Outlook: Internet mania

THE MERE mention of the "I" word seems to be enough these days to rejuvenate a sagging share price. Judging by the effect on dear old WH Smith yesterday, more should try it. Its more than woolly announcement about teaming up with BT and Microsoft to launch another "free" Internet service provider was sufficient to propel the share price 11.4 per cent higher. Since Dixons launched Freeserve last September, the Dixons share price has more than doubled.

Prospects for Dixons' core retailing business have improved a bit since then, but the bulk of this stellar performance is accounted for by Freeserve. Billions have been added to Dixons' market capitalisation courtesy of this new Internet service. Now WH Smith is hoping to repeat the trick. But as the stock market correctly surmised by marking the Dixons share price down by an equal and opposite amount in response to the WH Smith announcement, not everyone can win in this market.

Few people these days doubt the Internet's power to transform industry, or its vast commercial potential. But actually making money out of it is a different issue, and actually these British retailer based free Internet service providers seem rather less likely to make good profits out of the Web than most.

As Dixons has proved, retail networks provide a powerful motor for adding subscribers, but as the service is free, having more subscribers doesn't necessarily earn you more revenue. Nor does using the Net to flog your own products help the bottom line much, since the effect is merely to cannibalise existing sales.

WH Smith's Richard Handover was yesterday waxing lyrical about the importance of establishing his service as a fully fledged "portal". Certainly this offers the most likely pathway to profit, since the most successful portals ought eventually to be able to attract very considerable advertising revenue.

The trouble is that this is a fast moving industry and the competition - Yahoo!, Excite, and the like - have quite a heads start. Keeping the millions of non paying customers these new free services attract eyeballed to their own home pages is going to be a challenge most will fail to meet. As a consequence, it is hard to see how the valuations the stock market is attaching to these services can ever be justified.