Free DSL:
You Get What You Pay For

It worked for dialup Internet access, but is the give-it-away business model viable for DSL? With high entry costs—and with demand far outstripping supply—it's hard to see how ad-supported offerings can succeed.

by Jim Thompson

One of my favorite movies is a little gem by Mel Brooks entitled The Producers. The plot concerns a down-on-his-luck Broadway producer, played by Zero Mostel, and a mousy, dysfunctional accountant, played by Gene Wilder, who figure out they can make more money with a play that flops than with a hit show. Their scheme is to find a show that is sure to flop, then sell two or three thousand percent of the show to a bunch of gullible investors. Once the show closes, no one will expect anything and they can keep the profits. Of course, it's all illegal and, in the end, the producers wind up in jail.

For many new e-commerce companies, this basic scenario has become the blueprint for their business. The idea is simple: Find something someone wants, give it to them free or at a loss and then find enough suckers to provide all the money you need to keep the business afloat and keep the owners in fancy cars, airplanes, and new clothes. Hey, it's worked for big companies like Amazon.com and free dial-up providers like NetZero, AltaVista, and Freei.net. Of course, just as in The Producers, the piper must be paid in the end.

Follow the leader
In the latest giveaway scheme, a number of companies are planning to offer free DSL service. The first to announce high-speed access freebies was Broadband Digital Group (BDG). Announcements from Beverly Hills, California-based Staruni, and New York-based iNYC quickly followed.

So far, none of these companies is actually providing the service. Broadband Digital Group, though its FreeDSL.com site, expects to have the service ready by early April. (Let's hope it doesn't turn out to be an April fool's joke.) But even this date is not firm. According to Broadband Digital, technical limitations could prevent the service from being deployed in many areas—reportedly, for as much as two years.

The price of a free lunch
Although subscribers won't have to pay for DSL service from Broadband Digital, the advertiser-supported service comes with a ///lot of strings attached. Customers have to provide BDG with lots of personal information, agree to let BDG track their every movement as they traverse the Net, and watch a never ending stream of ads whenever they're online. In order to get a free DSL modem, customers must get 10 other people to sign up for the service, otherwise the modem costs about $100.

Under a comprehensive agreement, the 10 people in question must download the required software, must register via the hyperlink provided in an email message sent to them, must be entirely new to the program, and cannot be "registered or catalogued in Winfire's or BDG's databases or records or have been a Winfire user or BDG user."

In cooperation with Winfire, Broadband Digital Group has developed a private-labeled FreeDSL Browser Assistant displayed on user's computer screens while they're online. The FreeDSL Browser Assistant is a small bar that carries messages from advertisers. It can be placed anywhere on the screen but can't be closed and must remain visible on the desktop as long as users are connected through the FreeDSL service. This enables advertisers and marketers to deliver messages to users while they are online.

Expect no guarantees
If this isn't enough to make you begin to question the whole idea, the company won't guarantee the modem they provide will work properly. In the long list of disclaimers is this statement: "BDG makes no representation or warranty of any kind (whether express or implied) that the modem that is issued to you will be satisfactory to access the Internet services provided by BDG."

As with any free offer, there's been a flood of interest from potential subscribers. But while consumer interest is high, few see an upside to the business model. Giving away stuff for free has become a big but largely unprofitable business. Just recently, EMachines said it could not longer afford to provide free dial-up Internet access, which is far less expensive than DSL. This followed the announcement that EMachines would stop giving away computers. The experience of EMachines demonstrates the folly of a business model based on providing free services and/or products in exchange for customers being bombarded by advertising.

Red flags aplenty
Analysts point out that the demand for high-speed access is far out-pacing the ability of telephone and cable companies to keep up. Companies like AT&T are spending billions of dollars to upgrade their networks and they still can't keep pace with the demand for high-speed access. With broadband-ready lines already at a premium, it will be most interesting to see if Broadband Digital Group and Staruni have any chance at all for success.

Even if they can get enough DSL lines to make their plans feasible, turning a profit may be too much to hope for. Installing DSL is not cheap. Even Ryan Steelberg, founder of Broadband Digital Group notes that it costs about $100 to link a customer to the service and $20 to $30 per month to maintain it. He adds, however, that the costs will fall as volume increases.

While these figures sound high, most analysts agree they're probably far too optimistic. Currently, the cost for installing a new customer is more like $200. Added to this is the cost of connecting the customer to the Internet backbone.

There's also the question of the type of people who are attracted to such offers. Often, those who go for the free services are either in the lower income brackets or are casual users. Neither group has much appeal for advertisers.

Variations on a theme
iNYC is taking another approach. Under its plan, customers will earn credits (called "i-Bates") that can be used toward the cost of DSL service. Customers will have to click on about 16 ads every day to earn enough to pay for the monthly DSL cost.

Whichever approach is implemented, the basic business model seems questionable. Giving things away is nice, but first you have to have the product to give away and then you need the money to pay the bills. To quote Homer, "beware of Greeks bearing gifts"—especially if they look like Zero Mostel and Gene Wilder.

—End