Free ISP Model Hits Trouble in Australia

SYDNEY (01/31/2000) - A sign of the trouble that free ISPs (Internet service providers) are having in Australia is FreeNet's decision to close registrations from the general public to its free access services.

FreeNet now labels itself an "affinity" ISP and new recipients of free access will be confined to the customer base of affiliated companies and advertisers.

In other words, FreeNet is shifting its aims to something more akin to a customer loyalty reward program.

"We would prefer not to be pigeonholed as part of the free ISP industry," says FreeNet sales and marketing director Jeremy Pollard. "We see ourselves as an electronic matchmaker who is part of the customer relationship industry."

Another leading contender in the market, Freeonline, already does much the same thing. Freeonline has alliances with large corporates like National Australia Bank (NAB) which provide free access to NAB's Internet banking customers.

The ad-sponsored free Internet model calls for advertisers to foot access bills for any member of the general public willing to tolerate a permanent billboard on their screen. For a number of reasons, that model is proving unsustainable in Australia, says Freeonline co-founder Bill Lang.

Its greatest appeal lies with low-income users but advertisers prefer to float their messages past people with high disposable incomes. Free access also interests Internet newcomers more than Net veterans so support costs tend to be higher.

Another problem is that free ISPs are in competition with commercial ISPs boasting vast audience reach. With only so many advertising dollars to go around, marketers able to connect with 100,000 consumers via the Ninemsn portal are unlikely to pay for 20,000 low-value subscribers offered by a free ISP.

FreeNet claims to have 30,000 subscribers (compared to a projection of 100,000 when it launched last November), Freeonline claims 100,000-plus, while free service GoConnect claims it will have 55,000 subscribers when it launches in March.

However, "subscriber" is an elastic term that needs careful definition, according to a report on the ISP industry from stockbroking firm Hartley Poynton. In "More Subscribers and Less ISPs", analyst David Leslie says free Internet access has yet to win significant subscriber support in Australia. The model requires economies of scale to work and in the light of U.S. experience, it seems increasingly unlikely that the Australian market can provide the necessary numbers.

U.S. market leader Netzero, for example, estimates it needs at least 7 million users before it turns a profit with its ad-sponsored offering to the general public, according to Freeonline's Lang. "And that is in a country where the level of advertising per online user is five to seven times higher than it is here."

Another player, Internet 4 Free, is still fine-tuning its model a year after first publicising itself. National sales manager Mark Cooper says three ISPs are using Internet 4 Free's software but his company "has not yet made any serious attempt to obtain ad dollars".

The models followed by Global Freeway and Internet 4 Free both depend on client software running on Net users' PCs. Advertiser confidence in the free model isn't boosted by reports that hacker groups are dispensing advice on the Net about how to disable such modules.

Bundling free Internet access into new PCs is another marketing initiative having trouble making its numbers. "The sales of those machines are a total flop," claims Lang.

That may be overstating the case but there is no doubt business is slow. Poor sales in its bundled PC business have contributed to ISP Eisa's 1999 loss before tax of A$13 million (US$8.3 million), two and a half times higher than prospectus projections.

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