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RSS feedsDespite the nosedive suffered by many other .com ventures over the past few years, the economic state of ISPs (Internet Service Providers) has superficially appeared pretty stable.
Over the past eighteen months internet users saw a huge number of new and long-established service providers offering free access, low-cost calls, free web space and the like in return for gaining their custom. With the sheer volume of business generated and the number of different providers, it appeared - at least outwardly - that this was an economically potent marketplace.
Freeserve was the first to offer free access in 1998 and a steady stream of other ISPs offering similar packages followed this. By late summer 1999 everyone from the local football team to banks and supermarkets wanted to be an ISP and there were 300-500 service providers registered at this time. This boom in free access was heavily marketed and still is.
Flaws in the plan
The free access model suffered because the returns were low and the profit margins very tight. Despite making some money from a small share in call charges and advertising revenue, it was hard for even the most successful ISPs to turn a profit. Some, like Breathe.com, tried to provide unmetered internet access as a way of inflating lagging profits, but its offer of unlimited access for life in return for a single payment of £50 failed, despite attracting 50,000 users in the first nine months. It raised £2.5 million, yet eventually called in the receivers in early December 2000.
The problem for Breathe and others was that they were offering entirely free use to customers but still being charged by the minute by BT, with only a paltry income from users to stop their accountants jumping straight out of the window there and then. What businesses like this really needed was a wholesale, flat-rate deal from BT, and in the end they got it.
After repeated lobbying by Freeserve, AOL and many other ISPs and telecom companies prior to that, industry watchdog Oftel finally managed to persuade BT to roll out FRIACO (Flat Rate Internet Call Origination) to most exchanges by the end of April 2001.
Freeserve, AOL and BT now offer a monthly, flat-rate charge of less than £15 a month, allowing the user unlimited use of the internet at any time. The appetite of most UK internet users is more than sufficient to make this a viable option. The sheer volume of internet traffic in the UK, which crippled the early examples of unlimited-access ISPs, might well now carry others to success and riches.
End of the line?
If present rates of subscription continue, what will happen to the smaller ISPs still solely using the free access system? The offers of free access are still found in abundance, but with the advent of flat-rate subscriptions, the days of the numerous free access models could be well and truly numbered.
Paul Barker, investor relations spokesman at Freeserve, agrees that the free access market is diminishing already, due to the instant popularity of the unmetered access model. As he sees it: "The ISP economy is becoming more like a conventional marketplace, and the market leaders are the only ones with sufficient economies of scale to provide the unmetered service and remain economically efficient. The unmetered access plan will mean regular income and increased loyalty as customers are billed directly and won't be going through BT."
He added that those ISPs without the required size and financial muscle will be unable to use FRIACO as they will not reach the minimum number of local exchange ports required by BT to qualify for the service. Basically, the big boys will get bigger and the small fry will have to feed from an ever-diminishing pile of scraps left by the remaining internet users, who don't use it enough to warrant the unlimited service.
Some might try and survive by finding a less crowded niche and heading for more specialised markets, and no doubt some will succeed, but many are set to disappear. Some ISPs are moving away from the dial-up-service altogether and are attempting to move into the portals market, using their expertise to direct traffic and make their entire revenue from advertising sales.
Others may look at providing broadband unlimited access, but as Paul Barker points out, Freeserve charges £39.99 per month for its broadband access and the wholesale price of £35 presently demanded by BT would need to drop to £24.99, or ideally £19.99, to make this a profitable proposition for any ISP, large or small.
Unlimited Freeserve 'in three years'
Freeserve has consolidated its position by its £1.6 billion sale to France Telecom's internet giant Wanadoo, opening up the opportunity for pan-European business. Barker adds that it will retain its free access service for the first-time user and the very part-time user and has no immediate plans to shelve this. But if city brokers' predictions are to be believed, a full migration over to subscribed, unlimited use will have happened by 2006, with the more bullish suggesting as soon as 2004.
With 2.1 million registered users already subscribing to the monthly unmetered Freeserve ISP, and an overall 22 per cent market share of all UK internet users already partaking of an unlimited service, this looks to be a fairly good bet.
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