Sky No Longer Limit For Free ISPs

Remember when the “free ISP” movement heated up over the summer? Firms
such as British access provider Freeserve (FREE)
and NetZero (NZRO),
which targets the U.S. market, were touted as giant-slayers whose
advertising-based business models would steal millions of customers from
suddenly imperiled ISPs that charge a monthly fee.

While this faith in the free ISP model sparked only tepid initial
interest in Freeserve’s July 26 IPO, which gained 36% in its first day
of trading (less than half the 74% average for July ‘Net IPOs),
NetZero’s public offering on Sept. 24 was eagerly received by investors.
Shares of NZRO climbed 82% in their debut – not a moonshot, but higher
than September’s 72% average first-day gain.

Today the fortunes of these respective stocks are reversed. Freeserve,
the top ISP in the U.K., has become a high-flyer, soaring to 78 in Wednesday afternoon trading, up from its
$23.67 offer price. Its rise was fueled by a deal last week with BT
Cellnet to develop wireless Internet services in the U.K.

NetZero, meanwhile, has ridden a roller-coaster down to its Tuesday
afternoon price of 22 3/16, above its $16 offer price but below its
first-day close of 29 1/8.

And a new report released by Internet research firm Jupiter Communications (JPTR)
isn’t likely to help kick-start NetZero’s sagging stock. Rather than
take over the ISP market in the U.S., Jupiter concludes that free access
providers instead will be relegated to a niche of about 13% of total
market share.

Further, Jupiter estimates that free ISPs will generate only $901
million in advertising revenue by 2003, putting enormous pressure on
individual companies to increase revenue through e-commerce,
better-targeted ads or (gasp!) some kind of access fee.

All of which adds up to daunting challenges for NetZero and other free
ISPs. It will be interesting to see if dampening enthusiasm for the free
ISP model has an effect on the much-anticipated IPO next March from
AltaVista, which offers free access via start-up 1stUp.com.


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