Freeserve Looking for Boost From Free-Call Plan
Shareholders will be looking for usage gains due to the new connection package, and are hoping this will counter negative sentiment that has caused the Internet service provider's shares to sag. By allowing users to pay a
But Freeserve faces a crowded playing field in offering a free-call plan: AOL's (AOL - Get Report) U.K. operation announced a free-call strategy last week, and cable company NTL (NTLI) is doing the same.
Growth among Internet service providers, or ISPs, in the U.K. has been hampered by the fact that users must pay per-minute phone call fees when they log on. This has resulted in staggering phone bills for frequent Internet use. In response, ISPs have launched plans where, in exchange for a monthly fee, users don't pay phone charges when connected to the Net. But this strategy hasn't worked out exactly as planned because of difficulties the ISPs have encountered in working out bulk-rate call plans with British Telecom (BTY). Providers such as AltaVista Europe, a subsidiary of CMGI's (CMGI) AltaVista, and Lineone have been forced to cancel their packages because they couldn't bear the short-term costs involved to acquire subscribers.Indeed, even Freeserve experienced some problems with its free-call service, but it has promised to sustain the offer. The company is helped by a deal with communications company Energis (ENGSY), which in turn has a bulk-rate plan with British Telecom. The collapse of rival packages has played into Freeserve's hands, which means the company has been able to win customers from smaller ISPs that are unable to offer free-call packages. The last available figures show that Freeserve now has 140,000 subscribers on its free-call service, and this number is forecast to rise to 200,000. Simon Edelsten, an analyst at Dresdner Kleinwort Benson, argues the sector will consolidate as heavy Internet users switch to free-call packages. He believes this process will work to Freeserve's advantage because only large ISPs with considerable financial muscle have the funds to bear the short-term pain involved with the packages. Edelsten says that Freeserve will be able to pick up many of the heavy users from other ISPs for no cost. "Over the last year, people have expected Freeserve to spend money, or issue shares, in order to consolidate the U.K. ISP market. Clearly, if Freeserve is one of the few companies left offering unmetered access, it won't have to issue shares," he says. Dresdner Kleinwort Benson currently has a price target of 450p for Freeserve, and this is based largely on subscriber growth because other ISPs are failing on free-call access. Nick Bubb, an analyst at SG Securities, agrees. He says that free-call access, together with other potential offerings such as a TV access service, will "turn the tide" for Freeserve. Dresdner says connectivity will neither be a profit center nor a loss leader in the year to April 2001, stating that free-call access is likely to be subsidized for the next two years. Currently the subsidy is about
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