November 11, 1999 5:20 PM PST

NetZero paves a path in free ISP market

A new report says free Internet services are likely to find a permanent place in the market, but independent companies like NetZero could have a tough time surviving.

Led by companies such as NetZero and AltaVista, free dial-up services are shaking the foundation of the Net access market. Both have grabbed subscriber bases to rival the leading Internet service providers (ISPs) in the United States. Now other Web sites, PC makers, and offline services are jumping on the bandwagon and offering their own free services.

Yet it's a tough world for any firm that offers Internet access without an established brand to use as a springboard, according to a new Yankee Group report.

"[Independent free access providers] are at a disadvantage as compared to players like AltaVista, who are bundling free access as part of a larger content or commerce offering," said Yankee analyst Emily Meehan.

Online companies that offer e-commerce services or other content have stronger currency to offer customers, compared to firms like NetZero that provide free Net access without other services, Meehan notes.

The report serves as a warning shot--though certainly not the first--across the bow of NetZero, the most successful free ISP yet to hit the market. Analysts have long been lukewarm about the company's chance of long-term success, despite its strong Wall Street debut.

But NetZero executives say that their subscriber numbers already paint a picture of success. More than 2 million people have signed up for the free Net service, and more than 1 million of those subscribers log on to the Net at least once a month. That growth rate, they say, gives the company the momentum it needs to thrive long term.

But subscriber numbers alone miss the reason why NetZero should be able to survive as an independent, content-free service, executives say.

"People think we're just a free ISP," said Mark Goldston. NetZero is in fact an advertising company--and one of the most powerful ones on the Web, Goldston said. That's what will allow the company to survive financially, he added, as more companies come into the market with their own free Net offerings.

NetZero's service is centered around an advertising window that stays active on a PC screen at all times, but can also serve as a quick-jump guide to categories such as stock trading, news, sports, or weather--all sponsored by NetZero advertisers.

The company has also increased its ability to target its ads to specific consumers, through technology that can track a Web surfer's path online, click by click. For example, it now sells "ad missiles," which allow a company like eBay to buy advertisements that appear anytime a user goes to a competing auction site, executives say.

"NetZero has done the best job here," Meehan said. "They are figuring it out over time."

Nevertheless, its growth is limited by the fact that consumers have to give up personal information and allow their every online movement to be tracked, she noted. In addition, its customer base is made up entirely of people seeking low-end, free Net access--not necessarily the most valuable demographic for advertisers, she said.

Other Web sites seeking to offer free ISP services, such as stock trading companies, banks, or e-commerce portals, are likely to sign up smaller numbers but have a much tighter relationship with their customers, she noted. And in this market--as in all markets--a solid brand name will mean a much greater chance of success.

"If you're a mainstream, well-known brand, you're going to carry a lot more trust with your consumers," she said.

 

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