The free ISP dilemma

February 12, 2001: 1:23 p.m. ET

Free Internet service is a great draw, until users abuse their privileges
By Kim Cross

NEW YORK (Business2.com) - Charles Ardai has a peculiar problem for a Net executive. The founding CEO of Juno Online Services, a free Internet service provider (ISP), needs to get rid of some customers.

It's not that he has too many. It's just that a few of his customers cost more than they're worth.

Those are the ones hogging the bandwidth and eating away at the company's bottom line. Ardai says about 5 percent of Juno's nonpaying subscribers account for more than half its free-member phone costs.



	These are abusive users, and we have to do something about it. This isn't a charity. We have to run a business.



	Charles Ardai CEO, Juno Online Services

"One guy used up 572 hours in September," Ardai laments, hands fluttering about like nervous birds. "If you bring a bunch of 500-pound guys into an all-you-can-eat buffet and they devour everything, there's a point at which the management has to come over and say, 'Enough's enough!'"

Ardai isn't alone in squawking. Other companies have found the free-ISP business more trouble than it's worth.

WorldSpy, Freewwweb, and FreeInternet.com shut down in the past year, while portal AltaVista scrapped its free-ISP service. Venture firm CMGI (CMGI: Research, Estimates) pulled its funding from 1stUp.com in November when it failed to find anyone who would buy the company. Even Kmart's BlueLight.com, which offered free Net access to get Kmart shoppers online, considered shutting off the service after the holidays.

The top players remaining -- Juno (JWEB: Research, Estimates) and NetZero (NZRO: Research, Estimates) – both have seen their stock beaten down to pocket-change levels.

A flawed business model
The free-ISP business is a model so fundamentally flawed that it's a wonder so many investors were banking on it. The premise is that free Internet access will attract enough customers to generate a corpulent audience whose attention could be sold to advertisers.

The tricky part is getting those users to stay online long enough to look at enough ads -- but not so long that they run up a nasty phone bill. Just do the math: Juno's free subscribers, who make up 80 percent of its users, each cost $1.65 a month to support, but bring in only $1.10 in ad revenue each month. Ouch! The company tries to cover the loss, not so successfully, via its 750,000 subscribers, each paying $8 to $10 per month.

What's a company to do when customers cost more than they're worth? Make them pay, or shoo them away. At least that's what Ardai is considering. He's kicking around a few ideas that may be clever, or to the piggish customers, downright lousy.

One option is to confront the group of "abusive users eating us out of our house and home" and ask them to fork over the monthly fee that 20 percent of Juno users pay.

Another idea is to make the customers' experience so lousy they leave, by ratcheting up the number of advertisements users have to view before they get online or can grab their e-mail. If they get fed up, let them leave, he says. "If they run off and join a NetZero, fine," Ardai says. "Bless 'em."

But NetZero is no longer a free refuge for heavy users. When the company discovered that 10 percent of its users accounted for 53 percent of its phone bill, the company, whose slogan is "Keeping the Internet Free for Everyone," capped its free service at 40 hours a month.

When users hit the limit, they can opt to pay $9.95 a month for more hours online. It's the first time NetZero has ever charged customers a fee. "If [heavy users] go somewhere else, it will save us a ton of money," says CEO Mark Goldston. That could add tens of millions to NetZero's bottom line.

Meanwhile, BlueLight.com took similar measures in January, setting a 25-hour limit for free usage.

Goldston says that NetZero's 15 or so revenue streams -- mostly derived from ads -- will keep the company afloat. "Our business model is the only one that has worked," he brags, pointing to how NetZero stayed away from co-branding and revenue-sharing deals that sucked away would-be revenue from 1stUp.com, Spinway, and other private-label companies.

Juno may not be a competitor for long, he figures, as he's suing the company for infringing NetZero's patent on ad-serving technology. And he shrugs off his stock's price, trading for less than $1. "We've got so much capital [$220 million in cash at the end of the September quarter] that we can afford to wait out the storm of this ridiculous stock market."

One thing the survivors can agree on is that they need to do something about heavy users. Getting rid of them, or converting them to paying subscribers, would materially boost Juno's bottom line, according to Ardai. Although It's hard to say how much, considering variables such as bulk telecom and ad rates.

With a shrug and a lopsided grin, he says, "I'd be proud to say it in a chat room, to the Wall Street Journal, on the cover of your magazine, that hey, these are abusive users, and we have to do something about it. This isn't a charity," Ardai says. "We have to run a business."