Network: It's cheaper by the minute

Free phone access would be great for Net users but risky for ISPs. By Stephen Pritchard

AS ANYONE who pays the phone bill knows, "free" Internet access is anything but. Calls to your Internet service provider's modem can cost as much as four pence a minute during the day, and bills can start to mount up very quickly.

The success of free services, especially Dixons' Freeserve, has shown that Net users are worried about cost. In the last few months, Freeserve has been joined by dozens of other companies offering free Internet accounts.

For companies looking to break into the Internet market, this poses a challenge: how do you compete with a service that is free? The answer seems to be by cutting the cost of local calls. In the US, local phone calls are free. As a direct consequence, Internet use there is far higher than in Europe.

There is little likelihood of BT introducing free local calls in the immediate future, but the way the phone network operates means that ISPs can cut all, or part, of the cost of calls to their modems.

At the moment, ISPs receive a proportion of the money their users spend on dialling into the network. This rebate can be as much as a quarter of the cost of a local call. The free ISPs, such as Freeserve, rely on this revenue along with advertising to fund their operations.

Instead, Internet companies could use the rebate to reduce the cost of calls to their networks. AOL, the UK's largest paid-for Internet provider, was reported to be testing a service where users continue to pay a monthly subscription but pay no phone charges to go online.

Last week, however, AOL refused to confirm the reports, saying only that it "is continually testing various options and pricing points, including 0800 services".

In February, the ISP Claranet introduced a package, Claracall, where users pay less than BT standard rates when they go online. Subscribers pay pounds 8.99 a month to join, dial a free phone number, and pay Claranet directly for the time that they are online.

Claranet charges 2.8p per minute peak rate, and 0.5p at weekends. The company estimates that the typical Net user, spending 19 hours a month online, will save pounds 13 a month by switching to its service.

Other ISPs are going further by offering completely free calls. X-stream has run a number of promotions with free access, although these have generally been over the weekend or late at night. Screaming.net, which launched at the end of last month, looks set to be more useful to Net users who keep regular hours. The service is operated by LocalTel, a discount phone company which acts as a reseller for BT; the Internet service is being promoted with the electronics store Tempo. Screaming.net is free, and subscribers who opt to switch their phone service to LocalTel benefit from free calls to the ISP at evenings and weekends.

ISPs owned by phone companies have the greatest scope to cut the cost of Internet calls, as they control their own networks. Next month, Cable & Wireless Internet will bring out a range of pre-paid price plans costing between pounds 5.99 and pounds 29.99. The cheapest tariff includes 12 hours online a month, and the most expensive, 75 hours. Cable and Wireless estimates that this offers a saving of 54 per cent, against using a subscription- free Net package and paying BT for calls.

So far, no ISP has gone as far as offering free calls during peak times, so intensive Net users and small businesses will see few direct benefits. Free peak-time access is a dangerous step: ISPs have to gamble that their subscribers will use fewer minutes than the break-even point on their subscriptions. Based on standard BT rates, someone who leaves their PC online all day for an average 40 hour working week would run up a bill of pounds 96 a month. In practice, it is relatively easy to write Internet software that drops inactive calls after a few minutes, which keeps bills in check.

AOL's trial is reported to include peak-time access, but as most of the company's 600,000 subscribers use the Net from home, not the workplace, the company may be able to take the risk. AOL only supports modems, not the faster, bandwidth-hungry ISDN lines, and its proprietary interface may put off intensive Net users.

Companies such as AOL, which provide their own content and e-commerce channels, have other reasons to encourage people to use the service more. Internet advertising is still in its infancy, but advertisers are beginning to appreciate that subscriber numbers alone are not the best way to measure a service's advertising potential. The quality of the users - including their spending power and the time they spend on the Net - is at least as important.