October 14, 1999
In Wired World, Much Is Free at Click of a Mouse
By SAUL HANSELL
or years, marketers have known
that one word, more than any other,
can spur people to action.
The magic word, of course, is
"free." And the wheels of commerce
have long been greased with free
samples, free trial issues, free toasters at the bank, or free tote bags with
every bottle of perfume.
But those are Cracker Jack prizes
compared with what is happening
these days on the Internet, where the
slogan is quickly becoming: buy
nothing, get everything free.
With hundreds of Internet start-ups hellbent on immediate visibility
and rapid growth, the giveaways
have moved beyond information, like
magazine articles and stock quotes,
into products and services that could
otherwise cost hundreds of dollars.
Consumers can download a word-processing program or a recording
of a hit single, sign up for a new
phone number to receive faxes and
voice mail, or even call long distance
-- all without paying a penny.
Some sites will set you up in business with your own online store free,
if you can think of something to sell
that people will pay for.
If you want to take advantage of
this costless cornucopia but are not
yet wired to the Web, don't despair. A
bunch of companies want to provide
free Internet access. FreePC.com
hopes to give away a computer, too.
And if you need to communicate with
your militantly unwired Uncle Waldo, postage4free.com will send you a
stack of stamped envelopes, gratis.
"You name it, and there is a start-up somewhere that wants to give it
away free," said James Breyer, the
managing partner of Accel Partners,
a Silicon Valley venture-capital firm.
All this comes at a price, of course.
Those free envelopes are covered
with advertising, and so are most of
the other free offers. To get freebies,
customers often must also disclose a
dossier's worth of personal information for use by marketers and put up
with minimal customer service.
Not everyone wants to listen to 30
seconds of commercials to make a
free two-minute long-distance call,
as offered by mytalk.com. But
enough of these deals are attracting
enough customers that the free offers keep coming, despite questions
about whether there will be enough
advertising to support many more
such businesses.
Mytalk is hardly striking fear in
the heart of AT&T, but other giveaways are roiling certain markets.
Investors in Internet service providers are scared by the prospect of free
competitors. And even software
companies are feeling the impact
because so many functions can now
be performed on the Web free.
"There are markets that could be
spoiled," said Gill Cogan, a general
partner with the venture-capital arm
of Weiss, Peck & Greer. "After you
give something away free, it is very
difficult to start charging for it, or
even for other things."
The trend is being driven by the
ever-plummeting prices on computers and communications, which
make it so inexpensive to offer many
services that it makes as much sense
to give them away covered in ads as
it does to try to sell them.
| |
|
But can giveaways
make money only
in unceasing visits?
| |
| |
"The general rule is that anything
that has a potential for a broad audience will eventually be free," said
Joe Kraus, a co-founder of the Excite
service, which searches the Web free
and now also offers free e-mail,
voice mail, auctions, classified ads,
chat rooms and a small library's
worth of information. Ultimately, he
said, companies would rather have
consumers' time than their money --
assuming that they can make money
from those consumers some other
way.
"We are shifting from a retail
economy to what I call an attention
economy," Kraus said. "You are
willing to give away services or even
pay people to use services, if you can
get a lot of people listening to your
message."
Marketers have always looked to
place ads in new and prominent locations, but the popularity of the Internet has given rise to hundreds of new
companies with rich backers, desperately racing to get lots of new
customers right away, even if they
do not know exactly how they will
make money.
Many newer start-ups look to the
example of Hotmail, the first big
Web site offering free e-mail with
advertising. In 18 months, Hotmail
signed up 11 million customers. And even though it never
made much selling advertising, Microsoft bought Hotmail for some $400
million.
Timothy Draper, of the venture-capital firm Draper Fisher Jurvetson, Hotmail's early backer, said he
was so convinced that free services
were the way to build really big
businesses that he had invested in a
variety of others, including free Web
sites, free disk space and free Internet access.
"If you believe that the
Web is opening up a whole new world
economy where there will be a lot of
winners, what you want to do is back
one of the 30 companies that ends up
being worth a trillion dollars," he
said.
Not everyone is so sure that the
way to make a trillion dollars is to
give away the most stuff free.
"There is an unwarranted frenzy
around the free model on the Internet," said Breyer of Accel Partners, who argues that there just is
not enough money to be made in
advertising to justify most of these
companies. "In most cases, if one
does the math, the business assumptions simply will not hold up, and the
companies are pursuing suicidal
strategies."
One site challenging that premise
is Free-PC.com, which has to sell
about $30 a month in advertising to
cover the costs of a computer and its
free Internet access.
Donald S. La Vigne, its chief executive, maintains that the prominent
placement of the ads, in strips along
two sides of the screen, and the data
the company collects observing how
its customers use the machine, will
make the service attractive to advertisers.
"If someone goes to E-Loan and
four other housing sites in one week,
it's a good bet they're shopping for a
mortgage," he said. "Banks will pay
a lot of money to find someone in the
market for a home loan." Still, the
company will wait to see how this
idea works on 30,000 computers before it gives away more.
The hurdle for NetZero Inc. and
other companies that want to offer
free Internet service is almost as
high. It costs about $10 a month to
cover the telecommunications cost
of Internet access. So far the biggest
Internet service, America Online,
takes in only about $5 monthly from
ads per user, on top of its $21.95
monthly fee.
Wall Street appears to have fewer
doubts. With 900,000 active accounts,
NetZero is now worth about $3 billion, after its public offering late last
month. That compares with Earthlink, a big Internet service provider
with 1.5 million paying customers,
that investors value around $1.3 billion.
Implicit in Wall Street's assumptions is that millions of consumers
are willing to make their homes, or
at least their computers, look like the
logo-covered outfield wall of a Major
League Baseball park. So far they
are.
"The average consumer gets 3,000
marketing messages a day," La
Vigne said. "That doesn't mean they
like it, but they are used to it."
Indeed, these Internet sites are
riding a cultural shift, in which more
people embrace, rather than fight
commercialism.
"People in this generation are not
as concerned with advertising as older people," said Bo Peabody, 28, the
founder of Tripod, an online gathering place for Generation X now
owned by Lycos. "We feel that everybody has an agenda."
Sometimes the sales pitch is very
subtle. Onebox is a start-up that is
offering free voice mail with no visible advertising. It hopes to profit
ultimately by selling a premium
service linked to people's home
phone numbers. "It costs long-distance companies $100 to $300 to get a
new customer," said Bill Nguyen, the
company's founder. "Our free service costs less than $2 to provide. If
one person in 50 ever pays us, we will
make a lot of money."
There are already myriad examples of free services on the Internet
eating into lucrative markets. Five
years ago, for example, 40 percent of
the revenue of Dow Jones & Company's online unit came from news
headlines and stock quotes it sold for
25 cents a quote. Now, hundreds of
sites give those away.
Similarly, it took two years for a
company called Jfax to attract 35,000
customers to its $12-a-month service
that forwards faxes to an e-mail
address. In February, a rival called
Efax introduced a service that is
similar, but free, and to date has a
million customers. Jfax was forced
to respond with its own free service.
An even-higher-stakes battle is occurring over Internet auctions.
Ebay, the auction leader, charges a
fee of 2 to 5 percent. But Yahoo is
gaining ground with totally free auctions.
Yahoo is getting the same treatment, though in reverse, at its business that charges $100 a month and
up for a company to set up a store on
the Internet. Now, services like BigStep.com and FreeMerchant.com
will do all that without charge.
Another free service meant to bite
into Yahoo and other popular Internet sites is Rocketboard, a company
that hopes to give free keyboards,
with 18 extra buttons that send the
user to certain online stores.
"The portals now have the ocean-front views, but with Rocketboard
we are putting up a building that is
closer to the water," said Scott Heiferman, the company's founder.
So where does the free frenzy end?
Venture capitalists say that entrepreneurs are now trying to raise
money for everything from free cellular phones to free movies to free
stock trades. So far, there is little
inclination to give away such basic
nondigital commodities and services
as food, shelter or transportation.
"In the end, someone has to sell
something, or it's all a shell game,"
Kraus of Excite said. "The car
companies are never going to give
away free cars."
Or will they? Draper, the venture capitalist, said the idea might
not be as crazy as it sounds. "It's a
captive audience," he remarked. "If
you control my radio while I'm driving, keep track of where I go with a
global positioning system, and maybe do something with my cell phone,
there's a possibility you might be
willing to pay $50,000 to own me for
two hours a day."
And yes, someone has already registered the Internet address free-cars.com.
