Free ISPs In Trouble?
Will Flat Rate Access Destroy Free ISPs?
0630 Hrs 11 August 1999
Free ISPs are a recent phenomena. They capitalise on the facts that people like the concept of getting something for free and their reluctance to pay more than they have to. As a result the concept of Free (no-fee) ISPs has captured the imagination of the ignorant and the greed of the market. However flat rate access will cause serious, if not fatal, problems for many free ISP models.
Flat Rate Access is the Holy Grail of internet users. It effectively means that they get a quota of hours each month for a fee. The fee has to be attractive enough to make the prospect financially and emotionally viable.
Esat Clear's move of offering flat rate off-peak access at £17 per month is clearly the best offer available on the Irish internet market today. Most of the domestic internet users will use the internet in the off-peak hours anyway. So it would be insane for them not to take advantage of such an offer. The subscription fee for most ISPs is £12 per month and many domestic users will spend up to £30 per month in phone charges. Thus the flat rate access model looks a lot more attractive to the average domestic user. During the peak hours, the cost of internet access on the Esat Clear model is 3p per minute.
Free ISPs in Ireland, and no doubt elsewhere, earn some of their revenue from call termination fees. They get a percentage of the call fee. The rest of the revenue for free ISPs seems to be generated from online advertising. However most Free ISPs are in reality single ISPs that have been given a superficial branding. Oceanfree is really BT/Newscorp's LineOne ISP.
Calling a free ISP during peak hours (0800 - 1800 Hrs weekdays) is not economically viable. The calls to the free ISP numbers are billed as a local call. Instead of the 7.5 minutes per unit on the 1891 internet numbers, the initial billing is 3 minutes per unit. During off-peak hours the call to the free ISP is 15 minutes per unit and as such the user will save only the subscription fee.
Though Esat Clear's flat rate access only applies to off peak access, the fee is low enough to beat the competition. Even taken with a nominal £12 subscription it works out to a month of off-peak access for £5. It effectively removes the foundation of free ISPs. Why should a user pay more for the local call to a Free ISP in off-peak hours?
The Irish internet market is different from many other markets. There is not really that much competition. Telecom Eireann owns two of the main players (Tinet and Indigo). A few weeks ago, Indigo announced GoFree, a free ISP. This move was seen as largely a TE response to the advent of the BT/ESB Oceanfree ISP which had garnered some 30000 users in the first few weeks of operation. However given the nature of the Irish market, the loyalty of these users will be fleeting and it is not likely that these new users will give up their existing subscriptions. The savings for the user of a free ISP such as GoFree or Oceanfree would be minimal and probably limited to the subscription fee. The Esat Clear's "Surf NoLimits" flat rate option costs less over the space of the month and will hook the dedicated internet users.
The other ISPs in Ireland are now in a very tricky position. Telecom Eireann's plans for ADSL seem to be running slowly and according to some sources, it is having problems acquiring the necessary ADSL equipment for the exchanges. Bandwidth problems may also serve to cripple TE's ADSL plans. However TE may well be forced to introduce a flat rate access scheme as the result of Esat's move. The effect on Indigo, IOL and the smaller players will be staggered over the next seven months as subscriptions come up for renewal. The most obvious TE move would be to announce a flat rate access model for Tinet whilst leaving its Indigo operation to carry the can with the free ISP. This would have the effect of generating new users for Tinet and giving some captive eyeballs to TE's multimedia/pseudo-digerati venture rondomono.
Free ISPs are inherently vulnerable to flat rate access models. They are mutually exclusive because Free ISPs only remain attractive when the costs of the subscription and access are high enough to warrant dropping the subscription. Using a free ISP during the peak hours is not economically viable when compared to the standard subscription ISP model. It therefore depends largely on people who want to save the subscription fee and use it during off-peak hours.
A flat rate access model depends on getting the fee low enough to make it the best offer on the market. By limiting the model to off-peak hours, Esat has effectively crucified the free ISP model since it appeals to the market segment that would be attracted by a free ISP.
The free ISP is an marketing freak. It can only exist, as it stands with high peak access fees, in a highly competitive market where there is no flat rate access. If flat rate access was introduced in the UK, the free ISPs there could be in real trouble.