Entry No.129

IT Writers Awards

Why are you paying for internet access when you can get it for free? All thatís asked of you are some personal details, some screen real estate, or the right to watch where you surf.

Are free ISPs good value? Although estimates of the actual numbers vary, more than quarter of a million Australians seem to think that exchanging personal information for free access is a reasonable deal and have signed up with one of the six companies currently playing in the free access market. These six wonít be alone for long and wonít be content to rest in the margins. Free access represents a quantum shift in the way Australians think about getting online. The implications for conventional fee-levying ISPs are dire: theyíll either have to adapt to the new rules, or die.

Free access originated in Europe where more than 2.5 million people have signed up over the last two years. Its popularity there can be attributed to most countries having timed local calls instead of the flat fee system that we enjoy here. The innovation the free ISPs came up with was to convince European telcos to share the revenue from timed local calls. The logic behind the idea is that if people know they're only going to have to pay for the call and not for the access, they'll be inclined to spend more time online.

However, telecommunications deregulation and the homogenising influence the European Community initiatives are set to take their toll on the free ISP movement. Forrester Research predicts that free ISPs will be dead and buried by 2002, killed by falling revenues and reduced interconnect fees. So why are Australians rushing towards free access like lemmings toward a cliff? Chalk it up to our innate cheapness, and a completely different free ISP revenue model.

"What we do has nothing to do with being an ISP," says Jeremy Pollard, sales and marketing director for FreeNet. "We see ourselves as an intermediary, helping to facilitate the relationships between companies and consumers."

FreeNet is what Forrester Research calls an Interactive Relationship Manager (IRM), which sounds like terrible marketing speak, until you realise that many companies are crying out for a way to get their message to you in the cheapest way possible. In the car industry, for example, it's estimated that nearly one-third of the total price can be chalked up to customer acquisition costs - that is, getting you to notice the car in the first place.

Forrester's research indicates that the only way for those doomed European free ISPs to survive is by transforming themselves into IRMs. Which means that here in Australia we're ahead of the curve, but at what price?

When you sign up for a free ISP account in Australia, you will be asked to fill in a questionnaire detailing, among other things, your favourite products, sports and TV viewing habits. This is so that the company can either direct targeted ads to you, or can inform its corporate partners where you're going when you're online, in turn helping them figure out whether they're able to reach you with their message.

Free Online uses a model that is even more refined because its free service is limited to an area called the Free Zone. This zone is made up of what co-founder Bill Lang calls "affiliate sites", such as shopping zones, financial services and so on. "They are sites that are judged to be of interest to every day Australians," says Lang. "We've taken two companies as our role model - AOL, for its family friendly nature and ease of use, and FreeServe, the company that really turned free internet access into a household word in UK."

Free Online's model is to make its money from referrals to these affiliate sites, advertising and sponsorship. It's important to note that Free Online customers are allowed out on to the wider web, but only for a couple of hours a day, and that time also has to be broken into blocks. People that want to surf outside the Free Zone for unlimited hours can pay $19.95 per month, while the company will also soon add a kids-friendly area, with sites selected by LookSmart, at a set price per month. All up, getting online via Free Online is a little like wandering around a walled garden. It's pretty, it's safe, and ultimately it's limiting to people that really want to go grasp the raw power of the net. And in the final analysis, itís done so that companies can sell you more stuff by getting to know you better.

Lang is also aiming to provide "private label" services to companies wishing to provide free internet access as a value add to their customers.

The private label model is one that underpins the business plans of Free ISP, which has signed agreements with, among others, portal powerhouse Yahoo!. "Our aim is to have only 10% or so of our customers from the general public," says CEO Tamara Keniry. "The balance of our business will be made up of customers that are given the service by corporates as an incentive or as part of a loyalty program."

Where does this leave conventional, fee-levying ISPs? Will they be forced to jump aboard the free ISP bandwagon as Australians rush en masse towards the freebies? 

Opinions differ. Telstra, for example, has vehemently denied recent reports that it is set to launch a free internet service, and those denials have some justification. Its Big Pond brand is the second largest ISP in Australia, with more than 300,000 paying customers. Morphing those paying customers into freeloaders would turn Big Pond's revenue stream upside down - unless it could be shown that those customers would actually be of greater value to Telstra as marks for marketing initiatives. If Telstra was able to marry its existing databases (such as Yellow and White Pages, as well as billing and other information) with personal data from mandatory free access questionnaires, then it would be sitting on a very rich lode of demographic and consumption information. Unfortunately Telstra representatives won't be drawn any further on the free ISP issue, so we'll just have to wait and see.

Although marketing lies at the core of the free ISP business, the value of the customers which free access currently attracts has yet to be quantified.

IDC analyst Brooke Galloway says that initially, the customers attracted by free services are going to be those that are most price sensitive. "They're initially going to be lower value customers," says Galloway. In other words, not the ultra desirable AB demographic marketeers kill for. "But over time," adds Galloway, "people will start to wonder how much value there is in paying for access."

It's a sensible question. How much value is there in paying for something that is free? And where will this leave conventional service providers, or providers like AOL, which styles itself as a family-friendly, premium-priced online community. After all, it was AOL's "walled garden" model which puts AOL-only content only within the reach of subscribers, that inspired Free Online's FreeZone concept. The only differences between the two are size, price and the content provided. "We appeal to a different segment of the market," says AOL Australia representative David Packman, pointing to the fact that an estimated 80% of AOL customers spend nearly 80% of their time within AOL itself rather than surfing around the internet at large. "Our audience is people that appreciate the quality, the twenty four by seven customer support. AOL is about the experience."

Packman concedes that a raw connection to the Internet is enough for a certain group of customers, but says that ultimately people will want to go with a brand they trust.

The issue of quality doesn't end with premium content services. Many internet users are just as concerned with the speed and reliability of their connection as they are with the frills that the provider adds around it. Free ISP uses Telstra's backbone, while FreeNet jack into MCI's global connection and guarantee a user to modem ratio of 10 to one, meaning that there's one modem for every 10 subscribers.

But there are always going to be users that want the fastest connection to the net, and the only way to get that speed is to pay for either cable or satellite, or fork out the money for your own ISDN line. Premium services of this type aren't free, and probably never will be.

Should you sign up? Free Online's Bill Lang points out that there's nothing to lose by doing so. His competitor, Jeremy Pollard at FreeNet, echoes this sentiment, saying that there's nothing to stop people leaving if they don't like what they see. The core of the issue, however, is that nothing ever really comes free. The free ISPs are giving you access in exchange for personal information that will ultimately be used to try and sell you something. Is this so bad? ìPeople will begin to ask whether having to look at an occasional ad is such an impost,î says IDCís Galloway. ìMost people will probably just block it out and get on with using the net.î

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