Price war, legal concerns squeeze ISPs

Smaller ISPs such as Totalise may have to take extreme measures to compete, and analysts warn that many of them will be forced out of the market over the next couple of years. Experts forecast that only the largest ISPs, such as Deutsche Telekom AG8217;s T-Online unit, France Telecom SA8217;s Wanadoo unit, Freeserve and America Online Inc, will survive the shake-out.

quot;Within a few years, the European Internet-access market will be dominated by a small group of multinationals,quot; says Jupiter Communications analyst Olivier Beauvillain in London.

Although Totalise and other smaller ISPs can8217;t afford to offer free access now, Gregory believes it will be viable soon. quot;It is a bit expensive at the moment,quot; Gregory says, but he forecasts that a combination of competition and regulatory pressure will push wholesale prices on British Telecommunications PLC8217;s network down later this year to where offering unmetered access will be practical for smaller ISPs.

Britain8217;s ISPs hope that unmetered access will lead UK consumers to spend more time online, boosting advertising and e-commerce revenues. But analysts say the companies are too optimistic. quot;We don8217;t really believe that free access is viable 8211; there is not enough money to support that in advertising and electronic commerce,quot; says Jupiter8217;s Beauvillain. Although Jupiter estimates that 230 million euros will be spent on advertising on UK Web sites next year, much of that will be soaked up by major media companies and specialist content sites.

Stock Answer?: In this challenging environment, Totalise, which has a longstanding policy of giving 50 of its own shares to each new customer, is taking drastic steps to maintain the loyalty of its 100,000 users. In March, it started offering users two pounds worth of shares for every one pound they spend on call charges while online. Although the offer is limited to the first 2,000 minutes a consumer is online each month, it also dilutes the value of outstanding stock.

Totalise8217;s share give-away program has become less attractive in the past few weeks, as its stock price has plunged along with that of other U.K. Internet companies. U.K. technology stocks 8212; as measured by the FTSE techMark index 8212; are down about 38 from their mid-March peak, but British ISPs8217; shares have suffered much larger losses in the wake of AltaVista and NTL8217;s new offerings. Totalise8217;s stock, which is listed on the U.K.8217;s Ofex market for young comanies, trades at about 55 pence a share, off its reent low of 29 pence but still 61 below its March high of 142.5 pence. Freeserve has seen a similar slide as its shares have fallen from a high of 925 pence in at the beginning of March to 362.5 pence currently.

Totalise is also diversifying into other Internet-related activities. It has set up businesses selling cars and flowers online and there are plans to establish an Internet bank later this year. In early April the company announced that its car-sales operation had received seven million pounds of orders in its first two weeks in operation. Mr. Gregory admits that Totalise has considered withdrawing from the Internet-access business, but he points out that the ISP provides a valuable means of promoting these e-commerce ventures.

Balancing Act

Because of the Demon ISP settlement, Totalise plans to employ five supervisors to monitor its planned bulletin boards 8212; sites where users can post information and comments 8212; in the quot;near future.quot; It says it will remove any content that users complain about so as to avoid being sued for defamation or breach of copyright. But other ISPs fear that such an approach could leave them open to being sued for breach of contract or loss of business by the individual who posted the original information.

A European Union draft e-commerce directive also supports the principle that ISPs should remove material if they are notified that it is defamatory or in breach of copyright. But the directive, which is expected to be law by late May, leaves it to individual member states to decide whether such notice must come from an independent judiciary or a member of the public. In France, meanwhile, the government is introducing legislation that would make it mandatory for all consumers who put up Web sites to register address and contact details about themselves. The French Internet Service Providers Association is concerned that ISPs hosting such sites will have to police the system, further increasing their administrative costs.

The Demon settlement also suggests that U.K. ISPs will have to keep a close eye on incoming mail so as not to miss complaints about content carried on their services. That presents a particular problem for Totalise, which receives up to 10,000 e-mails a week. quot;The Demon case shows how easy it is for people to contact you and how hard it is to keep up with the correspondence,quot; says Mr. Gregory. quot;We no longer say 8216;do not hesitate to write to us again8217; at the end of each reply.quot;