Host of copycats clouds Dixons' Freeserve float
News Analysis: The free Internet service could be worth anything from pounds 500m to pounds 2bn. The range hints at the uncertainties facing the fast- changing online sector
Tuesday 08 June 1999
Dixons named CSFB and Cazenove as joint advisers to the float, but said full details on the possible pricing and structure of the listing would not be provided for several weeks.
Freeserve has proved a spectacular success for Dixons since it launched Britain's first free Internet access service in September. After just nine months Freeserve has established itself as the UK's leading Internet service provider with 1.5 million subscribers. The innovation has led to a host of copycat launches from the likes of Tesco, WH Smith, the Sun and BT.
There was another yesterday when Granada, the media and hotels group, announced plans to launch a service called G-Wizz. Granada hopes to cash in on the popularity of its top television programmes such as Coronation Street and Emmerdale. As well as gaining free Net access, subscribers can join special chat sessions with soap stars on exclusive online services, such as Coronation Street Confidential and Emmerdale Exclusive.
Granada is investing pounds 30m in the venture, which will include an online educational service based on the national curriculum. Users will pay a subscription fee and be able to tailor their studies to individual needs, helped by a personal tutor.
But, as Steve Morrison, chief executive of Granada's media division, points out: "We think the days of the free service provider are limited. There are already more than 100 in the UK, so the `free' tag is no longer a selling point."
His view is not that free services will start charging, but that providers will be judged by their ability to deliver interesting, valuable content that keeps subscribers loyal. Only this will enable Internet companies to leverage their subscriber base with other, paid-for services.
This is just one of many issues to be examined in the run-up to Freeserve's float. Others include distribution access to potential subscribers, the prospects of revenue from telephone charges being altered by the regulators, and the growth prospects of online advertising and electronic commerce.
Paid-for Net service providers such as AOL/Compuserve make most of their money by charging a monthly subscription. They also act as portals to the Internet, with search engines and a constantly updated array of extra services, such as free access to newspapers and stock prices. They make extra revenue from online advertising as well as their share of the telephone charges when users are online, though these are a relatively small share of total income.
By contrast, free services such as Freeserve rely solely on phone revenue, e-commerce initiatives and advertising.
A key question in Freeserve's valuation is how many of its 1.5 million subscribers are regular, active users, and how many simply use the free services as a means of gaining free Net access without using the other services available. This so-called "stickiness" - the ability to keep net surfers on your system, looking at the advertising on your screens - is a key issue. A subscriber who just signs up for free and then searches the Net using Yahoo or Excite is no good to the likes of Freeserve, Tesco, Granada and so on.
AOL, which has 600,000 UK subscribers in addition to 400,000 on its separate Compuserve service, says a subscriber is far more likely to be an active user if they are paying a monthly fee.
According to data compiled by Carat Interactive, AOL and Compuserve respectively achieve 141 million and 102 million "impressions per month", or hits, on their Internet sites. This compares with just 38 million by Freeserve.
The demographics of free services are also different. On Freeserve, 87 per cent of subscribers are male, with 51 per cent earning less than pounds 19,000 a year. At AOL, 70 per cent of its audience are male, with 65 per cent earning more than pounds 20,000, a more wealthy category.
AOL/Compuserve says it has no plans to start a free service in the UK. David Philips, managing director of AOL UK says: "E-commerce and advertising revenues are simply not big enough and will not grow quickly enough to sustain the business model."
So, as the value of the "free" tag wanes, other issues become paramount. The first is the distribution channel from which Net service companies draw their members. Freeserve is in a strong position here as Dixons, which will hold a majority stake, is the UK's largest computer retailer that can package Freeserve as part of the sale. Another is skill at developing online advertising revenues, and here media companies such as Granada have an advantage as they have long-standing relationships with advertising agencies and big advertisers.
Another factor is the possibility that the split in the revenue charges for online users might be changed. Currently free service providers make a major part of revenue from their cut of the telecoms charge. In Freeserve's case, its deal with Energis covers its costs at the moment. But it is understood that this deal has been renegotiated. And Oftel, the telecoms regulator, has said it will examine this issue again in 2001. BT wants the system changed as it currently makes barely a penny from the huge additional call volume it is carrying as a result of Net use. BT and others are presenting a further threat by offering free online phone time to subscribers at weekends and in the evenings.
But the key difference will be the "added value" of the online content. Service providers that get this right will be able to charge more for online advertising and increased commission for every link made from their site to other, linked home pages.
This is why AOL is valued at pounds 4,000 per subscriber, while tentative valuations for Freeserve are around pounds 1,500. With 1.1 million "active users", this values Freeserve at about pounds 1.5bn.
All this could change, of course, depending on the behaviour of America's top Internet stocks such as Yahoo!, EBay and Amazon.com. The soaring sector has been hit by a slump in recent weeks, with headlines such as "Amazon.bomb" suggesting the stocks are overvalued. Freeserve's advisers will be following US stock prices carefully over the next few weeks.
- 1 Morgan Freeman on the riot-focused coverage of the Baltimore protests: 'F**k the media'
- 2 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 4 Frankie Boyle on Scottish independence: 'In the Interests of Unity, F**k Off'
- 5 Length of pregnancy can vary by up to five weeks, scientists discover
Boston Marathon runner's search for mystery man she kissed ends with letter from his wife
Saudi Arabia's King Salman sacks senior aide for 'slapping' a journalist behind him live on TV
Frankie Boyle on Scottish independence: 'In the Interests of Unity, F**k Off'
Italian police 'reveal' what Jesus looked like as a young boy
Florida couple forced to register as sex offenders for having sex on public beach
In defence of liberal democracy
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
Andy McSmith's Sketch: Feisty audience is the real star of an enlightening show
iJobs Money & Business
£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...
£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...
£215 per day: Ashdown Group: Junior Project Manager (website, web application ...
£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...