Report: Free Internet Access In U.K. Will ‘Collapse’

A new report by Forrester Research, Inc. predicts that free Internet access in the U.K and the rest of Europe will collapse by 2002.

The report foresees that market and regulatory forces will lower European interconnect phone fees, decreasing margins dramatically over the next two years. As a result, user interconnection revenues will drop 30 percent.

Forrester adds that even in the U.K. — where regulators set up the ISP interconnection rate — fees will see a deep decline. In September 2001, regulators are scheduled to review the fees, and Forrester expects these tolls to drop to levels similar to the rest of Europe. The EU has already recommended a minimum of a 10 percent annual drop in UK interconnect fees over the next three years.

Bottom Line Will Suffer

According to Forrester, e-commerce fees and advertising revenues will not take up the slack for lost interconnection income. Moreover, costs will continue to grow.

Additionally, infrastructure and marketing costs are expected to rise as companies attempt to keep subscribers. With no barriers to switching, U.K. ISPs will struggle with churn — Freeserve already loses 4,000 users a day. Holding on to existing customers will require significant new investment in these two areas.

While the U.K.’s Screaming.net has already had to quadruple its capacity to satisfy customer complaints about busy lines, its rivals will also hire PR agencies and boost offline advertising in order to stand out in the increasingly crowded industry.

New Model Must Evolve

Forrester believes that the U.K and European ISPs will have to piece together a new business model that features their greatest asset — access to a wide consumer base. They will mine rich user data in order to evolve from PC-based access providers into “interactive relationship managers” — intermediaries that tailor intelligent online experiences to many different platforms, including handheld and wireless units.

However, before this can happen, the report says that certain steps must be taken to develop customer intimacy. These steps include:

Monitoring online behavior. Providers will use software from companies like Portal Software and Narus to monitor individual users as they surf the Internet, creating a rich profile. The info will include when customers connect, for how long, from which locations/ devices and where they go online.

Building a network of partners. In exchange for this information, the new providers must accumulate an arsenal of partners who can provide unique reward to its customers. These partners should include portals, e-tailers and auction sites.

Providing relevant content and ads. By combining tracking data with basic demographics, these new ISPs will work in tandem with content and e-commerce partners to target relevant content, advertising and merchandise.

Creating an intelligent dialogue with users. ISPs will lock customers in by creating programs similar to frequent-flier incentives that reward users for visiting partner sites. For clicking on ads or buying merchandise suggested by the ISP and its partners, users will receive promotions and product discounts. Users will be encouraged to build “click equity.”

One Major Obstacle

While Forrester says that this new model will work, it also concedes that certain user safeguards will have to be put in place to keep privacy regulators at bay. In addition, users will have to be given the right to turn off the tracking of their surfing habits.