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November 30, 2000

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MARCH 3, 2000 VOL. 26 NO. 8

Giving It All Away
Free internet access is here, but here to stay?

There's something counter-intuitive about the notion that you can make money by giving stuff away. Yet in the wonderland of the Internet space, where dumb ideas are often confused with creative ones and failure is looked upon as a worthwhile learning experience, offering free products and services has become a hallowed tradition. Ever since Microsoft knocked off Netscape by giving away its Internet browser, companies have been falling all over each other to hand out computers, content, software and other goodies as if the World Wide Web were the world's largest charitable institution.

Which it is. This helps to explain why the vast majority of dot-com companies are unprofitable. But, according to industry analysts, the free-stuff business model is not entirely bankrupt. At this stage of Internet development, building market share is crucial, and charity is an effective marketing tool. Two months ago, Starhub, a start-up telecommunications company, introduced free Internet access in Singapore. Starhub faced formidable and entrenched competitors including Pacific Internet, the leading member of a cozy three-ISP oligopoly, so a successful entry was far from assured. But by offering Singaporeans something they'd never had before - no-access-fee Web surfing - Starhub in a matter of weeks grabbed 33% of the market (this after buying local ISP Cyberway, which had a market share of less than 10%) and forced competitors to initiate give-aways of their own. "Overwhelming" was how Tan Tong Hai, general manager of Starhub's Internet service, described consumer response.

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Was it just a gimmick? Perhaps not. Free Internet access services are popular in Europe and are catching on in the U.S. and Australia. In Japan, free ISPs are starting to take market share away from established providers. Most plan to make money by selling advertising on their own Web portals, and in the portal game capturing a large number of consumer eyeballs is an essential first step towards building a viable business. Starhub does not rely solely on advertising. The company expects that by luring in customers with free Net access, it will be able to sell them a variety of telecommunications services (including e-mail, for which Starhub charges $1.17 a month). "Free ISPs are not going to be just a flash in the pan if they can create value-added services" and can keep surfers coming back to their websites, says Matthew McGarvey, regional Internet analyst for International Data Corp. in Hong Kong.

There's another reason why giving away free Net access may ultimately prove workable - or not, depending upon geography. Starhub's service isn't really free at all. In Singapore, consumers have historically had to pay up to .085 cents a minute for local telephone calls - Starhub gets a cut of that revenue for every minute its customers spend connected to the Web, since they must get there by placing a local call. In other places such as Japan, where people pay per-minute phone rates for local calls, consumers are eager to eliminate online access fees. But in areas where local calls are free and ISPs offer unlimited Internet access for a flat monthly fee anyway, the no-charge Internet model has less appeal. That's a big reason why in Hong Kong, where cross-town calls are not metered, free net access hasn't even been attempted even though there are scores of service providers battling for market share.

McGarvey says free-access providers may have staying power, as long as they offer service that is of comparable quality to that of paid providers. "In the ISP business, the key is still the customers' ability to get online quickly," he says. "Quite simply, people are willing to pay for speedy, reliable connectivity. This is a service business and it is the quality of service that really counts."

That fact may prove to ultimately be the undoing of free access. The more successful providers are, the more they must spend on equipment to make sure their growing number of subscribers can reach the Web without getting a busy signal. Maintaining service is not a trivial expense. Last year, Pacific Internet's operating expenses for Singapore were $53 million, and as the company expands costs are going up 10% or more every year, says Pacific Internet CEO Nicholas Lee.

"We did our sums with free ISP," Lee says. He figured there was not enough money to be made by sharing revenue with the phone company. That leaves the portal business. "I can provide [free service] but I need $100 million [Singapore] in either annual advertising revenue or e-commerce revenue or both," says Lee. "In a place as small as Singapore I can't get that this year - or next year or the year after. I will stick to the paid formula. Good luck to Starhub." That's a sentiment all cost-conscious Singaporean webheads can share.

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