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Post of the Day
June 29, 1999

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Subject: @Home Free Internet Service
Author: eljar66

The question of whether I.S.P's are dead is certainly an intriguing one. In foreign markets, "free internet service" has ousted the likes of such kings like AOL in favor of pro bono Internet services. At face value these services appear to be a no brainer, can't lose proposition. Further investigation reveals that the strategy may be workable in foreign markets, but laughable domestically.

Free Internet service is nothing new. There are many providers that offer absolutely free local dial-up. The catch? You must put up with obnoxious pop-up ads that incessantly invade your desktop. This perhaps is the reason that services like "Netzero" have not captured the hearts of AOL defectors and others trying to trim their budget. Simply put, people are willing to pay a reasonable monthly fee for an Internet service that has some sort of practical use. Start-ups like Netzero are certainly valuable for those on the strictest of budgets, but prove to be absolutely irritating to those who can afford to spend a nominal amount.

In order to understand what free internet service really means, it is necessary to evaluate why this product has been so well received in Europe, yet has barely made a dent here in America. We must first realize that nothing in life is really free, and further analysis proves this to be the case here too. What Internet providers abroad are peddling as "free" Internet is really a shoddy way of saying "expensive local calls, free internet." It doesn't matter what you designate as the billable service, both are well funded by the consumer. In that sense, Netzero offers much better bang for the buck, because local call fees do not continuously tax the phone meter. But you still must tolerate those annoying pop-up ads.

What Netzero has done, albeit with limited success, is demonstrate that ad revenue can theoretically compensate "free" Internet service. With this in mind, one has to consider the type of customer that a firm like Netzero might attract. Are these free-spending consumers who are likely to make online purchases, or do their frugal Internet service practices extend into other realms of their consumer psyche? I suspect the latter, making this a business model with limited business potential.

Assuming for a second that the above is true, does this imply that a truly free Internet service cannot attract enough advertisements to substantiate its mission? More importantly, can this business model be successfully applied to a one of the premium, full-featured services in viable fashion, where local phone charges cannot be relied upon for revenue? I contend there is a way, and we have already seen hints of where it may show up.

Jermelouk has often said that he envisions @home moving to a more competitive pricing scheme for the cable Internet powerhouse. He has often cited the 19.95 unlimited access as a future goal, but other times has been less clear as to how low he is prepared to go in offering this revolutionary service. This would be the perfect arena for free Internet service success, without pop-ups. The average cable Internet access customer stays on line for an infinitely longer period of time. Consider the latest issue of PC Magazine. In their survey they also gauged this valuable statistic. 56% of cable internet customers spent an hour or more online a day, while of the AOL customers only 32% were determined enough to tackle the lethargic speeds of dial-up to stay online for such periods. Staying on line for longer periods of time, means more exposure to Internet ads leading to a more lucrative incentive to give away free service.

Free Internet over cable is more viable for other reasons. The type of ad that can be generated over cable is more likely to grab consumer's attention. They can send graphic intense ads, outfitted with dazzling real-time clips, and roaring sound, all at blazing speeds. Being able to utilize these "cool" ads over this medium may also lead to higher ad revenue over cable versus dial-up.

Finally, the type of person likely to jump on the cable Internet bandwagon, purports to be a much more valued consumer, than those willing to tolerate those dizzying pop-up ads on Netzero. These are more educated Internet users who are willing to spend a little extra to get a premium service. This makes advertising over cable Internet much more attractive once they gain a significant audience. The result will be much higher ad revenues than a firm like Netzero might generate, leading to the same end: Free service.

Whether free Internet service is ever implemented through cable services like @home remains in question. I suspect very strongly that given Jermelouk's bend on moving the cost lower, and the tremendous ad potential, that it will likely occur rather than later. Certainly if various companies have found a way to dispense free state of the art desktop computers with ad revenue support, @home might find a way as well.

Now bear with me on the next point, because I have already assumed a great deal, but I believe much of what I have already stated is reasonable and inevitable. If @home can find a way one day to generate enough ad revenue to deliver their service free of charge, than I contend they will become an Internet titan. Even if cable lines are opened up today, if @home can provide their service free, how will AOL possibly compete? Certainly the local municipalities don't expect AT&T to permit them to offer free service to AOL. AOL would have to pay AT&T a certain fee for each user, and than on top of that pay to have these people connected to their network. The intimate relationship that @home has with AT&T would certainly provide a much more advantageous position in this realm.

Even when the exclusive contracts run out, @home will still be majority owned by AT&T. This has ramifications that should excite @home investors. (no pun intended) This will assure that @home will get the most favorable treatment possible under the law. The key factor in this equation of course is the audience, something AOL has, and @home is well on the road to obtaining.