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Free ISPs force AOL to slash rates

But according to the giant, free services won't be forever

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AOL confirmed it is feeling the pinch from free Internet access services in the UK by reducing its monthly access fee to £10 for unlimited use from next month, although the company officially denies this is the reason. Access previously cost £17/month. AOL Europe is a 50-50 partnership with Bertelsmann, the German media group, which claims it is number three in the world. AOL is also offering free telecom access to a test group of non-subscribers for a fixed price of £15/month, as part of an experiment. According to David Phillips, AOL's UK MD, free local calls would wreck the business plans of the free services. In the UK, BT gets between a third and two-thirds of Internet access call costs, with the remainder going to the network operator. In the case of the free services, they get a proportion of this revenue from the network operator. While it is true that it would be more difficult for free services to charge a fixed fee for unlimited telecoms costs, there is nothing to stop them having it as an option. AOL has been lobbying Oftel for a quicker review of fixed-price access. Andreas Schmidt, AOL's CEO for Europe said that in his view, "Free is not a sustainable business model" which is no doubt true for AOL, since 85 per cent of its revenue comes from subscription fees. But this is not necessarily true for the free-access services. AOL Europe has complained to the European Commission competition directorate about Deutsche Telekom's alleged abuse of its monopoly power to suppress competition, and there are obvious worries that if the Telecom Italia deal goes through, monopolisation could be extended to the Italian market as well. AOL is believed to have some 600,000 subscribers in the UK (and 2.8 million in Europe), but constantly faces the problem of churn. As part of its moves to add value, AOL has done a deal with eBay to get access to European auction sites. This should also provide an additional burden for Microsoft, since it will have to monitor the site to ensure that unwanted copies of Windows are not being offered for sale. But suppose Windows were give away free with a packet of Smarties: what then? Phillips has also hinted that AOL will offer Internet access shops, but AOL may find itself colliding with an interesting move that could introduce many people to the Internet. Stelios Haji-Ioannou, the latter-day Sir Freddie Laker and owner of Easyjet, has announced he will be starting UK cybercafes on a grand scale, with access at £1/hour, compared with the £5 to £7 that is common in existing cafes. He says this is possible because of economies of scale, and that his first cybercafe will have 420 machines, compared with up to 20 or so in other establishments. Could it be that SH-I has done a deal with AOL? If so, you read it first in The Register. If not, well it's an interesting thought. ®

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