZero has a huge advantage: It gets demographic information from its users that lets it tailor ads to specific demographics. NetZero's set-up routine asks for Age, Sex, Income Level, Interests, and quite a few other things that help advertisers pick the right users to market to. This allows NetZero to charge $10 more per demographic category (i.e. Age, Location, etc.) over their base rate of $20 CPM, going as high as $65 CPM

On-target ads

Another factor that lets NetZero charge advertisers these kind of prices is its ability to target ads per URL. Even $65 CPM is a steal for a company if their banner ads come up when a user goes to their competitor's web page.

So, free ISPs would certainly seem to have some potential for profitability.

How about service levels? When I first heard about the Free ISP model, the old saying "You get what you pay for" popped into my head. So I downloaded the software, dialed up, and tried it. I quickly realized that both NetZero and my MindSpring account use GTE bulk dial-up; connection speed and throughput were essentially the same. NetZero also uses L3, NaviNet, and Agis for dial-up ports.

So what does all this mean to traditional ISPs? In my view, at the very least it means-sooner or later-they will have to compete seriously with the free ISPs. And the basis of that competition will be service: There will always be users who dislike ads-and those who want home pages (which NetZero does not offer)-and others who are willing to pay for personalized service.

In the end, the rule on Free ISPs is: Don't be afraid of them, but take them seriously. They're a genuine threat, but no more so than your friendly national ISP.

End

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