RealTime IT News

Threats To AOL Are Overblown

You'd think it was the beginning of the end for America Online Inc., based on some headlines I saw yesterday in the wake of the announced merger of ISPs EarthLink Network and Mindspring Enterprises.

While it's true that the deal makes the combined entity the second-largest Internet access provider, with 3 million subscribers, the new company is a long, long way from challenging AOL's supremacy. AOL has more than 20 million subscribers, counting CompuServe members.

But the press likes drama, and by writing about the merger and throwing in references to the free ISP movement - epitomized by NetZero (NZRO), which went public Friday - it can create a perceived threat to the most dominant Internet company.

The truth is, neither the free ISP movement nor the newly combined EarthLink (ELNK)-Mindspring (MSPG) are a threat to AOL, certainly not in the short-term. I think it's highly unlikely that free ISPs such as NetZero or Britain's Freeserve (FREEV) will force AOL to abandon its monthly subscription charge, from which the access giant derives the vast majority of its revenues.

In fact, the announcement Thursday by Microsoft (MSFT) that it will raise rates for its MSN access service by $2 per month should ease any pressure AOL might feel to lower its own $21.95 charge.

Most consumers are savvy enough to realize that there's no such thing as free, and many are simply unwilling to endure the bombardment of advertising that accompanies an account with free service providers such as NetZero.

NetZero in August reported having 1.68 million registered users, of which 891,000 had accessed the service. You can bet that many of the users who haven't used the service never will; they simply signed up because 1) they wanted a cheap back-up service, or 2) it was easy to sign up. And many of those who are using the service will drop it when they get sick of the ads.

What this all adds up to is churn, and churn is deadly to a business model. Just ask PointCast.

As far as Mindspring and EarthLink, the merger certainly has some impact in that it moves the new company past MSN as the second-largest access provider. That kind of consolidation is inevitable in the ISP industry, and it appears to be a shrewd move for both players. But right now allit does is make them the best of the rest.

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