The decline of free internet access

Oh dear, oh dear, it looks like its RIP for the free ISP and not much more free internet access for customers.

The free model, where customers don't pay subscription charges but do pay for the use of the phone line, is no longer financially viable, says research group Jupiter MMXI.

The model has been going downhill for quite some time. The ISPs could afford to provide free access at the height of the dotcom boom; advertising revenues were flying in from companies keen to advertise on the providers' sites.

But the huge scale of the expected revenues failed to materialise and life for ISPs has continued to get tougher. Revenues from advertising and interconnect fees, a cut of the revenues telecoms companies make from internet phone calls, will not be sufficient to support the majority of free ISP businesses. The companies have also come under increasing pressure to offer a speedy return in value to shareholders.

"The free business model was never sustainable and after the last 18 months a huge degree of realism has hit the market," said Dan Stevenson, analyst at Jupiter MMXI.

Freeserve, the British provider who introduced free ISP models to Europe at the end of 1998 and is now owned by French telecom firm Wanadoo, is adamant that the model is viable and will remain popular with people new to the internet, or those who don't use it often. The company, which at the end of July warned it would move to the US if the Government did not change a law that allows its main rival AOL to operate in the UK without paying VAT, has been offering paid-for access since last year. By February, the company had successfully migrated 500,000 of its 2.1 million subscribers to this package.

Virgin.net announced last week it is to launch an unmetered service in October. The move, which aligns the firm's offering with Freeserve, AOL UK and BT-openworld, is another nail in the coffin for free ISP models. Although Freeserve says the introduction of unmetered internet access is a response to customer demand, rather than a reaction to a decline in advertising revenues, the answer for ISPs has got to be a move to a subscription model. This guarantees the ISP regular flows of income, usually between £10 and £15 for a month's access. Worries about the ups and downs of advertising revenues would also be removed. It would also help providers to retain their customers because fee-paying ones are less likely to move to competitors.

But is it really good for consumers?

Customers will be able to spend unlimited time on the internet for a fixed fee. But with advertising revenues dwindling, the number of ISPs falling as consolidation occurs, and the likely hike in access fees, required to help the ISPs break even as quickly as possible, the price of getting online is likely to increase. And Freeserve seems to be leading the way with a 30 per cent hike this year.