GAINING GROUND ON A GIANT

America Online announced last week that it has hit the 20-million-subscriber mark - 18 million of its own and 2 million for subsidiary CompuServ. The ISP expects its fall release of AOL 5.0 to kick sign-ups into overdrive. Considering that dominance, the question facing other ISPs becomes, How do we catch up?

One way is to explore other alternatives to the PC desktop. Just two months ago, as part of its AOL Anywhere strategy, the company aligned with DirecTV and DirecPC provider Hughes Electronics to develop integrated digital entertainment and Internet services nationwide. Last week, in a further move beyond basic access, AOL made a minority investment in TiVo, the personalized TV service that lets viewers pause, rewind and fast-forward through broadcast TV in real time.

However, as it leaps from PC to TV, the Internet opens opportunity for those in AOL's shadow to emerge with something unique.

"It is a race to gain market share against other ISPs and carriers," said Emily Meehan, an analyst with The Yankee Group. To stand out, "they have to offer more than just Internet access."

Although the companies have not been specific about their offering, TiVo and AOL will offer e-commerce and enhanced information on-demand, said Stacy Jolna, vice president of programming and media partnerships for TiVo.

Personalized TV also is attracting attention from others. TiVo competitor Replay Networks received a $57 million investment last week from a group of media companies, including Time Warner, The Walt Disney Co., Showtime Networks and Liberty Media Group. The deal includes strategic business agreements between Replay and some investors, although no names were mentioned. With Replay's service, viewers can create personalized channels, which feature favorite shows, themes or actors, allowing them to watch what they want, when they want.

"I am optimistic about the concept behind TiVo and Replay because it is compelling to consumers; a product to better manage the television experience is valuable," said Kevin Hause, manager of consumer research for IDC. Personalized TV may not be a killer app, but Hause sees TV as the next frontier for information and applications. "[ISPs] will no longer just deliver content through the PC but will take advantage of other platforms to drive business revenue."

Other ISPs agree. Cable Internet provider Excite@Home is preparing a suite of interactive TV applications to be delivered through set-top boxes, including back-office operations, client software, e-mail and local advertising. The carrier expects the product to be ready in the third quarter of 2000.

"We expect that a high percentage of consumers will want both TV and PC Internet," said Jeff Huber, director of set-top products for Excite@Home. "The PC experience in the den is typically very task-oriented, whereas the television experience is more driven by convenience."

These services will appear first in the AT&T Excite@Home markets using the forthcoming DOCSIS-compliant advanced DCT5000 set-tops from General Instruments, but they likely will spread to other markets as more vendors bring out set-tops with interactive capacities.

Other ISPs also are trying to close the gap with AOL with new marketing moves. Or not so new: MindSpring and EarthLink will carpet-bomb potential subscribers with more than 50 million sign-up disks - an old AOL tactic - in the coming months.

Microsoft's MSN customers soon will be able to bundle their Internet access bills with an online phone bill. To provide this, Microsoft is working with eCHARGE, an online billing company.

"It's real natural and intuitive to have that monthly ISP bill - still usually a dial-up service - show up on your monthly phone bill," said eCHARGE President and CEO Ron Erickson. Because the average ISP receives about 30% of its monthly payments by check, online services such as eCHARGE can cut ISP operating costs.

Anything a non-telco ISP can do to bind its subscribers more tightly is going to cut customer churn, said Kurt Erhlanger, an analyst with NetAnalysisCorp. "If people get used to seeing MSN's fees as a line item on a phone bill that's presented online every month, they may start thinking of the Internet as another utility to be paid," he said.

One recent entrant in the ISP steeplechase is hoping to make it big by charging nothing. Alta Vista's FreeAccess offers subscribers free unlimited 56 kb/s access in return for their attention to onscreen ads. Using technology from 1stUp.com and Internet connectivity from ZipLink, the Web portal provider lets clients download software to navigate the Web through a small window called a MicroPortal. Subscribers need to click on ads directed at their demographic once an hour to stay logged on.

Other providers have offered ad-supported Internet access, of course, but Alta Vista's edge is its brand name; the Web site for its search engine usually places among the top 10 Web sites in monthly rankings.

Alta Vista "can become a force to be reckoned with among free Internet providers," Ehrlanger said. "The ad-supported model has gained respectability recently, but its market is probably limited, so recognizable brands may count for more here than in the ISP market as a whole. I imagine portals such as Yahoo!, Lycos and Excite are going to be watching Alta Vista's results pretty closely."