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The Anglo File: AOL Europe Can't Seem to Connect to a Clear Strategy

Although AOL maintains its subscription-based model will work, it won't rule out a free format, either.

It could have been the perfect chance for

AOL

(AOL)

Europe

to convince investors that its subscription-based business model would work in Europe. On the very day

Dixons Group

announced it would spin off its free Internet service provider, AOL representatives met with investors at the

BancBoston Robertson Stephens Technology and Telecoms Conference

in London.

Unfortunately, AOL was long on words and short on detail, and in the end, it contradicted itself by saying it too may well adopt a free ISP format.

On Monday, Dixons, the U.K. electronics retailer, announced -- not unexpectedly -- that it would float a minority stake in

Freeserve

, its ISP subsidiary. By all accounts, Freeserve has been an outstanding success. By scrapping subscriptions and relying instead on advertising, e-commerce and a slice of local phone charges for revenue, Freeserve overtook AOL as the U.K.'s largest ISP in a matter of 12 weeks.

Freeserve now has 1.5 million subscribers compared with AOL U.K.'s 600,000 subscribers. AOL Europe has about 2.6 million subscribers.

Needless to say, Freeserve's success has forced other ISPs in the U.K. to follow suit, and a majority of ISPs in the U.K. now offer free Internet access. AOL Europe, however, has insisted that with only 14% of Europe's households online and signs that the telcoms may begin offering free local calls to the Internet, the endgame is still some way off.

"One of the things we spend a lot of time thinking about is how ultimately all this will play out," Chris Hill, vice president of corporate development at AOL Europe, told investors at the conference.

Talk the Online Talk

Clear thinking, however, was not terribly apparent. Hill spent much of his time at the podium explaining why AOL Europe, with its localized content and ability to offer access to the Internet regardless of where customers are in the world, would ultimately be able to turn back the tide of the free ISPs.

Yet during a question-and-answer session, Hill appeared to contradict himself, saying that AOL's preference for the subscription model "doesn't mean we will never launch a free ISP." Free service, he said, could eventually be an option for AOL customers.

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Besides this issue, AOL Europe still has much to do to convince investors that it's on top of the game. Last month, much to the disappointment of the investment community, AOL Europe's long-awaited response to free Internet access was to cut its subscription rate to 9.99 pounds per month from 16.95 pounds. Hill added that one "should stay tuned" for changes in AOL Europe's pricing.

Hill insisted that this move "is not the sum-total response" of AOL Europe to the competitive challenges it faces from the free ISPs, but that there was much more to come.

Walk the Online Walk

Hill did hint, although vaguely, at a number of potential ventures. He said that AOL Europe is planning to invest in a number of ventures with portals that would give its subscribers access to more value-added services. These investments will be announced in the coming weeks, he said.

Other ventures included extending the AOL TV venture (currently in the U.S.) to digital TV in Europe within a year and also providing Internet services through next-generation mobile phones.

Ultimately, though, Hill said AOL Europe is pinning its hopes on the development of free local calls to Internet providers in Europe, which could ruin the free ISPs. He is not alone in this thinking. Brian McMillan, the head of

Colloquium

-- a subscription ISP in the U.K. -- believes that when unlimited local calls arrive, "everyone will see that the emperor has no clothes."

"The money from advertising and e-commerce just won't be enough for these ISPs," McMillan says.

Ironically, although free ISPs would hate to see free local calls, phone charges are actually hindering the development of European e-commerce, an essential building block to the economics of the Internet.

Hill said the average Internet user in Germany and the U.K. is only online for seven hours per month and pays on average $60 per month for this luxury. By comparison, the average user in the U.S. is online for 30 hours per month and pays only $20 per month. As a result, Europe is not only well behind Europe in terms of the amount of retailing done online, but it may also fall even further behind.

Are the unlimited Internet calls on which AOL Europe is pinning its hopes mere pie-in-the-sky dreams? Maybe not.

British Telecom

(BTY)

and

screaming.net

are already offering such services for Internet access, under certain conditions, of course. And Internet boycotts -- vigorously supported by AOL -- have been adding to this pressure.

"Last year I think most industry analysts saw free local calls in five to six years; I think this timetable has been compressed to a couple of years," Hill says.

So, even according to AOL Europe, things are unlikely to change overnight. AOL might consider offering investors and Internet users alike some idea of what it will do in the meantime.