Fool.com: War of the ISPs (Fool on the Hill) August 11, 1999

FOOL ON THE HILL
An Investment Opinion

War of the ISPs

By Yi-Hsin Chang (TMF Puck)
August 11, 1999

This week, Qwest Communications International (Nasdaq: QWST) took the war of the Internet service providers (ISPs) to yet another level. The Denver-based telecommunications company started offering free, unlimited Internet access combined with 250 minutes of state-to-state long-distance service for $24.95 per month. If you assume that Internet access costs $19.95 a month -- the de facto industry standard -- the long-distance service works out to be just $0.02 a minute. In short, it's a great deal if you make quite a few long-distance calls from home.

Elsewhere in the long-distance calling world, MCI WorldCom (Nasdaq: WCOM) this week matched rival Sprint's (NYSE: FON) ever-sinking rates with its own "MCI 5 Cents Everyday" calling plan. The new plan allows for $0.05-a-minute state-to-state calls between 7 p.m. and 7 a.m. on weekdays and all day on Saturdays and Sundays, and costs $1.95 per month.

The Qwest offer and the ongoing heated battle among long-distance carriers are the latest indications that the war of the ISPs will get pretty ugly fast. While cutthroat pricing may delight Internet users, it's bound to be bad news -- at least initially -- for Internet service providers, which rely on monthly subscription fees as their bread and butter.

Take America Online (NYSE: AOL), which is by far the most popular Internet service provider but is also among the priciest. AOL charges users $21.95 a month for unlimited access -- it's $19.95 a month ($239.40) if you pony up the fee a year in advance. AOL's closest competitor, Microsoft's (Nasdaq: MSFT) MSN, runs $19.95 a month, while AT&T's (NYSE: T) WorldNet Service charges $21.95 for unlimited access ($19.95 for 150 hours per month).

Last week, The Wall Street Journal reported that Microsoft plans to be "aggressive with access" by lowering or even eliminating its monthly fee. The software giant apparently has tested $9.95-a-month fees. Considering Microsoft's recent $5 billion investment in AT&T, it's not inconceivable that the two would band together to try to overtake AOL as the leading Internet access provider, though Microsoft may try to step gingerly with the antitrust trial against it still casting a long shadow.

Meanwhile, other Internet service providers appear poised to steal market share from AOL. MindSpring (Nasdaq: MSPG), for example, has an online guide for former AOL subscribers designed to help them make the transition from AOL to MindSpring. Despite MindSpring's just-announced deal with AOL allowing MindSpring subscribers to use AOL Instant Messenger, MindSpring's website has a section devoted to preaching the benefits of tossing AOL and getting MindSpring. "Escape AOL!" it says, claiming that it has better customer service, no popup ads, and a direct connection to the Web. MindSpring's service costs $19.95 a month for unlimited access.

In another example of the Internet meets long-distance service, EarthLink (Nasdaq: ELNK) has an alliance with Sprint by which EarthLink subscribers can get $2 off the standard, monthly $19.95 access fee by signing up for "Sprint Sense Anytime" -- $0.10-a-minute for all state-to-state long-distance calls for $4.95 a month.

While cable modems and other forms of high-speed Internet access will no doubt further increase competition among Internet access providers, the biggest threat to all the ISPs to date are the new free access providers.

I recently got a flyer in the mail advertising Freei.Net, based in Federal Way, Washington, and currently providing free Internet access in Chicago, Los Angeles, San Francisco, Seattle, and Washington, D.C. The company touts that it offers "the same quality and customer satisfaction as AOL but without the estimated $250 per year cost." As of late June, Freei.Net had signed up more than 150,000 subscribers in the Northwest in just over six months.

Freei.Net gives consumers free Internet access. The "catch" -- if you can call it that -- is that a banner window opens and displays different ads every 15 seconds. Surprisingly, the window is not "in your face" but rather unobtrusive. You can even move it anywhere on the screen, out of your way, but you can't get rid of it completely. The idea is that the ads will actually be relevant. That is, if you do a search for movies, you'll see ads from your local video rental store or movie theater.

There are a couple of other companies also offering free Internet access. NetZero.net calls itself "defenders of the free world," though according to one review site I found, its problems include unstable software, slower connections, and bad technical support. Another competitor is Free-PC Network, which gives away free computers along with free Internet access. It gave away 10,000 PCs during the second quarter -- more than 1 million people applied for a free computer. Beginning in September, it plans to give away 5,000 PCs a month. The neat thing is that you actually get free 'Net access on your existing computer while you wait for your new one.

While AOL insists that Internet users don't buy on price but on value, its recently announced alliance with eMachines shows that it, too, will start cutting prices even if indirectly, through special offers. The eMachines offer involves a $400 rebate for consumers who buy a discount PC from eMachines and sign up for a three-year membership to CompuServe 2000. That means you can basically get a free computer -- eMachines' $399 eTower -- by agreeing to three years of CompuServe service (a lifetime by Internet standards).

Dell Computer (Nasdaq: DELL) also got in on the action with its new Dellnet Internet access service. The PC direct-seller is offering free Internet access for a year (150 minutes per month) with the purchase of a Dell Dimension desktop or Inspiron notebook PC.

The field is getting crowded, and the first shots have been fired in the war of the ISPs. May the best ISP win.