Free internet service providers fight for share in small market

By Aimee McClinchy

Friday 24th March 2000

GOING AGAINST THE TREND: FreeNet chief executive Karim Hussona believes free ISPs can work

Promoted as the next big thing, free internet service providers (ISPs) may not prove a success in the Australasian market.

One Australian free ISP has called for financial backup, local company FreeNetAccess' site is down and another local player has experienced first-surge access problems.

Internet analysts said free ISPs must radically change their business models to be viable in this market.

Local free services include FreeNetAccess, FreeNet and, launching next week, Surf4Nix.

Australia has four or five free services.

Free ISPs have become established in Europe and the US, where they have substantial capital behind them, and in the UK where they can earn commission from the local calls the free access generates for telcos.

But that is not the case here.

In this country, Telecom's Kiwi share makes local calls free so there is no payoff.

Other hurdles include limited bandwidth, overloading and access problems because the free ISPs do not own the telco infrastructure, and a lack of online advertising dollars.

"They are finding the eyeballs using it aren't worth the cost of running the ISP," www.consult senior analyst Ramin Marzbani said.

"Advertising models won't work with less than $3 million online in New Zealand ... and these guys can't offer quality of service," Mr Marzbani said.

"In Europe, local calls cost at least £2 an hour. We'd need to charge about $9 an hour before having enough money to pay for even a half-decent service."

IDC Research manager Pat Pilcher said: "The free ISP model will be very problematic [because of the] Kiwi share.

"If anything the niche for free ISPs is with businesses, where they pay for local calls but the ability to make easy dollars is questionable," Mr Pilcher said.

Forrester Research claims free ISPs worldwide will disappear completely by 2002 unless they figure out how to maintain profitable relationships with customers.

FreeNetAccess, a heavy-duty advertising model backed by Asian investor Jim Wu, has already disappeared off-screen. Mr Wu claimed it would be back up in a few days "after moving servers."

The two other local players, FreeNetAccess and Surf4Nix, remain confident they will be a success.

"It's a small-town mentality. They are trying ... to put you off the scent," Sur4Nix's founder Aaron Brett said.

Surf4Nix, an advertising-based model, was caught in a controversy earlier this year after claiming to be free but charging $39.95 and requiring members to sign up at least three more members.

But Mr Brett said the company had changed its referral policy, had 10,000 pre-registered users and was due to go online on March 28.

Surf4Nix was looking for private capital and was working on a supershopping site. It planned to enter the Australian and Hong Kong markets and was forging alliances with overseas free ISPs, he said.

FreeNet, launched three weeks ago by telco Compass Communications, last week faced up to disgruntled subscribers who encountered line-busy signals on its 0867 lines.

It offers 10 free hours a month and paid-for plans after that, and has already has 10,000 subscribers across 10 cities nationwide.

Chief executive Karim Hussona said the situation had been resolved. A restriction of 63 simultaneous calls over FreeNet's two 0867 lines had seen an overload but more interconnection lines were now added.

Mr Hussona, who also oversees an ISP focused on business customers that just bought ISP Taranaki Net Source, said he knew of industry worries but said: "They are wrong."

"We looked at other models like the advertising model but we saw the population base was not big enough.

"From June onwards a number of major retailers and products will be linked with our site ... we believe it will work and we've invested over $1 million. Compass is a profitable telco funded by a substantial organisation.

"Every business endeavour has an element of risk and uncertainty," he said.

FreeNet is not related to Australia-based FreeNet, which stopped taking subscribers at 30,000 after a variety of technical problems. ANZ stepped in to take a 25% stake and now offers it to its customers.

Telstra, said to be starting a free service, "was sitting back and waiting" for a competitor to become big enough to worry, Mr Marzbani said.

But Telecom Xtra's sales and marketing manager Kevin Kenrick said Xtra had looked at all advertising, pay per call and referral-type models overseas before deciding they are not going to work here.

"Internet service is never free - someone somewhere has to pay the cost," Mr Kenrick said.

Ihug founder Tim Wood has scoffed at free services, calling them "a fish-and-chip service."

Mr Pilcher from IDC Research said the big ISPs would relax their access costs when other value-added revenue streams grew.

But he thought major retailers with strong capitalisation could float free online services successfully because "a large part of the model relies on scale."

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