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AOL scare gives FreeServe punters the jitters

Carry on speculating, we say

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Dixons Group shares were the FTSE 100's second worst performer yesterday on (wrong) news that AOL Europe was considering joining the free ISP brigade in the UK. The Daily Mail even says that AOL's entry into the UK free ISP market could cause a price war. Which is astonishing, considering FreeServe is,well, free. AOL would have to pay people to become subscribers to pull off that trick. Yesterday, Dixons shares fell 55p to £11.72. These shares are a way into FreeServe, the company's groundbreaking ISP, set for a £1.9 billion flotation later this year. There are all sorts of reasons to question the valuation placed upon FreeServe - a company with huge market share in the UK -- 31 per cent and 1.5 million subscribers -- but AOL Europe is not one of them. AOL has nine per cent of the UK home Internet subscription market, according to Fletcher Research - which would give it around 500,000 people paying a tenner a month. It has one million subscribers in Germany. This is a lot of money to give away. The company is a prisoner of its own past successes -- it will not torch these paying accounts. The odds on it setting up a non- AOL branded free ISP business successfully (ie: without hacking off its existing customers) is remote. This means relative decline in Europe -- because the company will not grow as fast as its free ISP rivals. The Free ISP pricing model is proving hugely attractive to consumers. That is why AOL is getting into political lobbying -- AOL wants unmetered telecoms in Europe --(unmetered by the way means flat fee, not free access) because that way it can justify its premium-priced subscription service.

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