AOL cuts their rate in UK to battle free ISPs. I don't care about today's stock activity. I still think we have a winner here in XSNI. Jeff
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AOL Europe Cuts U.K. Flat-Fee Subscription Charges by 40%
By Bundeep S. Rangar
AOL Europe Cuts U.K. Flat-Fee Subscription Charges by 40%
London, May 11 (Bloomberg) -- AOL Europe will cut its flat-
fee charge by more than 40 percent in the U.K., the first step in
a broader new pricing and portal strategy it plans to start this
autumn, as it takes on popular providers of free Internet access.
AOL Europe, a venture between America Online Inc., the
world's No. 1 online service, and Germany's Bertelsmann AG, the
world's No. 3 media company, said AOL UK will cut its fee to 9.99
pounds ($16.25) a month, from 16.95 pounds, from June 1.
The move comes as AOL tries to counter the success of free
Internet service providers in the U.K. It took only three months
for a free Internet access service by Dixons Group Plc, Britain's
largest electronics and appliances retailer, to steal the No. 1
title from AOL. Freeserve has gained 1.3 million users, twice the
number of AOL users, in just seven months of running.
''We want to turn the meter off so that people stay online
longer,'' said Andreas Schmidt, AOL Europe's CEO, in an
interview. However, AOL would not go as far as providing free
Internet access. ''Free is not a sustainable business model.''
AOL plans on introducing within six months a flat-fee
package for both subscription and phone charges, initially in the
U.K. and later in other European countries. It will also start
country-based Web portal sites, with content supplied by about
300 partners such as the Economist magazine and Deutsche Bank.
Rankings
Freeserve has become the U.K.'s third-most visited portal
site. AOL is trying to counter that success by starting portal
sites, or gateways to other Internet sites, first in the U.K. and
Germany, using technology that runs Netscape Inc.'s Netcenter
portal site and providing specialized news and entertainment
content.
To that end, AOL said it will market in the U.K. eBay Inc.,
the top online auction company as part of a worldwide agreement
for which eBay paid $75 million. It will also advertise Verio
Inc., the world's largest domain-based Web hosting company.
AOL is not among the top five portal sites in the U.K.,
Germany and France, the three biggest European Internet markets,
where Yahoo Inc. leads. AOL Europe has 2.8 million users.
The free Internet access model works in Europe due to a
quirk in the telecommunications framework that allows phone
companies to share revenue from local phone calls. Currently in
the U.K., the local phone company, such as British
Telecommunications Plc, retains between 33 percent and 60 percent
of the charge, with the balance going to the network operator,
which shares its revenue with the free ISP.
Users in the U.K. pay between 1 pence ($0.02) and 4 pence
per minute in local telephone charges.
Cutting Out Fees
To compensate for the phone charges, companies such as
Prudential Plc, Britain's largest insurer, Barclays Plc, the
second-largest bank, W.H. Smith, the largest book retailer, Tesco
Plc, the largest food retailer and the Arsenal Football Club Plc,
removed subscription fees. Even British Telecommunications Plc,
the country's largest phone company, scrapped its pay-as-you-go
service in favor of a free one.
The model has been copied by other European companies, such
as Germany.net in Germany, Kingfisher Plc in France, Tiscali in
Italy, Econophone Inc., Sunrise and Span in Switzerland.
European businesses, from phone companies to book retailers
and banks to sporting clubs, are scrambling to offer free
Internet access and muster enough users to attract advertising
money and commission on sales through their sites.
''Providing free access is quickly becoming the cost of
doing business on the Internet,'' said Nick Jones, an analyst
with Jupiter Communications. ''It is not an extra feature.''
Switching to a free model, however, is too costly an
alternative for AOL. Subscription fees accounted for almost 85
percent of the Dulles, Virginia-based company's $1.8 billion
worldwide revenue in the first half of fiscal 1999.
It argues that it takes more than just a free service to
attract users.
''Getting users for free is one thing, getting to know them
is another,'' said Schmidt. ''We have an ability to bill
customers who may be reluctant to give out credit card
information. Free services have no customer records.''
Call Charges
Instead of dropping its subscription fees, it is trying to
get the telephone operators to drop their local call charges.
Three months ago, European Union regulators began
investigating Deutsche Telekom AG after AOL Bertelsmann Europe,
complained that Europe's largest phone company was using its
power to suppress competition in the Internet market.
''Local call charges are the biggest barrier to Internet
usage,'' said Schmidt. ''If it merges with Telecom Italia, that
will be another point the European Commission will look at.''
AOL's move is supported by a recent Jupiter Communications
study in Germany, France and Britain, which suggested that while
11 percent of consumers said they were likely to go online in the
next year, 40 percent would do so if phone charges were dropped.
The number of Internet users in Europe are expected to more
than double to 88 million by 2005, according to U.K. market
researcher Datamonitor Plc.
''We hope to have about 10 million users in the next four to
five years, or about 25 percent to 30 percent of the market,''
Schmidt said. ''E-commerce will be the big revenue generator.''
E-Commerce
Buying and selling goods on the Internet is expected to
increase to $12.9 billion by 2001 in the U.K. from $257 million
in 1998, according to Forrester Research Inc. Across Europe, it
will grow to $64 billion, or almost 1 percent of gross domestic
product.
''That's where the future of the online service provider
lies,'' said Forrester's Sawyer. ''Users will become consumers.
That's what AOL must target.''
AOL said it had sold advertising and e-commerce arrangements
worth 25 million pounds ($41 million) in Europe for the next two
years.
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