Pay no more

Wall Street may have snubbed the $12.5 billion marriage between Lycos and Terra Networks, but the deal could lead to free Web and phone service.

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Imagine free local calls, zero long-distance charges, complimentary
unlimited cellphone time and no more Web access bills. If you’re still
forking over hundreds of dollars a month for these services, the thought of
completely free communications might appear radical.

It could happen sooner than you think.

Some Internet service providers in both this country and Europe are already
making money exclusively through advertising and e-commerce deals. And
wireless companies — even your local Baby Bell — will soon join them. For
them, charging you for their services will be like Wal-Mart sticking
customers for admission. “We’re going to be happy if you just look at
content and shop,” says Bill Keenan, Alta Vista’s director of access.

Keenan may be right. Last week we saw the first sign of things to come in
the $12.5 billion marriage between Spanish Internet service provider Terra Networks and Lycos, the
Massachusetts-based Web portal and site network.

It wasn’t covered as a Big Deal — the news generally got buried deep
inside the business section. And the proposed union certainly didn’t
impress Wall Street. Amid questions of cultural incompatibilities that
sound like a CNBC sitcom (Terra CEO Juan Villalonga and Lycos chief Bob
Davis don’t even speak the same language), along with dubious short-term
benefits — a round of analyst downgrades stung both stocks.

Despite the deal’s relative non-eventness — their b-list coupling is no
AOL Time Warner — it was a clear indication that portals and ISPs and
phone companies are moving to become one and the same thing.

But it’s not just the Terra-Lycos deal that will change the landscape. It’s
a combination of similar deals; if one company offers free service, its
competitors will have to follow.

More portal-telco hook-ups will be coming. Excite@Home (of which I own a
few shares) has been the subject of recent buyout rumors. DeutscheTelekom,
the German phone behemoth, has been developing its own portal/ISP combo,
but may be looking to buy others. Vodafone/Mannesman has climbed into bed
with French portal hopeful Vivendi. And lingering independents like
AltaVista are surely being shopped. Whatever the specific combinations turn
out to be, they’ll directly affect anyone who pays a monthly phone or Web
bill.



In other words, everyone.

Despite a potentially monumental domino effect on the industry, the biggest
impetus for Terra’s bold move was that greatest of motivators: abject fear.
Until now Terra has mainly functioned as an old-school ISP in Europe and
Latin America, akin to pre-flat-rate AOL. But its sales have been quickly
eroding. The reason: New Net customers across the Atlantic and Caribbean
have been flocking to free ISPs, which have thrived abroad far more than
they have in the United States. Terra has to offer free access to
compete. Free ISPs outside the country have made money by cutting deals
with local phone companies to share the call revenue generated by Internet
usage. But this model is likely to vanish within a few years, as local
calls in Europe move away from being metered by the minute.

Terra peered into the crystal ball and realized it had to get off the ISP
bus and jump onto the media company bandwagon, drawing revenues strictly
from ads and e-commerce partnerships. And what do you need to establish a
Web presence that creates lots of advertising and e-commerce traffic? A
portal. Hola, Lycos!

Despite the Street’s lack of enthusiasm, Lycos fares well in the buyout.
It’s getting a rich 40-percent premium on its current market cap –
although Terra’s shares, which will fund the deal, could fall further.
Equally important, Terra offers Lycos a big leg up in markets like Spain, Germany and Mexico, where it could become a leading portal instead of an also-ran
. (Lycos is a top-10 site in many European countries, but it’s made little
headway in the U.S. market.) U.S.-centric LCOS investors may have forgotten
that there’s Internet money to be made beyond these shores, but Bob Davis
seems to have kept that fact well in mind.

The deal also gets Lycos into the wireless arena. Terra is a subsidiary of

Telefonica,
whose wireless holdings in Europe and Latin America are
among the world’s largest. Without Terra, Lycos would likely luck out on
the wireless Web boom. With Terra, the portal could be a player in a game
that ends up looking a lot like the ISP business. Providers of network
access will find that the best way to make money is to give that access
away, load the network with ads and shopping opportunities, then take a cut
of the consequences.

If portals — variations on ads-and-commerce are what will enable truly
free ISP services — then portal-like wireless features will cause the cost
of mobile phone calls to drop toward zero. Free mobile service will hit
Europe first because the technological infrastructure will allow it there
first. But it will spread to the States as well.

The end result would be a two-tiered system — those who pay for Web
access, phone service and the like, and those who don’t. AOL’s loyal
subscribers may choose not to budge from the pay-per-month structure, so
they don’t lose their instant-message buddy network. But hordes of others
may rush to the free model. And unlike now, they wouldn’t be relegated to
sub-par service.

People will have a choice — just like they have the option to subscribe to
HBO if they want premium programming. That’s all good for consumers, and
surely, the players in the game aren’t complaining.

Steve Bodow is a writer in New York who has contributed to New York magazine, Wired and Feed.

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