Winfire Inc., the Irvine startup that made a splash with its offer to give away free high-speed Internet access, is plunging into new markets and is closing in on financing worth $50 million to $75 million, according to company officials.
The third-round financing for Winfire stands to be one of the largest in Orange County since this spring’s technology pullback on Wall Street. Ryan Steelberg, Winfire’s president and co-chief executive, said he and brother Chad are getting interest from potential investors, despite challenges they face working with some local phone carriers.
“Things are going extremely, extremely well,” he said.
Company officials are talking to investors and are weighing whether to take venture capital funding or financing from an unnamed telecommunications company, Ryan Steelberg said. A deal could close in the next 45 days, he said.
The Steelbergs are looking to offer a basic package of speedy digital subscriber line Internet access for free. The pair hopes to make money by selling advertising and by charging for premium services that provide even faster connections. The strategy, which has drawn skepticism from some analysts, hinges on local phone companies installing the necessary lines and equipment, both at their switching centers and at the users’ locations. These companies are obligated to work with Winfire, but also compete with the company, charging their customers as much as $50 a month for the same offering.Winfire’s expected financing would fund an accelerated rollout to new cities, boosting the total number of markets from a handful now to more than 50 by the end of the year, Steelberg said. Originally, the company planned to have 40 markets online by year’s end.
Though the company has attracted national attention for the advertising-supported service it announced in January, it has not come without its share of glitches.
Some reports say Winfire, previously known as Broadband Digital Group, is a month behind schedule in some areas, including parts of California, because of delays by local phone companies in upgrading or installing their lines to carry the high-speed service.
So far, about 1,200 people use the service in greater Los Angeles, New Orleans, Miami and Atlanta. Another 1,000 or so have purchased the modems necessary to receive the service. Some 8,000 others with eligible phone lines have ordered the required modems. Hundreds of thousands of other customers have signed onto waiting lists to use the service once it’s available in their areas.
Installation Issues
Digital subscriber lines work with customers’ telephone service. Setting up a connection requires an upgraded telephone line and often-tricky installation procedures, which leaves Winfire at the mercy of phone companies already scrambling to meet demand from their own customers. Some people have had to wait months for the phone companies to upgrade their lines.
Steelberg said his company is mitigating some of those delays with an automated installation procedure he expects will reduce much of the up-front cost of signing on customers. Using software developed internally, Winfire can take orders, submit installation requests to the phone companies and test the connection without any human intervention.
About a quarter of Winfire customers have been able to set up their connections themselves, and most of the remainder run into a minor technical issue such as forgetting a step in the installation process, Steelberg said. According to him, the process helped Winfire sign on more customers in the Pacific Bell region last month than any other DSL-based Internet access provider, including Pacific Bell itself.
Another encouraging sign, he said, is the number of customers who have elected to upgrade to fee-based service.
Winfire touts itself as the world’s first free high-speed Internet service, but the majority of users are paying for their access, opting for the company’s premium, faster offering instead. According to Steelberg, about two-thirds of his customers have signed up for the $10-, $20- and $35-per-month plans. The company expected just 20% of its customers to upgrade to the paid service.
The company’s other revenue streams are coming along as projected, Steelberg said.
Several advertisers with Winfire are running the seven- to 15-second multimedia spots expected to bring in most of the company’s revenue. The full-motion video ads resemble television commercials but allow viewers to click for more details.
The brothers are looking for the third piece of Winfire’s revenue puzzle in the form of corporate subsidies that would allow customers to take advantage of Winfire’s ability to instantly ratchet up their modem speed.
Much like the way Web site operators pay companies such as Cambridge, Mass.-based Akamai Technologies Inc. to store their content closer to users for faster access, the company is betting that media-rich sites will pay Winfire to temporarily boost customers’ connections.
That idea will probably require a far larger customer base, but the Steelbergs hope it eventually could become a significant revenue source.
Mike Lowe, a senior analyst for Scottsdale, Ariz.-based Cahners In-Stat Group, said Winfire clearly is the leader in free broadband, but added that the segment’s long-term prospects are iffy at best.
Free dial-up services such as Westlake Village-based NetZero Inc.,which cost much less to set up than DSL lines,have yet to turn a profit. Others such as Freewwweb and WorldSpy have folded. And phone companies have struggled to meet DSL demand from their own customers, let alone those using competing services, including Winfire’s.
“They’re providing it for free, but they’re not getting it for free,” Lowe said.
Last week, market researcher International Data Corp. said in a report that free Internet service providers face some big hurdles, including high costs for acquiring subscribers, massive turnover and questions about whether consumers will put up with the ads that pay the bills on such services.
Still, the brothers, neither of whom has yet reached 30, have a track record.
Both dropped out of college and created AdForce LLC in 1995, selling it to Internet holding company CMGI Inc., which took it public soon after. They followed with online ad agency 2CAN Media (an online advertising network now called AdSmart and owned by CMGI). The pair also designed the Web browser add-on software used for the DSL service.
They own a small stake in CMGI, though neither is active in CMGI or their former companies. n
