Beer, Peanuts and Money on the Net.(free access to the Net )(Brief Article)

Some internet gurus would still have you believe that free access to the Net is a basic right of man. They are wrong. As economists like to say, there is no free lunch, not even in cyberspace.

To understand why, consider the free lunch itself. Bars offer free (often salty) food to encourage people to drink more. This is what economists call "selling complements." Other examples are razors and blades, left shoes and right shoes, or phone and Internet service. Consumers care only about the total price of the package, so giving away 50 cents of peanuts to sell an extra dollar of beer makes economic sense.

The logic is clear when complements are sold by one business, like a bar. But what happens when they are sold by different companies? Then there are deals to be made, and this is happening all over Europe. For telephone companies, free Internet Service Providers (ISPs) are like salty peanuts, luring customers. So the phone companies are willing to share a fraction of local-calling revenue with the ISPs, up to 30 percent in some European countries.

The question is whether that revenue is enough to give people the service they want. Probably not. Most customers aren't satisfied with peanuts: they want the full Internet buffet (e-mail, calendars, search engines, directories, customer support and the like). So how do free services pay for all that?

Cheerleaders for the New Economy often argue that "network" enterprises operate under new rules, with special cost advantages. But they do not. An ISP enjoys classic supply-side economies of scale: once it has spent the money to create CONTENT, the cost of distributing it is tiny. If ISPs can bring in lots of customers, they don't have to make very much money on each customer to break even. This phenomenon is often confused by New Economy gurus with demand-side economies of scale or "network effects," which raise the value of a good to customers. Telephones and fax machines are classic examples--the more customers have them, the more valuable they are to any one customer.

There's nothing truly new about the Internet enterprises in any of this. There aren't even big demand-side ...