INTERNET - That giving feeling

As free email and internet access tempts thousands of users on board, service providers are having to think fast about strategies for their survival.

The internet has a strong tradition of supplying users with freeoard, service providers are having to think fast about strategies for their survival. facilities such as public domain software and free long-distance phone calls.

Recently, the stakes have been raised by Microsoft's acquisition of Hotmail, which offers an email service at no cost, and by the growing number of other companies that are providing internet access for nothing. It's a situation that must be making some internet service providers (ISPs) pretty nervous as the telecoms companies, which control dial-up access, position themselves to eat their lunch.

Historically, ISPs have leased capacity from large telecoms companies, turning a profit by adding value to the provision of basic internet access.

But competition in the sector has become so fierce that what used to cost just a tenner a month is now being given away.

The problems will get worse rather than better for ISPs that don't own their own backbone networks , according to a recent report from IDC on the growth of the UK's telecoms network services. The report puts the market's value at #17.8 billion in 1997, and says it looks set to pass the #22 billion mark by 2002.

'The UK really is the competitive benchmark for Europe,' says Andy Doyle, senior analyst at IDC's European telecommunications program. 'Business markets represent the hotbed of competition in the UK at present.'

More important from a telco's point of view is the fact that, for the first time, data is poised to become more crucial than voice communications.

'Data traffic is expected to eclipse voice traffic over the existing telecom network. We are about to see a paradigm shift in telecoms,' Doyle adds.

Those who think free internet access is purely a north American phenomenon should think again. The trend is already beginning to happen in the UK.

Public Online, which claims to be the first operator in the UK to provide free internet connection, is offering a package that comprises free internet access for two years, five free email accounts and 2Mb of free Web space.

The service provider makes its money by charging users, who access its service through an 0800 Freefone number, at a rate of four pence per minute at any time of the day. Public Online says this is the amount BT charges for local telephone calls, so the user is effectively obtaining access to the internet for free. The company makes no charge for its browser software.

Public Online believes it can make its service work because it is the first UK ISP to strike an 0800 internet connection deal with Worldcom, the international comms carrier. Worldcom, which is fast making its mark, recently beat off competition from BT to join forces with the US telecoms giant, MCI.

Nick Spooner, managing director at internet solutions provider Entranet, agrees that ISPs are facing a serious threat. He predicts that there will be 'an enormous amount of consolidation within the UK internet industry in the coming months. BT and Cable & Wireless (C&W) are only now coming to terms with exactly what the internet business is'.

Commenting on BT and C&W, Spooner says: 'At least they both have a brand.

I expect there to be a direct correlation between those who own brands and the survivors in this business.'

Spooner believes competition will hot up further as leading consumer companies, such as Tesco and the Nationwide Building Society, enter the market. He argues these consumer names will fare better than their specialist ISP rivals because people will recognise the branding.

'Names like Demon have done well in the ISP market because it is still a fledgling market. The typical early adopter internet subscriber has been the techie or power user,' he adds.

The average consumer has never heard of Demon and Cix, so as the internet access market matures, the influence of these operators will wane.

Spooner believes consolidation in the sector is inevitable because the smaller ISPs will not have the resources to provide what he believes are the four key requirements for success: quality of service; sufficient bandwidth; the marketing muscle needed to build a strong brand image; and the ability to provide comprehensive technical support.

UK specialist ISPs are acutely aware that this is an issue they need to tackle. Graham Davies, sales and marketing director at long-established ISP Cix, comments: 'In the long term, it won't be possible for the smaller ISPs to be competitive in the pure dial-up internet access market. However, they will survive in the short-to-medium term because such access is quite difficult to deliver. It's not like a telephone service where you just plug in a handset and then go.'

Telcos jumping into the ISP arena will need to get to grips with a higher level of technical support - something the specialist players are already adept at. Davies says: 'The ISPs have been providing good support for quite some time - we've become quite good at it. When you phone Cix you get a friendly voice talking you through how to connect via something called Windows. A lot of people seem to forget that there are plenty of users out there who have hardly ever used a PC before they make their first internet support call.'

He adds that the pressure on ISPs to provide support is bound to become more intense because UK users are getting connected to the internet at the rate of about 1,000 every week.

According to Spooner, another big threat to ISPs will be posed by niche players such as Which Online, the consumer association's service, and Citibank. Both of these are selling internet access as an adjunct to their other services.

Citibank ran an offer last summer offering any customers who opened an account before 31 August free internet access for 12 months, a package it claims is worth #144 to a typical internet user. Citibank promoted the offer by loose inserts in the leading national newspapers, as well as by linking it to its sponsorship of Elton John's 1998 world tour.

One strategy for survival chosen by some specialist ISPs is to form joint ventures to build their brands. Spooner points to ScottishTelecom, which has acquired Demon and Prestel for its branding push, and NTL, which provides the services behind Virgin internet, as two examples.

But the telcos are well positioned to cash in on the lucrative large business end of the market. 'If you're a bank or an international conglomerate, obviously you're going to pick one of the telcos such as BT or C&W as your ISP because you'll feel sure they are capable of handling the internet traffic, which will rapidly become a a critical part of the business,' Spooner points out.

He adds that it is interesting content that is most likely to attract the average internet user to a service, 'and I just can't see the smaller ISPs having the bank accounts to handle that'.

But Davies disagrees. He argues that Cix already has the necessary content to attract users in the shape of its conferencing facility and says the company will continue to build on that.

Nor does Davies see Microsoft's provision of a free email service to users as a threat. He believes Hotmail is an interesting facility and is weighing up the possibility of offering it as an add-on service to Cix users' mailboxes.

'It's early days and I haven't fully investigated the technicalities of such a facility,' he says. 'The objective is to provide a means of accessing your Cix mailbox when you're abroad and away from your normal PC/software setup.'

Davies believes any free email service has potential spamming and security problems and argues that Hotmail can't completely replace the provision of a comprehensive email facility.

Industry observers agree that there are other strategies for survival.

One way for specialist ISPs to take on the telcos is to join their club, as Easynet has done. The company has bought its own System X telephone exchange from GPT for #1.6 million and now has the facility to route and terminate its own telephone calls.

Easynet has also won its own international facilities based telecoms licence (IFL) from the DTI.

Easynet chairman David Rowe says: 'Purchasing international bandwidth is a significant cost for the group and it is therefore vital that Easynet seeks to reduce the cost per megabit of international bandwidth capacity purchased. The award of an IFL licence is an important step in that ongoing process.'

Easynet successfully interconnected with BT in June and began terminating its own users' data calls. 'Our telecom switching facilities, combined with our internet infrastructure, provides a one-stop shop for data and voice services,' Rowe adds.

But the chief advantage of Easynet's approach is that it provides the company with direct access to international submarine cables. That mean Easynet can play with the big boys in the interconnection market and will not be entirely dependent on the likes of BT for its backbone network.

Davies takes a different slant on entering the world of telephony. 'I think IP (internet protocol) telephony is going to become very interesting.

It won't compete on a local level because even though the quality has improved, it's still sufficiently different for people to prefer to use a BT line to ring their Grandma in Aberdeen.'

But he thinks IP telephony can really make its mark as an alternative for people making calls to international destinations such as Nigeria, where there are still monopolies in operation.

It is already quite clear that free internet access is not just a temporary fad that will run its course and then disappear. Existing ISPs can't stick their heads in the sand and hope that the problem will go away.

'It's no great secret that we're all going to have to differentiate to survive,' says Davies. 'Within as little as 24 months you're going to see the small, dial-up internet service provider as we now know it completely disappear.'

The real winners, of course will be the users, who will not only have more choice about who they deal with, but will also see their telephone bills shrinking. The whole market should benefit as the offer of free access tempts a raft of users onto the internet.

And as the market matures, these users could easily migrate to established ISPs whose attractive content has enabled them to survive what look set to become a bloody marketing battle.