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

DIXONS, the electrical retailer, yesterday confirmed plans to seek a partial stock market flotation for its Freeserve Internet subsidiary in a move that will value the fledgling business at between pounds 500m and pounds 2bn.

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 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.

Start your day with The Independent, sign up for daily news emails
Ed Miliband and David Cameron are neck and neck in the polls
election 2015Armando Iannucci: on how British politics is broken
Life and Style
Great minds like Einstein don't think alike
Missing: 'Mail' columnist Peter Hitchens
election 2015
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
ebooksA celebration of British elections
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
Chuck Norris pictured in 1996
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
A voter placing a ballot paper in the box at a polling station
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power