Bulk of Soaring Online Growth Going to Free ISPs

America's online population is growing by leaps and bounds, but the demographics aren't encouraging for providers of conventional, fee-based dial-up service.

by Jayson Matthews
Asssociate Editor, siliconvalley.internet.com

More than 11 million consumers joined the online ranks during the second quarter of this year, an increase of nearly 24 percent since the end of last quarter, according to Telecommunications Reports International (TRI). The company's recent online census, conducted every year since 1980, says the total online population has surpassed 62 million, many of whom are opting for free, ad-supported Internet service providers (ISPs), or showing a willingness to pay a premium for high-speed cable modem or digital subscriber line (DSL) services

Amy Fickling, managing editor for TRI's Online Census, says the 24 percent growth rate for ISPs (58 million consumers and counting) was due in large part to the success of free ISP services.

"Free ISPs fueled the tremendous growth in Internet access accounts this quarter, and have reshuffled the lineup of the nation's largest consumer-oriented online service providers," she says. [see ISP-Planet's Top 12 ISPs by Subscriber.] "Meanwhile, high-speed providers, particularly DSL providers, continue to show significant growth rates as well, while most of the leading fee-based dial-up ISPs showed only single-digit percentages in their growth rates—if that."

San Jose-based Yahoo! (in conjunction with Kmart), Cupertino-based Lycos, Redwood City-based Excite@Home, San Francisco-based 1stUp, and Palo Alto-based AltaVista are just a few of the more than 100 companies that have jumped into the free ISP pool over the past year.

"It's a very difficult business model," explains Jordan Rohan, an analyst at Wit Soundview. "To be really profitable, a free ISP has to sell highly targeted, time-specific ads. They need economies of scale and an enormous ad sales force—which most don't have."

Yet some do. Juno, the largest of the bunch so far, currently serves over 10 million customers, recently acquired free ISPs WorldSpy and Freewwweb. Rohan predicts similar buyouts will continue, and that the big players still standing will be free to make some sizeable potential profits.

In a related report, TRI says the DSL market saw the most significant increase of all access providers, growing at a rate of 51 percent to 286,300 total subscribers. Also showing a healthy gain was cable modem access, with a 21 percent growth rate during the quarter to nearly 2.8 million customers.

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