An information freeway

Suddenly, it seems, everyone is offering free access to the Internet. But are these no-cost services too good to be true?

IF THE best things in life are free, then the Internet must be a very good thing indeed. This month has seen a rush of companies offering free access to the Net. High-street banks, night-clubs, tabloid newspapers, stationers - it seems that everyone is becoming an Internet business.

The move to free Internet access began in earnest last year, when Dixons launched Freeserve. Unlike most mainstream Internet companies, Freeserve charges no monthly subscription. Instead, it raises its money through advertising and e-commerce, and through a share of the money users pay to call its local-rate modem lines. Calls to technical support are at a premium rate. Freeserve has radically changed the Internet business in the UK. The service claims about a million users. Some have come from existing Internet service providers (ISPs). Others are new to the Net, attracted by Freeserve's success.

"Freeserve has demonstrated that cost is a big inhibitor to going online," says Mark Danby, Freeserve's general manager. "It is all to do with removing barriers, making it easy and cheap."

Other Internet companies have been forced to follow suit. BT has launched Clickfree; Tesco Net, the Internet arm of the supermarket giant, has abandoned its monthly charges. Most significantly Virgin Net, already an established ISP, is now a free service. At the same time, companies new to the Internet business are giving away accounts. Barclays Bank, The Sun and soon its red-top rival The Mirror, WH Smith, Eidos, publishers of Tomb Raider, and the Ministry of Sound night-club are well-known examples. It's easy to spot the link between the new Net companies: they are all well-known brands. They may know less about the Net than banking or groceries, but that hardly matters.

The free Internet services are not investing millions of pounds in building networks, installing servers and setting up racks of modems. Behind the scenes, almost all the new generation of ISPs are run by a handful of established names in the Internet and telecommunications world: BT, Cable and Wireless, WorldCom, Energis and NTL. All it takes today to set up an Internet service is to sign a deal with one of these companies, design a home page, and send out some CD-roms.

According to industry experts, companies launching a free Internet service have little to lose. They can even risk more by not setting one up, as their customers may sign up with a rival company that is an ISP, and shop there instead.

"Companies setting up a free ISP service have few of the costs," suggests David Rowe, chairman of Easynet Group, which provides ISP packages for brands including Eidos. "Their costs are just marketing, distribution and their content. They don't have to worry about a network or technical issues. A company such as Eidos sends out millions of CDs in boxes already. The cost of another CD is minimal. They can leverage their existing customer base and achieve volume. When they achieve volume, they will receive revenue."

Phone-call revenue-sharing arrangements have made free ISPs possible. Internet users pay BT or a cable company for a local call each time they go online. Part of that money goes to the company operating the local- rate modem lines. The company operating the modem lines passes some revenue on to the service provider. In turn, they share a proportion of the income with the brand. This is only a fraction of a penny a minute, but, with the potential for millions of users, it could be an important source of cash.

Companies, though, have other reasons for offering Internet services. Capturing, or keeping, the hearts and minds of users is one. Eidos, for example, can use its ISP home page to promote Lara Croft's latest adventures and other computer games. Freeserve can promote offers at Dixons or PC World; the Ministry of Sound can publicise club nights, merchandise and CDs. Banks have an even more attractive reason for becoming ISPs. Selling financial services over the Net is big business. An Internet transaction, such as paying a bill online, costs a bank a fraction of the cost of the same transaction in a branch.

If there is one company that knows about branding, it is Virgin. The switch to free Net access coincides with a new Internet strategy across the Virgin group. Virgin Net's challenge is to come out from the shadows of the Virgin brand.

"Our content is not just about Virgin," explains David Johnson, the company's commercial director. "There is actually very little about Virgin on the service." Instead, Virgin Net hopes its material, from partner publishers in areas ranging from health to music, or specially commissioned, will help it stand out among ISPs.

For Internet service providers with neither their own networks, nor a brand, the future looks less rosy. It is hard to justify charging pounds 10 a month or more for a service that other companies give away. Rumours abound of problems going online with free ISPs, including busy lines and slow connections, but even users who pay subscriptions face similar problems.

Internet companies appear to face a stark choice over the next few months: they can go free, or move out of the consumer market entirely. Some have already done this: I-way abandoned consumer dial-up accounts last year, and Easynet has successfully moved away from the mass market and now concentrates on providing Internet access to businesses and to partners, who sell services on to the public. Companies such as Demon may choose to focus on small businesses and homeworkers, who need an ISP that they can stay with as their business grows.

Internet companies with strong content, such as AOL, may opt to become portal sites. AOL recognised the value of portals when it purchased Netscape last year: Netcenter, Netscape's home page, is one of the most visited sites on the Web. In the UK and Europe, the Microsoft Network has already chosen the portal route. MSN continues to provide dial-up accounts, but the portal is where MSN is currently focusing its attentions.

"It is smart for us to offer access, but we do it in a non-strategic way," says Judy Gibbons, MSN's director. "There is a cost of providing Internet access, but it is a very low cost. It is more a question of whether you can afford not to do it."