Free-for-all

It's a classic American business model first perfected by King Gillette, who sold low-margin razors cheaply to create customers for the high-margin blades.

Now parts of the Internet look like those Times Square electronics jobbers in a perpetual state of lost-our-lease liquidation. A flood of start-up Internet service providers give away the hardware to sell access. Others give away both access and hardware to sell end users-to advertisers. Will these no-charge operations fly when other free Internet services have failed?

Six-month-old ISP NetZero Inc. expects to buck that trend. The start-up from tech incubator Idealab offers subscribers free Web access nationwide with e-mail, in exchange for demographic information on sign-up. NetZero combines that data with proprietary software that monitors on-line behavior. They sell results to Web advertisers that pay for an ad banner that can be moved on, but not removed from, the user's browser. Those ads then can be targeted to the user's interests.

NetZero buys its Internet access primarily from three backbone providers-Level 3 Communications, GTE and AGIS-and maintains dial-up numbers in most major U.S. markets. While the provider will not reveal its per-user connectivity costs, Meghan Magill, an analyst with GNP Consulting, said they are probably pretty low-perhaps as low as $1.50 per customer.

The ISP does virtually no marketing except through its Web site. That almost guarantees that those who sign up for NetZero are not newbies but skilled users looking to switch ISPs, which makes them more attractive to advertisers, said Janet Daly, marketing vice president for NetZero.

Demographics are the first obstacle for any free ISP selling ads, Magill said. "Customers who want something for free are not usually attractive to advertisers," she said. "It sounds hard, but why advertise to people who aren't able or willing to pay $20 a month for access?"

Whether NetZero tops that hurdle depends partly on size. According to the company's own head count, it reached 750,000 users in mid-April and expects to hit the 7 million mark in the second quarter of 2000.

Intersquid.com, another newcomer, avoids the advertising model in favor of attracting long-term service contracts. The provider offers Internet connectivity from the PSINet backbone, with more than 400 points of presence covering most of the United States. Subscribers pay $29.99 a month for 30 months of unlimited Web service, e-mail and a personal Web page.

To sweeten the deal, the ISP will send subscribers a free computer with a 333 MHz Celeron processor, 56 kb/s modem, 4.2 Gb hard drive, 32 Mb of RAM, speakers, microphone and monitor. Subscribers who drop Intersquid before their contracts expire must pay for their PCs on a prorated basis.

The company is a virtual ISP, outsourcing almost everything, including service on the PCs, which is the manufacturer's responsibility. It's a nearly pure marketing play, but in the superheated Internet environment, that may be enough, according to Intersquid founder and CEO Joseph Calamari (thus the name). The company got 10,000 customers in four days after announcing its offer, he said. He expects to be able to add 5000 new customers a month once the initial rush dies down.

The business model works because Intersquid has low connection costs with PSINet, runs lean with a small staff and gets a deep volume discount on PCs from an unnamed manufacturer.

The idea came to Calamari before the current rash of free-PC-with-ads offerings, but he acknowledges that the competing offers have had an impact-primarily on price, which was $39.99 a month when the company began testing early this year.

When Intersquid reaches a critical mass of subscriptions, the company will sell advertising space on its start page. "Intersquid will follow the standard Internet advertising model-the Yahoo! standard, not the intrusive one that's standard with the other 'free' models," Calamari said.

Deals like Intersquid's and Free-PC.com-now selecting its first 10,000 customers to receive free PCs with free Internet from NetZero and always-on advertising-are in some ways a natural extension of the Web as shopping mall. "The Internet has a way of lowering the price floor on all goods," said Allen Wynchell, a research analyst with Albritton Investors. "E-mail was a for-pay proposition until Hotmail came along. Now everyone's throwing it in as a value-add."

"The keys to these 'free PC' deals will be charging enough to cover your costs while hitting the right price for the end user," he said. Intersquid may have a problem in that regard-the $29.99 monthly fee is higher than the $15 to $20 that most low-cost ISPs charge.

The latest word in free offers-at press time, anyway-is from Encanto Networks: a free Web server for small businesses that sign up for two years of dial-up Internet access at $69.95 a month. Encanto's e.go server costs $1495 and is designed to get offices of 10 PCs or fewer started in e-commerce. By eliminating Windows NT from the server and running proprietary Java applications over Unix, Encanto can both cut the cost of the server and make it easy to run without in-house expertise.

"But you don't solve the cost problem for small business unless you solve the connection problem," said Tom Blaisdell, Encanto's marketing vice president. A dedicated line for $300 to $600 a month will keep most small businesses off the Web, so the company's InstantConnect technology uses intelligent caching to make the server work over traditional phone lines.

Encanto is the domain name server for all the URLs of e.go Web sites and caches the most frequently requested pages from each site. When one is requested, it serves up the page from the cache, then calls the e.go server for that site-which is plugged in, but off-line-rings twice and hangs up. After that wake-up call, the server calls into its local port, makes the Internet connection over a 56 kb/s line and takes over.

The system saves money for both the enterprise and Encanto because the company can provide Internet connections for multiple customers rather than provisioning a link for each.

Encanto uses several Internet backbone providers, including IBM Global Services. The e.go server handles 100,000 hits per day, or 2000 e-commerce transactions-more than enough for Encanto's small business target market, Blaisdell said. The company offers a 24-hour help desk, performs remote diagnostics daily and pushes software upgrades as needed-all part of the monthly fee.

According to International Data Corp., 7.1 million businesses in the country have 100 or fewer employees, and 80% of those have fewer than 20. Blaisdell believes the Encanto solution will suit many of these as well as the 20.7 million income-producing home offices.

* LICENSING CONSOLIDATES Sipro Lab Telecom has been authorized by AT&T, France Telecom and NTT to serve as the central licensing point for the G.729 voice compression standard for transmitting toll-quality voice over IP. While uncompressed speech can be transmitted at 64 kb/s, the G.729 standard-adopted by the ITU-can achieve the same quality at 8 kb/s.

* GTE AIMS AT NEXT GEN FAX GTE Internetworking will partner with Hewlett-Packard to develop IP fax capabilities for inclusion in HP's consumer product line, including LaserJet printers. The companies will pool expertise on technical development, engineering and systems integration.

Who's trading in what Internet freebies and how they mean to turn a profit:

* FreePC offers a free computer and free Net access in exchange for user demographicdata and always-on ads.

* NetZero provides free Internet access nationwide to users-700,000 of them currently-who view targeted ads on a portion of their screens.

* DirectWeb offers a free computer to Philadelphia-area users who buy Internet access-though they give it back if they cancel-and hopes to profit from e-commerce transaction fees.

* Gobi will ship subscribers to its national Internet service a PC with periodic upgrades-even to cable-and hefty penalties for canceling the three-year contract early.

* Intersquid.com national customers will get a free PC with no ads onscreen if they sign on for 30 months of Internet service.

* Encanto Networks will give a free Web server to small businesses that sign a two-year contract for Internet access via their InstantConnect dial-up caching technology.