Freeserve ousted as AOL agrees £100m Dixons deal

The internet service provider AOL is expected to have to pay up to £100m to the electronics retailer Dixons over the next five years for a deal to have its internet products sold in the company's Dixons, Currys, PC World and The Link stores.

AOL, which replaces Freeserve as Dixons' supplier, is thought to have agreed to pay the retailer an upfront fee of around £10m as well as a bounty payment for each new customer that signs up in the stores - a deal, sources said, that could cost the company £100m over five years.

Freeserve hinted yesterday that AOL had overpaid for the distribution deal, saying if it had agreed to the new terms being put forward by Dixons then it would not have been able to meet its target of becoming profitable next year.

A spokesman for AOL dismissed that suggestion yesterday, saying: "Freeserve management should buy sweeter grapes - this deal represents great value for AOL, Dixons and consumers."

The move is a blow for Freeserve since a large number of all its new customers, estimated at slightly less than half, currently sign up in a Dixons-owned store. It also marks the end of the pair's partnership.

Dixons set up Freeserve in 1998 and floated it on the stockmarket a year later. It went on to sell the business to France Telecom's Wanadoo internet arm in all share deal in early 2001, although it has been selling the stock ever since. Dixons, which still owns about 85.9 million Wanadoo shares, estimates it has made around £1bn out of Freeserve since launching it.

AOL will replace Freeserve's narrowband internet product in the Dixons-owned shops from February of next year but will not replace Freeserve's broadband offering in the chain until February of 2005.

The deal leaves Freeserve looking for a new high street electronics partner. It said yesterday it had signed up the Lloyds pharmacy chain of 1,300 shops although it also sells through Orange, Littlewoods and Texaco.

Eric Abensur, Freeserve's chief executive, said: "We have been prepared for the possibility of a non-renewal of the Dixons contract for some time."