With numerous sites now offering free dial-up Internet access,
high-speed access becoming readily available, bulk connectivity costs
dropping and advertising dollars spent increasing, investors are left
with a lot of due-diligence work. What Internet access companies’ will
benefit from these strong trends that are shifting our entire Internet
economy?
CMGI- (CMGI)
majority owned, 1stUp.com is a good place to start. The company is
still private, though it’s likely we will see an S1 filing within the
next month.
1stUp.com’s technology provides a scalable solution indirectly
delivering consumers free, advertising supported dial-up Internet
access. Unlike other ad-supported providers, 1stUp.com caters to
corporate partners, allowing these partners to offer their users a
branded, free Internet access service. High-profile 1stUp.com corporate
clients include Excite@Home (ATHM),
AltaVista, and Bolt.com among several others.
Reporter@Large had the opportunity to sit down and speak with Charles
Katz, 1stUp.com’s chief executive officer.
Reporter@Large: So Lets talk about what 1stUp.com is really all
about.
Katz: Well, 1stUp.com provides ad-supported Internet access
technologies that allow companies to offer ad-subsidized, free Internet
access to their consumers.
Reporter@Large: What kind of businesses does 1stUp.com target as
potential partners?
Katz: We segment them into three different groups: 1) Internet
companies. Companies like AltaVista or Excite that already have an
online presence and want to continue and further communications with
their users even after they’ve left that core Web site. 2) Computer
Manufacturers. These are companies that have the first crack at the
consumer once they’ve bought a computer. 3) Brick and Mortar
companies. Businesses like newspapers, banks and retailers that have a
trusted brand name with their consumers but maybe don’t have a strong
Web presence yet and this is a way to get a lot of their users online
and to push those users to their online content.
Reporter@Large: I especially liked the deal you guys did with
Excite@Home. It seems only natural for a high-speed access provider to
offer a step ladders approach from free dial-up access to the company’s
premium paid-for broadband services.
Katz: Yeah, from our perspective it makes a lot of sense to try
and get people online. We think we can play a very strong role in the
broadband market as well. We may not offer free broadband access, but
the idea of ad-subsidizing Internet access remains the same, whether it
be dial-up, broadband, or internationally as well.
Reporter@Large: So the 1stUp.com model will benefit in the era of
broadband.
Katz: Absolutely.
Reporter@Large: And as Internet access becomes more of a
commodity, how exactly does 1stUp.com’s model benefit?
Katz: As the costs of connectivity come down, the direct costs of
offering the service come down as well. So it makes our direct cost
service offering cheaper. We’re taking advantage of two key trend
lines: 1) the cost of connectivity is coming down and 2) the amount of
online advertising spending, particularly to the top Web sites, is going
up. So as those curves grow farther and farther apart, the business
model becomes more and more valuable.
Reporter@Large: Can you give us an idea of the different players
involved in 1stUp.com’s business?
Katz: Sure. There’s the backbone Internet service providers
(ISPs) like NaviNet, PSI Net or Split Rock. These guys simply provide
connectivity fro
m ports around the country or world. In the same way
that other Internet access providers purchase time on their modem ports
(i.e. AOL, Earthlink), we do the same thing. So it’s sort of a black
box as to where the money comes from, whether it’s subscription fees or
advertising dollars. They just get paid.
Then there are the advertisers. Advertisers are simply buying pieces of
the real estate just as they would on a billboard, television show, or
on a traditional Web page. They’re buying real estate for a particular
amount of time, for a particular amount of money. (Charles is referring
to traditional banner ads as well as the option to purchase space on a
navigation bar that sits on the users desktop as he/she surfs the Web.)
So it’s a pretty clear value proposition for them.
The consumers, at the other end of the spectrum, benefit because they
now have the option to have free, ad-subsidized Internet access and
hopefully it’s from one of their favorite brand names out there.
Certainly, millions of people have already decided that this is a choice
they want to make.
Reporter@Large: The only relationship left is the one between
1stUp.com and its paying partners.
Katz: Right. The reality is each business deal is different
because each partner has different needs. So what we end up doing is
working with our partners to figure out what those needs are. Some
companies aren’t very risk adverse, in which case they’re not as excited
about taking on big financial risk in exchange for financial reward.
Other companies are very risk adverse and they say hey, “we realize this
is going to make us a lot of money at some point, and we want to capture
this value down the road.”
Reporter@Large: What are these risks for your partner companies?
Katz: Well the risks are purely financial in that there is a
certain cost for connectivity, but there is money from the advertising.
So if you can generate more advertising revenue than the direct cost of
offering the service, then how do you split up that money? And if you
can’t generate as much advertising revenue as the direct costs, who
makes up that difference?
It becomes a pretty simple risk-reward curve where the more you’re
willing to risk up front; the more you’re going to get rewarded down the
line. This happens as the costs drop and advertising revenues pick up.
Reporter@Large: So what is the value add for 1stUp.com partner
companies?
Katz: One of the advantages of joining the 1stUp.com group of
companies is that all partners join under the 1stUp umbrella. So you
get the economies of scale from AltaVista, Excite and all our other
partners, all buying connectivity under this one umbrella. Rather than
having the buying power of a single brand name, 1stUp.com has the buying
power of multiple and large brand names.
On the advertising side, advertisers are most interested in targeting a
very large group of specific people. So the larger your total end-user
base can be, the more attractive it is to advertisers. They can make
one large media buy with 1stUp.com, opposed to a single company that
wouldn’t be able to attract the same amount of users and advertisers.
Reporter@Large: Is CMGI providing a lot of 1stUp’s infrastructure
and advertising support?
Katz: CMGI’s NaviNet provides some of our back-end connectivity
and we also receive support from their huge advertising network. The
stable of advertising companies assist us in generating the most amount
of revenue possible with the real estate we’ve created. So CMGI is
helping us drive costs down and they also help us generate additional
revenue streams. Also, because of their large family of companies,
there are a lot of points of distribution for us.
Reporter@Large: From an investor standpoint, why would 1stUp.com
make more of an attractive investment than lets say a
Katz: I think it’s the idea that we’re able to aggregate multiple
brand names underneath one umbrella. We’re not tied to a particular
brand name waiting to see if it succeeds or not. We’ve got multiple
brand names going out and spending marketing dollars to push our service
offering. We’re not a marketing company. We let our partners market
and distribute the system as they see fit, and since they already have
strong relationships with their consumers, they’re in a much better
position to make those marketing decisions.
Reporter@Large: There seem to be tremendous synergies between
advertising power house, Engage
Technologies (ENGA)
(another CMGI majority owned company) and 1stUp.com.
Katz: Yeah, Engage cookies computers and watches where people go
at sites that are “engaged enabled.” 1stUp.com has information on a
smaller amount of users but more complete information on those users
because whether they go to an engaged enabled site or not, since they’re
using our connection, we can always see where they are. So merging
these two databases (Engage and 1stUp.com) makes it a complete set of
online information.
Reporter@Large: Are broadband and international expansion
concerns or opportunities for 1stUp at this point in time?
Katz: Definitely opportunities for 1stUp. Again, the same model
of using advertising to subsidize access remains the same whether we’re
talking about the U.S. dial-up market, the U.S. broadband market or
Internationally. As long as people are getting on the Internet, some
people are going to trade paying for it with advertising, as you see in
every other communications medium. Television is a great example.
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