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Free AOL Sends Go Daddy IPO Packing

Kevin Kelleher

Go Daddy received a clear message from Wall Street on Tuesday: Stop, Daddy!

The company, which registers domains and hosts Web sites, shelved its plans for an initial public offering, citing among other things "hostilities throughout the Middle East." Whether you buy that reason or not, the collateral damage will include the dashed hopes for other start-ups counting on a Hail Mary IPO to raise cash in the stingy public markets.

It's hard to say just how excited or indifferent institutional investors were on investing in Go Daddy on its own merits. That's because the withdrawal of the company's IPO came on the same day that America Online announced it would offer email domain registrations for free, effectively pulling the rug that was Go Daddy's consumer-oriented market out from under its feet.

Aside from businesses, most domains are registered to people who want a personalized email address and their own Web site. AOL will start offering the vanity email addresses next month, and domains for personal sites will follow. AOL hopes to stitch those sites into its own social network.

That move did little for AOL's parent Time Warner , but it left investors searching for a reason to invest in a company like Go Daddy that was competing with a larger, better-known competitor offering its core service at no cost to customers.

It's tempting to read into Go Daddy's move more evidence that tech companies without a sterling income statement and the promise of profit for the foreseeable future simply weren't welcome in the markets. Go Daddy, which has posted a loss in each of the last five years, appears to be caught in the undertow of Vonage's (VG - Cramer's Take - Stockpickr) now legendary IPO fiasco.

That thinking may well be true, but AOL's move represents a different dynamic whose ripples may be felt in the Internet sector far beyond Go Daddy's plans to raise cash. AOL's decision to offer free domain registration is the latest in a series of moves to offer for free the content and services that other companies, both public and private, were looking to for premium fees.

In recent weeks, in an effort to revise the customer base that has been deteriorating for years -- AOL's user base has peaked above 35 million in 2003 and has since dwindled to 23 million -- the company has shifted strategy toward an ad-supported model offering services that are now free.

Throughout the 1990s, America Online's business model was providing reliable Internet service as well as, for the price of admission, basic Internet services such as email, instant messaging, and news and other proprietary content. But as the Internet evolved, other sites began offering these same services free and AOL lost customers who became sophisticated enough to feel stifled underneath AOL's protective wing.

Now AOL is not only adopting the tactics that its rivals used against it, it's taking them a few steps further. Besides going after companies like Go Daddy and Yahoo! that have been charging modest fees to register domains, AOL is offering virus and spyware protection for free -- a move that Microsoft has already made but is nonetheless a direct hit on companies like Symantec (SYMC - Cramer's Take - Stockpickr) that have been charging for similar software.

AOL is also offering 5 gigabytes of free online storage through its Xdrive unit, more than several times the amount of free storage available at Yahoo! Briefcase, Apple iDisk and other sites that are usually limited to 1GB of free storage at most.

Alongside these changes, AOL also launched a vast video portal. Some programs, like "The Chappelle Show" and "SpongeBob SquarePants," cost $1.99 to download. Others, such as "The Jamie Foxx Show," are free.

While few other companies are actually charging to access video content, AOL, backed by the sizable and video library of its parent, could quickly become a formidable competitor to companies such as Yahoo!, Google and even upstart YouTube -- not to mention Apple's iTunes, which is hoping to become the clearinghouse of choice for selling video programming on the Web.

More interesting, perhaps, AOL's push toward free content and services may spark another round of companies offering even more content and services free. During the Web's short history, it has seen a few cycles in which periods of innovation sputter and give way to times when many of those innovations are offered at the cheapest price possible, if not free, where they can be supported through ad revenue.

So far, 2006 has been a year in which companies have focused more on copying and improving on each other's earlier innovations than on rolling out new, enticing products and services. At the same time, Internet advertising revenue has continued to grow at a robust rate -- up 38% in the 12 months through March -- setting up conditions for a free-for-all that could present problems to companies counting on premium online services.

If that's the case, it will be companies like AOL, those that are most aggressive with offering free services, that will be the winners.

Of course, AOL must overcome other recent blemishes on its image, such as the release of subscribers' search histories and its reputation for harassing people who want to cancel. Whether AOL's revenue increases over the next couple of quarters will show whether this bold move is paying off or not.

Even if AOL can't make its new free-stuff strategy work, other companies that can capitalize on online advertising are likely to tap into the trend it seems to have started. Companies that stubbornly hold on to their premium services likely will find themselves under pressure.

Then it won't just be Go Daddy singing the blues.