Free ISPs Gain Market Share in US

Already popular in Europe, free ISPs will help 13 million Americans access the Internet by 2003, according to a report by Jupiter Communications.

Of the predicted 13 million, 8.8 million US households will use a free ISP as their primary access to the Internet, representing 13 percent of the total US online consumer market. While this market sector continues to grow, free ISPs will fail to displace the traditional paid access model, but will open the door to more flexible offerings from ISPs and provide new opportunities to affinity groups.

“Consumers perceive free services as a niche offering,” said Zia Daniell Wigder, a senior analyst at Jupiter Communications. “Growth of the free ISP market is expected to continue at a fast pace, but cannot be compared with growth in paid ISP services. We expect free ISP accounts to mirror the trend of free email. Consumers will maintain several free ISP accounts simultaneously, but are likely to use only one or two on a regular basis. Many of the free ISP subscribers will be duplicates.”

While many different models have emerged, most free ISPs are relying on advertising revenues to support their business, yet Jupiter expects free ISPs to capture just $901 million in advertising revenue by 2003, representing an estimated 8 percent of total online advertising spending. ISPs must qualify subscribers and provide advertisers to cover the cost of service, according to Jupiter. New players to the free access market looking subsidize the cost of access should also consider diversifying their revenue streams beyond advertising, capitalizing on online commerce and even charging low access fees as a way to drive up overall revenues.

“Jupiter expects to see more ISPs and other Web ventures unveiling free or low-cost services as part of larger offerings,” Wigder said. “In fact, certain specific categories of online ventures, including lifestyle consumer brands, affinity portals, big-ticket retailers, and financial services firms, can reap benefits from rewarding consumers with Internet access in the form of private label service or a partnership with an existing ISP. These players can establish longer-term relationships with consumers by offering ISP services.”

An earlier report by Cahners In-Stat Group found that consumer ISP customers are migrating to non-traditional service providers, such as Regional Bell Operating Companies (RBOCs) and other telecommunications carriers, which have emerged from the middle of the pack to carry a higher profile as consumer ISPs for 1999. During 1998, the combined subscriber base for these non-traditional service providers grew 137 percent, compared to only 37 percent growth among traditional ISPs (including AOL, MSN, Mindspring, Earthlink, Prodigy, and Flashnet). Top telecommunications-owned ISPs now account for 6.5 percent of the US consumer market, up from 3.9 percent at the start of 1998.