Freeloading wireless

The news that wireless tech producer Qualcomm will invest $144 million in ad-supported ISP NetZero had many analysts scratching their heads.

"The logic is not obvious here," said Edward Handlin, chief consultant with Handlin-Roser Associates. "It seems more wishful than pragmatic."

But the deal has put additional spin on two recent developments: the eventual convergence of mobile phones and the Web, and the new respect being accorded the free ISP business model.

Qualcomm's $144 million investment last week gives it a 10% stake in NetZero - and, not incidentally, a marketing agreement that will make Qualcomm's Eudora 4.3 e-mail manager the standard e-mail platform on NetZero installation CD-ROMs. The software is free when operated in a mode that displays small ads in a window on the user's monitor. Qualcomm also will market NetZero's access to Eudora's 19 million current members.

The plans are not specific. But Mark Goldston, CEO of NetZero, said the companies will collaborate on Qualcomm's wireless high data rate (HDR) technology. When it becomes available - probably within two years, although technical trials are ongoing - HDR could enable Internet access over wireless phones anywhere those phones work, downloading data at speeds exceeding those of high-speed cable modems and DSL access. Such technology could deliver moving images over the small screens commonly found on wireless phones.

But some industry analysts wonder how many natural points of contact there are between a free, ad-supported ISP and the world of wireless phones.

"As it is, there's doubt about the effectiveness of advertising on the PC, in banner ads or any other form," said Kenneth Huizenga, an analyst with Data Partners. "But compared to the 2-inch-by-2-inch screen on your average WAP phone, banner ads are the equivalent of Super Bowl commercials."

The e-commerce possibilities of wireless Internet phones are not as well understood as those of the PC, he added. Shoppers may be reluctant to "buy big and buy often" via phone without the catalogs and displays computers provide.

But NetZero is anticipating a future in which dial-up is no longer the dominant access mode it is today, Goldston said. "The goal is to become a seamless connectivity provider, allowing users to navigate and receive e-mail across a variety of devices," he said. NetZero plans to offer access over cable and DSL - for low cost, not for free.

Those questions aside, Qualcomm's investment underscores the fact that free Internet services - once derided as being worth what they cost - are a force in the ISP business. NetZero now has 3 million registered users. And 1stUp.com, a CGMI-owned wholesaler of free access to branded ISPs, serves as many registered users through its 70 partners as EarthLink, which currently has 3.5 million subscribers.

Free ISPs are growing faster than their paid dial-up counterparts. In the fourth quarter of 1999, AltaVista increased its registered users 175%, Freeinternet.com grew 100% and NetZero rose 77%. Yahoo! and Excite@Home now offer no-cost dial-up. BlueLight.com, the free ISP offered under the Kmart brand through Internet wholesaler Spinway, signed 1 million customers in the first six weeks after its January launch. It has 1.3 million and enrolls an additional 20,000 every day.

All told, about 9 million users have registered for free Internet access, Huizenga said. Only half of those are active users, analysts estimate; most of the rest may only use the free access as backup when their paid ISPs go down. But that total is still more than one-third of America Online's current customer base.

And price may become more of a weapon in the battle for computer-owning households. According to Jupiter Communications, 76% of U.S. homes with PCs have online access. Thus ISPs will have to work harder and spend more to acquire new customers. And many of those in the remaining 24% are in lower income brackets and won't willingly shell out $22.50 per month for access when they can get it for nothing more than looking at a few ads.