Free DSL

Winfire is ramping of the pace of its "free DSL" rollout. Find out how this company charges less for the same services.

by Jim Wagner
ISP-Lists Managing Editor

In field littered with the corpses of free ISPs, Winfire, Inc. is ready to step up the pace on its free DSL rollout in the second half of 2000.

Free doesn't pay
Winfire's free DSL service was launched on January 3, 2000, and the company claims it registered over 400,000 consumers in the first month of operation. The service initially expanded one city at a time, but it now opening in several new cities at once. Most recently, on August 15, 2000, it opened in six cities on the same day.

The ISP offers free 144Kbps DSL service after users pay for the $199 DSL modem kit, which includes modem, telephone jack filters and its proprietary self-install software. Customers can opt to make 23 monthly payments at $9.95.

Note that many fee-based services waive the installation fee. Covad Communications offers free setup and modem with a contract, and then charges around $40 a month.

Bill Rodey, DSL Forum vice chairman and treasurer, said the offering is a great boon to consumers.

"It's a great world when consumers have all these choices," Rodey said. "All of this was made available by the Federal Communication Commission's freeing up the bundled loop. We're very encouraged that there are more options available out there for consumers. I live in Chicago and I'll probably end up using the service."

Bring 'em in with the catch-phrase
But the "upsell" ISP is betting on paying customers as it rushes its DSL deployment against telcos and competitive local exchange carriers. The upsell model is based on the belief that customers will be attracted by free service, but will upgrade to the paid, premium service later. It's a proven model, as Juno, an upsell dialup ISP, is now the third largest ISP in the U.S. with 3,380,000 active subscribers.

So is the "upsell" working? 35 percent of Winfire's customers use the FreeDSL service.

The basic premium service gets rid of the pesky ad banner and guarantees up to144Kbps at $9.95 a month. For $19.95, or the monthly price people pay for premium dial up service, DSL users get 384Kbps download speeds, and $34.95 a month gives them 1.54Mbps. Paying for the premium services negates the DSL modem kit charge.

Free Internet users who upgrade their service to the paid, premium service get a refund towards the 13-month contract they sign with the provider. The 13 months is determined by the RBOC, which activates the leased DSL for one year. Any customer who decides to cancel their subscription before the 13 months is required to pay the rest of that yearly lease and return the DSL modem.

As the numbers point out, many customers are opting for the paid DSL services. Fifty percent are signed up for the $19.95 service and 10 percent have taken the $34.95 service. Only five percent take advantage of the no-banner-ad service at $9.95 per month.

Discounts are key
Ryan Steelberg, Winfire president and chief executive officer, said this discounted service plan is the reason for the company's success.

Compared to other DSL services that can cost between $40 and $60 per month, Winfire's services present a tremendous value to customers," Steelberg said. "In quarter three of 2000, only 35 percent chose to use the free service. Most subscribe immediately with the paid services. It's a value proposition for many people, who pay half the price of regular DSL service."

It's also the ticket to a gross positive margin, which, in the Internet logic of the times, may be the sign of a successful venture.

The light of a GPM day
Steelberg claims his company will see the light of a GPM day sometime early next year, due in part to paying customers. But the real savings, he said, come from other factors, one of which is not installing a DSLAM at the central office.

Instead, Winfire pays for the copper transport to a co-location facility, where it's then routed throughout the world. The company currently has an agreement with Williams Communications Group, Inc., for its colo space. That means it's a fixed cost for transport, Steelberg said. That fixed cost, he said, is very close to the cost of providing regular dialup service.

It also saves money with proprietary self-install software, which saves Winfire the cost of a truck roll. Steelberg would like to license his splitterless setup, but doesn't want to make things any easier for the competition.

Banner advertisements are not a reliable revenue stream. They are an eyesore and burden for most Internet surfers. Even if customers don't actively try to "hack" out the banner console, its effectiveness is minimal, as clickthrough rates attest.

To spice up advertising, Steelberg has been working to provide his advertisers the option of 7 second, 15 second, and 30 second streaming media spots on his banner service to get the message out. Ad banners these days are a waste of money, he said, and advertisers don't want to spend money on ads that don't deliver the clickthroughs. Streaming media ads are a viable option with the DSL service.

"The reason other free ISPs haven't worked is because banner ads would never sustain the company," Steelberg said. "We've been partnered with DoubleClick, so the tracking has always been good, but the content wasn't. We think we've addressed that with the new ads that take advantage of DSL's speed."

The value of experience
Steelberg knows a thing or two when it comes to advertising, as evidenced by his resume.

With his brother, he co-founded AdForce, an online centralized advertising firm, building marketing partnerships with Netscape Communications Corp. and 24/7 Media.

After selling out the company to CMGI for $500 million, Steelberg launched Internet advertising firm 2Can Media, which was in turn acquired by CMGI and folded into CMGI's Adsmart Network.

Ironically, Steelberg managed the online advertising sales for NetZero .

Analysts weigh in
Mike Lowe, Cahners In-Stat analyst, said the free DSL model can work, given perfect conditions.

"Free DSL can succeed, but there's a pretty narrow window of opportunity," Lowe said. "First, since they're still paying for the DSL line they're giving away, cost structures need to come down pretty dramatically. This is starting with the advent of line sharing, but that's just a start. Second, providers like Winfire are counting on subscribers upgrading to higher speeds of DSL and buying value-added services. These are their primary revenue streams. If actuals fall short of forecasts, they could be in trouble.

"In a nutshell," Lowe concluded, "if Free DSL works, it could change the way we do business when it comes to DSL. However, they really need to throw a bullseye to get it to work."

—End