Outlook: Internet loss

EVERY MAN and his dog seems to be launching a "free" Internet service provider these days. The latest offering comes from Mirror Group, which plans to put pounds 1m of advertising behind ic24.net, as well as promoting the service through its flag ship title, the Mirror.

Not to be outdone, the Sun has already nipped in with a spoiler, Currantbun.com, while the list of other "free" service providers grows almost daily.

Besides the trailblazing Freeserve from Dixons, there are now equally impressive offerings from WH Smith, Tesco and British Telecom. Meanwhile Kingfisher has joined forces with Bernard Arnault to launch what it claims will be the first pan-European free service provider.

Saturation point doesn't look like being reached any time soon. These services pay for their start-up and operating costs through the telecommunications revenue they generate, so their proliferation isn't going to stop with the present six.

With the cost of entry so low and the apparent rewards in terms of what these services add to the share price so high, it is not going to be long before everyone's doing it.

In these circumstances, it is hard to see how these free service providers can possibly justify the valuations the stock market seems to be attaching to them.

Dixons is planning to float Freeserve, and already analysts seem more than happy to accept a valuation of anything between pounds 2bn and pounds 4bn. Even at the lower end of that range, this seems fanciful for a business which faces so much competition.

Don't forget, the Internet may be a new technology, but it is also in the end just an alternative form of distribution.

For most of these established companies piggie-backing off each other in the portal and service provision market, the thinking is more defensive than expansionist. The e-commerce opportunities they generate will be as much about cannibalising existing sales as creating new ones.

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